{"id":51067,"date":"2022-12-01T14:11:21","date_gmt":"2022-12-01T08:41:21","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=51067"},"modified":"2024-07-02T18:42:48","modified_gmt":"2024-07-02T13:12:48","slug":"section-186-of-the-companies-act-2013","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/","title":{"rendered":"Section 186 of the Companies Act 2013: Know Its Significance"},"content":{"rendered":"\n<p>Section 186 of the\nCompanies Act 2013 underpins norms around the loans and investments made by the\ncompany. It states that companies cannot leverage more than two layers of\ninvestment firms (in a vertically stacked scenario) for making investments.\nJust like Section 185, this section forbids companies from; <\/p>\n\n\n\n<ul>\n<li>Rendering loans to any\nindividual or body person. <\/li>\n\n\n\n<li>Facilitating security or\nguarantee in connection with a loan to any other body corporate or person. <\/li>\n\n\n\n<li>Acquiring via purchase, subscription,\nor securities of anybody corporate.<\/li>\n\n\n\n<li>Exceeding 60 percent of\nits paid-up share capital, securities premium account, and free reserves or\n100% of the securities premium account and free reserves, whichever is more.<\/li>\n<\/ul>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/#When_Does_The_Applicability_Of_Section_186_Of_The_Companies_Act_2013_Come_Into_Effect\" >When Does The\nApplicability Of Section 186 Of The Companies Act 2013 Come Into Effect?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/#Key_Requirements_under_Section_186_of_the_Companies_Act_2013\" >Key Requirements under Section\n186 of the Companies Act 2013<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/#What_Doesnt_Fall_Under_Section_186_Of_The_Companies_Act_2013\" >What Doesn\u2019t Fall Under Section\n186 Of The Companies Act 2013?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/#Maintenance_of_Register_under_Section_186_of_the_Companies_Act_2013\" >Maintenance of Register under Section 186 of the Companies Act 2013<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/#Penal_Provisions_under_Section_186_of_the_Companies_Act_2013\" >Penal Provisions under Section 186 of the Companies Act 2013<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/section-186-of-the-companies-act-2013\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"When_Does_The_Applicability_Of_Section_186_Of_The_Companies_Act_2013_Come_Into_Effect\"><\/span><strong>When Does The\nApplicability Of Section 186 Of The Companies Act 2013 Come Into Effect? <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Section 186 of the\nCompanies Act 2013 comes into effect whenever the company decides to<\/p>\n\n\n\n<ul>\n<li>Invest in other companies<\/li>\n\n\n\n<li>Invest in other companies via its subsidiary<\/li>\n\n\n\n<li>Issue security to someone<\/li>\n\n\n\n<li>Ensure a guarantee on behalf of someone<\/li>\n<\/ul>\n\n\n\n<p>In a nutshell, this\nsection ensures legal fencing around undertakings of companies concerning loan\nfacilitation or investment. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Key_Requirements_under_Section_186_of_the_Companies_Act_2013\"><\/span><strong>Key Requirements under Section\n186 of the Companies Act 2013 <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following are\nsome important norms-cum-requirements that companies should take into account\nbefore granting loans or making investments. <strong><em><\/em><\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Requirement No.2: Securing board approval<\/em><\/strong><\/h3>\n\n\n\n<p>Securing board approval is\na mandate for a company to grant loans or make investments. The board approval\nshall be secured via a resolution passed at the meeting. The consent of all the\ndirectors is mandatory for serving such an undertaking. Resolution by\ncirculation or committee\u2019s resolution of directors is not sufficient to serve\nthis purpose. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Requirement No.2: Members\u2019 approval via Special Resolution <\/em><\/strong><\/h3>\n\n\n\n<ul>\n<li>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. <\/li>\n\n\n\n<li>Limit u\/s 186(2) is higher of \u2013\n<ul>\n<li>60 percent of (paid-up share capital + free fund reserves + securities premium) or<\/li>\n\n\n\n<li>100 percent of (free fund reserves + securities premium).<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>The special resolution must show the limit board can sanction to make loans, investments, guarantees, or security. <\/li>\n\n\n\n<li>No approval via special resolution is needed in cases where the company;\n<ul>\n<li>Grants a loan to its Wholly Owned Subsidiary, joint venture company, or<\/li>\n\n\n\n<li>Renders the guarantee or security to a Wholly Owned Subsidiary, a joint venture company<\/li>\n\n\n\n<li>Acquires the securities of its Wholly Owned Subsidiary via subscription.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Requirement No.3: PFI Approval <\/em><\/strong><\/h3>\n\n\n\n<ol>\n<li>The company must secure permission from the concerned Public Finance Institution from which it has acquired a term loan. <\/li>\n\n\n\n<li>PFI\u2019s permission is not necessary in cases where\n<ul>\n<li>The total of loans, investments, guarantees, or security proposed to be made does not surpass the underlying threshold. <\/li>\n\n\n\n<li>There is no default in terms of loan repayment or PFI interest as per the norms concerning term loans.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Requirement No.4: Interest Rate to Be Considered <\/em><\/strong><\/h3>\n\n\n\n<p>The rate of interest must\nbe higher than the existing yield of Government security close to the loan\u2019s\nperiod.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Requirement No.5: No Subsisting Default Concerning Deposits<\/em><\/strong><\/h3>\n\n\n\n<p>A company\nbeing red-flagged by authority for deposits\u2019 repayment doesn\u2019t qualify for\nmaking loans, guarantees, investments, or security until it confronts the\npenalties for such a default. