What is interesting is that it was a loan that the company, Best Deal TV, run by the Shetty-Kundra duo, raised but was shown as an investment.
Well, if you are wondering how an investment can be shown as a loan or vice versa, then remember that it is typically done to save taxes, among other reasons specific to the company or the lender-borrower agreement.
An investment can, in fact, be shown as a business loan or personal loan in various scenarios:
a) Plain loan: It can be a plain vanilla loan where there is a fixed repayment schedule and fixed interest.
b) Convertible loan: It starts as a loan but can convert into equity at a later stage.
c) Shareholder loan: It is given by existing shareholders instead of a bank.
Why would someone show investment as loan?
An investment can be treated as a loan when a borrower (company) does not want to part with the company’s part ownership (i.e, equity) and wants to claim tax deduction against interest payments. If it is treated as a loan, the company is meant to repay the loan and interest payments are allowed as deductions before computing tax payable.
Why would a company show loan as investment?
Conversely, a loan can be shown as an investment when the company does not have liquidity to repay the loan and instead is willing to give ownership in return for the sum invested. In such a case, company is not entitled to claim deduction against interest payments.
However, it does not need to repay the loan either. Interestingly, in the case of a company’s insolvency, the first right of recovery lies with creditors (those who gave the loan) and not with the owners.
So, whether lenders have a right to recover from a company’s assets upon its liquidation depends entirely on whether the amount was treated as a loan or an investment.
Back to Shilpa Shetty-Raj Kundra’s case: Juhu-based businessman Deepak Kothari (60), director of Lotus Capital Finance Services, alleged that he gave the loan of ₹60.4 crore for business expansion between 2015 to 2023.
After providing a guarantee in April 2016, Shetty resigned as director of the company in September 2016, the businessman said in his complaint.
Kothari later discovered that insolvency proceedings were on against the company in 2017 for defaulting on another agreement, reported news agency PTI.
In his complaint, the complainant alleged that he gave the loan for business, but the accused diverted the money for personal use, the police said.
Notably, Shetty and Kundra deny all the allegations, which they say are purely civil in nature and have been adjudicated by the National Company Law Tribunal Mumbai on October 4, 2024.
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