{"id":6189,"date":"2020-04-06T16:37:32","date_gmt":"2020-04-06T11:07:32","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=6189"},"modified":"2022-11-16T14:20:24","modified_gmt":"2022-11-16T08:50:24","slug":"loan-and-investment-by-company-section-186","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/loan-and-investment-by-company-section-186\/","title":{"rendered":"Loans and Investments by Company (Section-186)"},"content":{"rendered":"\n<p class=\"has-drop-cap\"><em>This article will help you know about the provisions related to the&nbsp;<\/em><strong><em>Loan and Investment<\/em><\/strong><em><strong> made by the company (like layers of investment, limits for loans, the penalty for contravention etc.) <\/strong>under the Companies Act 2013 and rules thereof.<\/em><\/p>\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\/loan-and-investment-by-company-section-186\/#Applicable_Sections_Rules\" >Applicable Sections &amp; Rules;<\/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\/loan-and-investment-by-company-section-186\/#Contents_of_this_Article\" >Contents of this Article;<\/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\/loan-and-investment-by-company-section-186\/#Meaning_of_the_term_%E2%80%98Investment_and_%E2%80%98Investment_Company\" >Meaning of the term \u2018Investment\u2019 and \u2018Investment Company\u2019;<\/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\/loan-and-investment-by-company-section-186\/#How_many_layers_of_Inter-corporate_investments_can_be_made_in_India\" >How many layers of Inter-corporate investments can be made\nin India?<\/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\/loan-and-investment-by-company-section-186\/#What_are_the_limits_for_granting_Loans_Guarantees_Security_and_Investment_Section_1862\" >What are the limits for granting\nLoans, Guarantees, Security and Investment? {Section 186(2)}<\/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\/loan-and-investment-by-company-section-186\/#Non-applicability_of_provisions_of_Sec-186_to_Companies_other_than_Government_companies\" >Non-applicability of provisions\nof Sec-186 to Companies (other than Government companies);<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/corpbiz.io\/learning\/loan-and-investment-by-company-section-186\/#Exemption_from_the_applicability_of_Section_186_to_Government_Company\" >Exemption from the\napplicability of Section 186 to Government Company;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/corpbiz.io\/learning\/loan-and-investment-by-company-section-186\/#The_penalty_of_contravention_of_Section-186\" >The penalty of contravention of Section-186;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/corpbiz.io\/learning\/loan-and-investment-by-company-section-186\/#Note\" >Note:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/corpbiz.io\/learning\/loan-and-investment-by-company-section-186\/#Register_of_Loans_made_Guarantees_given_Securities_provided_and_Investments_made\" >Register of Loans made,\nGuarantees given, Securities provided and Investments made;<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Applicable_Sections_Rules\"><\/span>Applicable Sections &amp; Rules;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li><strong>Section 186<\/strong> of the <strong>Companies Act, 2013<\/strong><sup><a class=\"text-primary\" href=\"https:\/\/www.mca.gov.in\/content\/mca\/global\/en\/acts-rules\/companies-act\/companies-act-2013.html\"><strong>[1]<\/strong><\/a><\/sup>.<\/li><li><strong>Rule 13<\/strong> of Companies (Meetings of Board and its Powers) Rules, 2014.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Contents_of_this_Article\"><\/span>Contents of this Article;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Meaning of the terms \u2018Investment\u2019 and \u2018Investment Company\u2019.<\/li><li>How many layers of Inter-corporate investments can be made in India?<\/li><li>What are the limits for Loans, Guarantees, Security and Investment?<\/li><li>Non-applicability of provisions of Sec-186 to Companies other than Government companies.<\/li><li>Exemption from the applicability of Section 186 to Government Company.<\/li><li>Procedures involved in making a loan, giving a guarantee, and providing security.<\/li><li>Register of Loan given, Guarantees given, Securities provided, and Investment made.