Company Registration

Section 186 of the Companies Act 2013: Know Its Significance

calendar01 Dec, 2022
timeReading Time: 4 Minutes
Section 186 of the Companies Act 2013: Know Its Significance

Section 186 of the Companies Act 2013 underpins norms around the loans and investments made by the company. It states that companies cannot leverage more than two layers of investment firms (in a vertically stacked scenario) for making investments. Just like Section 185, this section forbids companies from;

  • Rendering loans to any individual or body person.
  • Facilitating security or guarantee in connection with a loan to any other body corporate or person.
  • Acquiring via purchase, subscription, or securities of anybody corporate.
  • Exceeding 60 percent of its paid-up share capital, securities premium account, and free reserves or 100% of the securities premium account and free reserves, whichever is more.

When Does The Applicability Of Section 186 Of The Companies Act 2013 Come Into Effect?

Section 186 of the Companies Act 2013 comes into effect whenever the company decides to

  • Invest in other companies
  • Invest in other companies via its subsidiary
  • Issue security to someone
  • Ensure a guarantee on behalf of someone

In a nutshell, this section ensures legal fencing around undertakings of companies concerning loan facilitation or investment.

Key Requirements under Section 186 of the Companies Act 2013

Following are some important norms-cum-requirements that companies should take into account before granting loans or making investments.

Requirement No.2: Securing board approval

Securing board approval is a mandate for a company to grant loans or make investments. The board approval shall be secured via a resolution passed at the meeting. The consent of all the directors is mandatory for serving such an undertaking. Resolution by circulation or committee’s resolution of directors is not sufficient to serve this purpose.

Requirement No.2: Members’ approval via Special Resolution

  • When the total of the loan, guarantee, investment, or security to be made surpasses the threshold u/s 186(2), securing permission via a special resolution becomes mandatory.
  • Limit u/s 186(2) is higher of –
    • 60 percent of (paid-up share capital + free fund reserves + securities premium) or
    • 100 percent of (free fund reserves + securities premium).
  • The special resolution must show the limit board can sanction to make loans, investments, guarantees, or security.
  • No approval via special resolution is needed in cases where the company;
    • Grants a loan to its Wholly Owned Subsidiary, joint venture company, or
    • Renders the guarantee or security to a Wholly Owned Subsidiary, a joint venture company
    • Acquires the securities of its Wholly Owned Subsidiary via subscription.

Requirement No.3: PFI Approval

  1. The company must secure permission from the concerned Public Finance Institution from which it has acquired a term loan.
  2. PFI’s permission is not necessary in cases where
    • The total of loans, investments, guarantees, or security proposed to be made does not surpass the underlying threshold.
    • There is no default in terms of loan repayment or PFI interest as per the norms concerning term loans.

Requirement No.4: Interest Rate to Be Considered

The rate of interest must be higher than the existing yield of Government security close to the loan’s period.

Requirement No.5: No Subsisting Default Concerning Deposits

A company being red-flagged by authority for deposits’ repayment doesn’t qualify for making loans, guarantees, investments, or security until it confronts the penalties for such a default.

Requirement No.6: Key Details in Financial Statements

  1. The company shall enclose the following details in the financial statement:
    • The details about the loans granted, investments made, and security rendered, and
    • The purpose for which the loan or security or guarantee is proposed

What Doesn’t Fall Under Section 186 Of The Companies Act 2013?

The following section talks about the elements that fall outside the scope of Section 186 of the Companies Act 2013.

Concerning the Government Companies

  1. A Government company belongs to the defence sector.
  2. A Government company (non-listed entity), in case such company secures permission of the Ministry or Department of CG which heads administration affairs of the company or State Government, as the case may be.

Concerning Share Acquisition

  1. Any acquisition of shares allotted w.r.t right shares.
  2. Any acquisition completed by a firm whose core business is security acquisition

 Concerning Loans, Guarantees, or Security

  1. A banking company in the general course of its business;
  2. An insurance firm in the general course of its business;
  3. A housing finance firm in the general course of its business;
  4. A firm dealing with the business of company finance or rendering infrastructural facilities

Concerning the Acquisition of Shares and Loan

  1. Any acquisition made by NBFC[1], whose core business is security acquisition.
  2. The exemption available to such a firm shall be in line with investment and lending activities.

Maintenance of Register under Section 186 of the Companies Act 2013

  1. Every company must ensure proper tracking of granted loans, investments, guarantees, or security via a register.
  2. The register shall enclose details in the standardized format.
  3. Firm’s registered office should be the place for register maintenance.
  4. The inspection of the register would take place at the firm’s registered office.
  5. The copies of the register are accessible to any member against the submission of standard fees.
  6. Also, members can take out some extracts from the registered post submitting the standard fees.
  7. The standard format for the register is MBP-2.
  8. The maintenance of registers should start from the incorporation date.
  9. Removal of the register(s) is not possible unless mentioned in the Act.
  10. Company Secretary or any other authorized person is accountable for maintaining the register(s).
  11.  The maintenance of registers is mandatory either via manual or electronic modes.

Penal Provisions under Section 186 of the Companies Act 2013

If a company is found guilty of breaching the norms of this section, the following penalties come into effect:

For Company

Fine – Minimum INR 25000 and,

Maximum INR 5,00,000

For Every Defaulting Officer In Question

Maximum Jail term – 2 years; and

Fine – Minimum INR 25,000 and,

Maximum INR 1,00,000

Conclusion

Loan facilitation and investment is a strategic decision for companies falling under the Companies Act 2013. Since both elements have a significant impact on the company’s long-term growth. Companies cannot grant credit for any amount to a third party or make an investment in another company without taking section 186 into account. As it is evident from the above, any contravention with the section can pose severe penalties to the defaulting company and its members.

Read Our Article: Loans and Investments by Company (Section-186)

Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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