A company can give loans and guarantees, acquire securities or make investments in another company or body corporate with the consent of the board or shareholders. Such loans given by a company to other companies or body corporates are known as inter-corporate loans. When a company invests in another company, it is known as inter-corporate investment.
Section 186 of the Companies Act, 2013 (‘Act’) regulates inter-corporate loans and investments. A company can give loans and guarantees, acquire securities or make investments only according to the provisions laid down in Section 186 of the Act.
Section 186(2) of the Act states how a company can give loans and guarantees to other companies and body corporates. It states a company can directly or indirectly:
However, a company can give loans, guarantee and acquire securities of up to 60% of its paid-up share capital, securities premium account and free reserves or 100% its securities premium account and free reserves, whichever is more.
Section 186(1) of the Act provides that a company can make investments only through more than two layers of investment companies, except for the following:
The provisions of inter-corporate loans provided under the Act will not apply to the following:
Section 186(2) of the Act limits the loans, guarantees or securities given by a company to another body corporate. It provides that a company cannot give loans, guarantees or securities more than the prescribed limit, i.e. 60% of its paid-up share capital, securities premium account and free reserves or 100% of its free reserves and securities premium account, whichever is more.
However, a company can give loans, guarantees and securities or make investments above the prescribed limit when it is previously authorised by a special resolution passed in a general meeting.
A company can also give loans and guarantees to its wholly-owned subsidiary company, or joint venture and acquisition of securities can be made by the holding company of its wholly-owned subsidiary above the prescribed limit.
A company registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (SEBI) and covered under such class of companies can take inter-corporate loans or deposits above the prescribed limit.
A company that has defaulted the repayment of any accepted deposits or in payment of interests cannot give a loan, guarantee or security or make an acquisition till such default is subsisting.
A company cannot give an inter-corporate loan at a rate of interest lower than the prevailing yield of one, three, five or ten years of government security closest to the loan term.
The company should disclose the following to its members in the financial statement:
The company giving inter-corporate loans should follow the below procedure:
The company will have to pay a penalty of not less than Rs.25,000 that may exceed up to Rs.5 lakhs for the contravention of the provisions of Section 186 of the Act. Every director of the company in default is punishable with imprisonment for a term that may exceed up to 2 years and a penalty not less than Rs.25,000 that may extend up to Rs.1 lakh for the contravention of the provisions Section 186 of the Act.
Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.
Section 186 of the Companies Act, 2013 regulates inter-corporate loans and investments, specifying limits and procedures for giving loans, guarantees, or acquiring securities. Requirements include special resolutions, rate of interest restrictions, disclosure in financial statements, and penalties for non-compliance.