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Raj Shakya
| Updated: 06 Apr, 2020 | Category: Compliances, Event Based Compliances

Loans and Investments by Company (Section-186)

Loans and Investments

This article will help you know about the provisions related to the loans and investments made by the company (like layers of investment, limits for loans, the penalty for contravention etc.) under the Companies Act 2013 and rules thereof.

Applicable Sections & Rules;

  • Section 186 of the Companies Act, 2013[1].
  • Rule 13 of Companies (Meetings of Board and its Powers) Rules, 2014.

Contents of this Article;

  • Meaning of the terms ‘Investment’ and ‘Investment Company’.
  • How many layers of Inter-corporate investments can be made in India?
  • What are the limits for Loans, Guarantees, Security and Investment?
  • Non-applicability of provisions of Sec-186 to Companies other than Government companies.
  • Exemption from the applicability of Section 186 to Government Company.
  • Procedures involved in making a loan, giving a guarantee, and providing security.
  • Register of Loans given, Guarantees given, Securities provided, and Investments made.

Meaning of the term ‘Investment’ and ‘Investment Company’;

The word ‘Investment’ in everyday discourse would include any property or right in which money or capital is invested, like an investment of money in equity shares, debentures, mutual funds or other securities (except the making of loans or advances or any other financial transactions such as lease, purchase of receivables, or other credit facilities).

An ‘Investment Company’ means a company whose primary business is the purchase and sale of shares, debentures and other various types of securities.

How many layers of Inter-corporate investments can be made in India?

A company shall (unless otherwise stated) invest in not more than two layers of investment companies in India. {Section 186(1)}

Example; If Company ‘H’ is the holding company of Company ‘S’ and Company ‘S.S.’ is the subsidiary of the Company ‘S’.

Then Investment flow will be as follows –

From Company ‘H’ to Company ‘S’ (layer 1) and from Company ‘S’ to Company ‘ S.S.’ (layer 2). There is an indirect investment of Company ‘H’ in the Company ‘ S.S.’.

Exceptions to Section 186(1):

  • A company from purchasing any other company incorporated in another country, if such other company has any investment subsidiaries more than 2 layers under the laws of such other nation.
  • A subsidiary company of having any, Investment subsidiary for the objective of meeting the requirements of any law or regulations, for the time being in force. [Proviso to sub-section (1) of section 186]

What are the limits for granting Loans, Guarantees, Security and Investment? {Section 186(2)}

No company shall either directly or indirectly, sanction any loan or guarantee, provide any security to a person or other body corporate or make any investment in securities of any other body corporate, exceeding-   

60 per cent of the company’s paid up share capital and free reserves (F.R.) and securities premium account (SPA)

OR

100 per cent of its free reserves (F.R.) and securities premium account (SPA), whichever is more unless the same is earlier authorised by a special resolution passed in a general meeting.

Note: Section 186(2) shall not apply on Specified IFSC public and private company only if a company passes a resolution either at a duly convened meeting of the Board of Directors or by circulation method.

Non-applicability of provisions of Sec-186 to Companies (other than Government companies);

  • To any loan made, any guarantee is given or any security provided or any investment made by;
  1. a banking company,
  2. an insurance company,
  3. a housing finance company,
  4. a company involved in the business of financing industrial companies, or of providing infrastructural facilities,
  5. in the ordinary course of its business.
  • To any investment –
  1. made by any investment company,
  2. made in the shares allotted in accordance with section 62(1)(a) of the Companies Act, 2013 or in shares allotted in the rights issue made by a company;
  3. made in respect of any investment or lending activities, by an NBFC duly registered under the RBI Act, 1934 and whose primary business is the acquisition of securities. 

Exemption from the applicability of Section 186 to Government Company;

As per the Central Government’s notification dated 5th June 2015, under Section 462 of the Companies Act, 2013, Section 186 shall not apply to:

  • a Government company engaged in defence production;
  • a Government company, (other than listed), if such company obtains approval from the Ministry or Department of the Central Government, or as the case may be, the State Government, before making any loan/guarantee/security or making any investment under the section.

The penalty of contravention of Section-186;

Liability of Imprisonment Fine
Company NA Not less than, Rs. 25,000/- and may extend to Rs. 1,00,000/-
Officer in default May extend to 2 years      and Not less than, Rs. 25,000/- and may extend to Rs. 1,00,000/-
  • Loan or investment to be made with the approval of all the directors at the Board Meeting {sub section 5 of section 186}

No loan/investment shall be made or guarantee/security given by the company unless the resolution approving the same is passed at a meeting of the Board with the consent of all directors present at the meeting.

  • Prior approval through Special Resolution [Section 186 (3)]

Section 186(3) read with Rule 13 of Companies (Meetings of Board and its Powers) Rules, 2014, states that

Every proposal for making a loan to any other body corporate, beyond 60 per cent of its paid-up share capital plus free reserves and securities premium account or 100 per cent of the free reserves (F.R.) and securities premium account, whichever is more shall be approved at the Board meeting with the consent of all the directors, who were present at the meeting and also to be authorised by the shareholders at the Annual general meeting by way of a special resolution.

Note:

Exemptions to wholly-owned subsidiary company:

Where a loan/guarantee is given, or security provided by a company to its wholly-owned subsidiary company or a joint venture company, or investment made by a holding company, in the securities of its wholly-owned subsidiary company, the requirement of section 186(3) shall not apply. In such a case, the company is required to disclose the details of such loans or guarantee or security or investment in the financial statement as provided under section 186(4).

Companies Registered Under SEBI {Sec- 186(6)};

No company, which is registered under the section 12 (Registration of stockbrokers, sub-brokers, share transfer agents, etc.) of the SEBI Act, 1992 and covered under such class or classes of companies as may be prescribed, shall take the inter-corporate loans or deposits beyond the limit as prescribed and Such company must furnish, in its financial statement, the details of the loan or deposits. 

Disclosure in financial statements [Section 186(4)]:

The company should disclose to the members in the financial statement the full details of the loans given, the investment made/guarantee given/security provided and the objective for which such loan/guarantee/security is ought to be utilised by the receiver of the loan or guarantee or security.

Prior Approval of Financial Institution {Section 186(5)}:

The company has to obtain prior approval of the public financial institution or any other lending institution such concerned, where any term loan is subsisting.

Rate of interest {Section 186(7)}:

Loan given under this section shall carry the rate of interest not lower than the prevailing yield of 1 year, 3 years, 5 years or 10 years Government Security closest to the tenor of the loan.

Default exists concerning repayment of deposits {Section 186(8)}:

No company, which is in default in repayment of any deposits accepted before or after the commencement of the Companies Act, 2013 or in payment of interest thenceforth, shall give any loan/guarantee/security or make an acquisition until such default is pending.

Register of Loans made, Guarantees given, Securities provided and Investments made;

Rule 12 says that every company offering a loan or giving guarantee or providing security or making an acquisition of securities shall, maintain a register in the manner prescribed in the, ‘Form MBP 2‘ and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made.

The entries in the register shall be done consecutively in respect of each such transaction within the 7 days of making such loan/guarantee/security or making any acquisition. 

The register shall be placed at the registered office of the company, and the register must be maintained permanently. It shall be kept in the safekeeping of the company secretary of the company or any other person so authorised.

Read our article:Loan to Directors: A Complete Checklist

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Raj Shakya

Raj Shakya is working as an CS 'Intern' in Corpbiz. He has expertise in various corporate and allied laws.

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