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Requirement No.6: Key Details in Financial Statements<\/em><\/strong><\/h3>\n\n\n\n<ol>\n<li>The company shall enclose the following details in the financial statement:\n<ul>\n<li>The details about the loans granted, investments made, and security rendered, and <\/li>\n\n\n\n<li>The purpose for which the loan or security or guarantee is proposed<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Doesnt_Fall_Under_Section_186_Of_The_Companies_Act_2013\"><\/span><strong>What Doesn\u2019t Fall Under Section\n186 Of The Companies Act 2013?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The following\nsection talks about the elements that fall outside the scope of Section 186 of the\nCompanies Act 2013.<strong><em><\/em><\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Concerning the Government Companies\n<\/em><\/strong><\/h3>\n\n\n\n<ol>\n<li>A Government company\nbelongs to the defence sector.<\/li>\n\n\n\n<li>A Government company\n(non-listed entity), in case such company secures permission of the Ministry or\nDepartment of CG which heads administration affairs of the company or State\nGovernment, as the case may be.<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Concerning Share\nAcquisition <\/em><\/strong><\/h3>\n\n\n\n<ol>\n<li>Any acquisition of shares\nallotted w.r.t right shares.<\/li>\n\n\n\n<li>Any acquisition completed\nby a firm whose core business is security acquisition<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>&nbsp;Concerning Loans, Guarantees, or Security<\/em><\/strong><\/h3>\n\n\n\n<ol>\n<li>A banking company in the general course of its business; <\/li>\n\n\n\n<li>An insurance firm in the general course of its business; <\/li>\n\n\n\n<li>A <strong><a href=\"https:\/\/corpbiz.io\/housing-finance-company-registration\">housing finance firm<\/a><\/strong> in the general course of its business; <\/li>\n\n\n\n<li>A firm dealing with the business of company finance or rendering infrastructural facilities<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>Concerning the Acquisition\nof Shares and Loan<\/em><\/strong><\/h3>\n\n\n\n<ol>\n<li>Any acquisition made by <strong><a href=\"https:\/\/corpbiz.io\/nbfc-registration\">NBFC<\/a><\/strong>, whose core business is security acquisition. <\/li>\n\n\n\n<li>The exemption available to such a firm shall be in line with investment and lending activities. <\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Maintenance_of_Register_under_Section_186_of_the_Companies_Act_2013\"><\/span><strong>Maintenance of Register under Section 186 of the Companies Act 2013<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol>\n<li>Every company must ensure\nproper tracking of granted loans, investments, guarantees, or security via a\nregister. <\/li>\n\n\n\n<li>The register shall enclose\ndetails in the standardized format. <\/li>\n\n\n\n<li>Firm\u2019s registered office\nshould be the place for register maintenance.<\/li>\n\n\n\n<li>The inspection of the\nregister would take place at the firm\u2019s registered office.<\/li>\n\n\n\n<li>The copies of the register\nare accessible to any member against the submission of standard fees. <\/li>\n\n\n\n<li>Also, members can take out\nsome extracts from the registered post submitting the standard fees. <\/li>\n\n\n\n<li>The standard format for\nthe register is MBP-2.<\/li>\n\n\n\n<li>The maintenance of\nregisters should start from the incorporation date. <\/li>\n\n\n\n<li>Removal of the register(s)\nis not possible unless mentioned in the Act.<\/li>\n\n\n\n<li>Company Secretary or any other authorized person is\naccountable for maintaining the register(s). <\/li>\n\n\n\n<li>&nbsp;The maintenance of\nregisters is mandatory either via manual or electronic modes. <\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Penal_Provisions_under_Section_186_of_the_Companies_Act_2013\"><\/span><strong>Penal Provisions under Section 186 of the Companies Act 2013<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If a company is found\nguilty of breaching the norms of this section, the following penalties come\ninto effect: <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>For Company<\/em><\/strong><\/h3>\n\n\n\n<p>Fine \u2013 Minimum INR 25000\nand,<\/p>\n\n\n\n<p>Maximum INR 5,00,000<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong><em>For Every Defaulting\nOfficer In Question <\/em><\/strong><\/h3>\n\n\n\n<p>Maximum Jail term \u2013 2\nyears; and<\/p>\n\n\n\n<p>Fine \u2013 Minimum INR 25,000\nand,<\/p>\n\n\n\n<p>Maximum INR 1,00,000<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong> <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>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\u2019s 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. <\/p>\n\n\n\n<p class=\"text-left\"><b>Read Our Article<\/b>: <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/loan-and-investment-by-company-section-186\/\">Loans and Investments by Company (Section-186)<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>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; When Does The Applicability Of Section 186 [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":51068,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[2915],"acf":{"service_id":"1"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"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.","postViews":5013,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/51067"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=51067"}],"version-history":[{"count":4,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/51067\/revisions"}],"predecessor-version":[{"id":65150,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/51067\/revisions\/65150"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/51068"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=51067"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=51067"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=51067"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}