Payment of Interest Out of Capital (Section 208 of the Companies Act, 1956) :

Where any shares in a company are issued for the purpose of raising money to defray the expenses of the construction of any work or building, or the provision of any plant, which cannot be made profitable for a lengthy period, the company may—

(i) pay interest on so much of that share capital as is for the time being paid up, for the period and subject to certain conditions and restrictions.

(ii) charge the sum so paid by way of interest, to capital as part of the cost of construction of the work or building, or the provision of the plant.

No such payment shall be made unless it is authorised by the articles or by a special resolution.

No such payment, whether authorised by the articles or by special resolution, shall be made without the previous sanction of the Central Government.

Before sanctioning any such payment, the Central Government may, at the expense of the company, appoint a person to inquire into, and report to the Central Government on, the circumstances of the case; and may, before making the appointment, require the company to give security for the payment of the costs of the inquiry.

The payment of interest shall be made only for such period as may be determined by the Central Government; and that period shall in no case extend beyond the close of the half-year next after the half-year during which the work or building has been actually completed or the plant provided.

The rate of interest shall, in no case, exceed four per cent per annum or such other rate as the Central Government may, by notification in the Official Gazette, direct.

The payment of the interest shall not operate as a reduction of the amount paid up on the shares in respect of which it is paid.