MCA vide General Circular No. 06/2015 dated 9th April, 2015 has issued clarification with respect to section 186 (7) of the Companies Act 2013 and clarified that in cases where the effective yield (effective rate of return) on tax free bonds is greater than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security closest to the tenor of the loan then there is no violation of 186(7) of the Companies Act, 2013.

A similar clarification was also issued under section 372A of the Companies Act 1956. This circular has been issued to clarify that similar position is also applicable to section 186(7).

Just for information in case of tax free bonds, the interest paid is tax free and therefore after considering the impact of the tax saved, the effective yield is more than the actual interest rate.