Section 186 Of The Companies Act, 2013

Section 186 of the Companies Act, 2013 provides for the loans and investments that can be made by a company. It states that a company can make investments through more than two layers of investment companies.

Section 186(2) of the Companies Act, 2013 also states that a company cannot directly or indirectly:

• Give loan to any person or body person,
• Give any security or provide a guarantee in connection with a loan to any other person or body corporate,
• Acquire by way of purchase, subscription or otherwise, the securities of any other body corporate
• Exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

Legal requirements

Requirement No. 1: Approval of Board

• The approval of the Board is required in all cases irrespective of the amount of loan, investment, guarantee or security.
• The approval of the Board shall be obtained by means of a unanimous resolution passed at a Board meeting with the consent of all the directors present at the meeting.
• Resolution by circulation or resolution of the committee of directors is not sufficient.

Requirement No.2: Approval of the members by passing Special Resolution

• When the aggregate of the loan, investment, guarantee or security already made together with the loan, investment, guarantee or security proposed to be made exceeds the limit specified u/s 186(2), prior approval by means of a special resolution is necessary.
• Limit u/s 186(2) is higher of –
  • 60% of (paid-up share capital + free reserves + securities premium) or
  • 100% of (free reserves + securities premium).
• The contents of the special resolution shall contain the total amount up to which the Board is authorized to make loans, guarantee, investment or security. 
• No approval by way of special resolution is required, where –
  • The loan is given by a company to its Wholly Owned Subsidiary [WOS] or joint venture company [JVC], or
  • The guarantee is given or security is provided by a company to its WOS or JVC.
  • Where the acquisition of securities of its wholly owned subsidiary is made by a holding company, by way of subscription or otherwise.

Requirement No.3: Approval of Public Financial Institution [PFI]

• The company shall obtain the prior approval of PFI from which it has taken a term loan. 
• The company directors shall pass a resolution at a Board meeting.
• Approval of PFI is not required if –
  • The aggregate of loans, guarantee, investments or security already made together with the loan, investment, guarantee or security proposed to be made does not exceed the limit given.
  • There is no default in repayment of loan installments or interest to PFI as per the terms and conditions of such term loan.
  • In the case of a Specified IFSC (International Financial Services Centre) public company or Specified IFSC private company, the Board can pass a resolution at the Board of Directors meeting or through a resolution passed by circulation.

Requirement No.4: Rate of interest

The rate of interest chargeable should be more than the prevailing yield of one, three, five or ten years Government Security closest to the period of the loan.

Requirement No.5: No subsisting default with respect to deposits

• A company which has defaulted in repayment of any deposits accepted by it or in payment of interest on deposits, shall not make any loan, guarantee, investments or security till such default is subsisting.
• In other words, where a company fails to repay the deposits or interest thereon on the due date, it may make loan, guarantee, investments or security only after the default has been made good.

Requirement No.6: Disclosures in financial statements

• The company shall disclose to the members in the financial statement –
  • The full particulars of any loans given, investments made, guarantee or security provided, and
  • The purpose for which the loan or guarantee or security is proposed to be utilized by the recipient.

Requirement No.7: Company registered under SEBI

• A company registered under section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992 and covered under such class or classes of companies shall not take inter-corporate loan or deposits exceeding the prescribed limit
• The company shall furnish in its financial statement the details of the loan or deposits.

Non-applicability of Section 186

With respect to loans, guarantee, security or investment made by

• A banking company in the ordinary course of its business
• An insurance company in the ordinary course of its business
• A housing finance company in the ordinary course of its business
• A company engaged in the business of financing of industrial enterprises or of providing infrastructural facilities.

With respect of shares alloted

• Any shares allotted in pursuance of rights issue.
• Any acquisition made by a company whose principal business is the acquisition of securities (i.e. investment company).

With respect to investment or lending activities

• Any investment or lending activities made by a non-banking financial company whose principal business is the acquisition of securities.

Restrictions with respect to layers of Investment Companies

Register of loans, investments, guarantee or security

• Every company which makes a loan, investment, guarantee or security shall maintain a register.
• The register shall contain the prescribed particulars and in the prescribed manner.
• The register shall be kept at the registered office of the company.
• The register shall be opened for inspection at the registered office of the company.
• The Copies of the register may be obtained by any member on payment of prescribed fees.
• Also, the extracts may be taken out from the register by any member on payment of prescribed fees
• The register shall be maintained in Form MBP – 2.
• Company secretary of the company or any other person authorized by the Board is required to maintain the register under its custody.
• The register shall be maintained either manually or in electronic mode.
• The register shall be prepared with effect from the date of its incorporation.

Penalty For Contravention Of Section 186

If a company contravenes any of the provisions of this section, the punishment would be as follows:

For Company

Fine – Minimum Rs. 25,000 and,
Maximum Rs. 5,00,000

For an official in default

Maximum Imprisonment – 2 years; and
Fine – Minimum Rs. 25,000 and,
Maximum Rs. 1,00,000