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Meaning_of_the_term_%E2%80%98Investment_and_%E2%80%98Investment_Company\"><\/span>Meaning of the term \u2018Investment\u2019 and \u2018Investment Company\u2019;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The word \u2018Investment&#8217; 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 <em>(except<\/em> the making of loans or advances or any other financial transactions such as lease, purchase of receivables, or other credit facilities).<\/p>\n\n\n\n<p>An \u2018Investment Company\u2019 means a <a href=\"https:\/\/corpbiz.io\/company-registration\"><strong>registered company<\/strong><\/a> whose primary business is the purchase and sale of shares, debentures and other various types of securities.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_many_layers_of_Inter-corporate_investments_can_be_made_in_India\"><\/span>How many layers of Inter-corporate investments can be made\nin India?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A company shall (unless otherwise stated) invest\nin not more than two layers of investment companies in India. {Section 186(1)}<\/p>\n\n\n\n<p><strong>Example;<\/strong> If Company\n\u2018<strong>H<\/strong>\u2019 is the holding company of\nCompany \u2018<strong>S<\/strong>\u2019\nand Company \u2018<strong>S<\/strong>.S.&#8217;\nis the subsidiary of the Company \u2018<strong>S<\/strong>\u2019.<\/p>\n\n\n\n<p><strong><em>Then Investment flow will be as follows \u2013 <\/em><\/strong><\/p>\n\n\n\n<p>From Company \u2018<strong>H<\/strong>\u2019 to Company\n\u2018<strong>S<\/strong>\u2019 (layer 1) and from\nCompany \u2018S\u2019 to Company \u2018<strong> S.S<\/strong>.&#8217; (layer 2). There is an indirect investment of Company \u2018<strong>H<\/strong>\u2019\nin the Company \u2018<strong> S.S<\/strong>.&#8217;.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Exceptions to Section 186(1):<\/h3>\n\n\n\n<ul><li>A company from purchasing any other <strong>company incorporated in another country,<\/strong> if such other company has any investment subsidiaries more than 2 layers under the laws of such other nation. <\/li><li>A subsidiary company of having any, Investment subsidiary for the objective of meeting the <strong>requirements of any law or regulations, <\/strong>for the time being in force. [Proviso to sub-section (1) of section 186]<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_limits_for_granting_Loans_Guarantees_Security_and_Investment_Section_1862\"><\/span>What are the limits for granting\nLoans, Guarantees, Security and Investment? {Section 186(2)}<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>No company shall either directly or\nindirectly, sanction any loan or guarantee, provide any security to a person or\nother body corporate or make any investment in securities of any other body\ncorporate, exceeding-&nbsp;&nbsp;&nbsp;\n<\/p>\n\n\n\n<p><strong>60<\/strong> per cent of the\ncompany&#8217;s paid up share capital and free reserves (F.R.) and securities premium\naccount (SPA) <\/p>\n\n\n\n<p><strong>OR<\/strong><\/p>\n\n\n\n<p><strong>100<\/strong> per cent of its free\nreserves (F.R.) and securities premium account (SPA), whichever\nis more unless the same is earlier authorised by a <strong>special resolution<\/strong> passed in a general meeting.<\/p>\n\n\n\n<div class=\"shadow1\"><strong>Note:<\/strong> Section 186(2)\nshall not apply on <strong>Specified IFSC public and private company<\/strong> only if a company passes a resolution either at a duly convened meeting of the Board of Directors or by circulation method.<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Non-applicability_of_provisions_of_Sec-186_to_Companies_other_than_Government_companies\"><\/span>Non-applicability of provisions\nof Sec-186 to Companies (other than Government companies);<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li><strong>To any loan made, any guarantee is given or any security provided or any investment made by;<\/strong><\/li><\/ul>\n\n\n\n<ol><li>a banking company,<\/li><li>an insurance company,<\/li><li>a housing finance company,<\/li><li>a company involved in the business of financing industrial companies, or of providing infrastructural facilities,<\/li><li>in the ordinary course of its business.<\/li><\/ol>\n\n\n\n<ul><li><strong>To any investment &#8211;<\/strong><\/li><\/ul>\n\n\n\n<ol><li>made by any investment company,<\/li><li>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; <\/li><li>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.&nbsp; <\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Exemption_from_the_applicability_of_Section_186_to_Government_Company\"><\/span>Exemption from the\napplicability of Section 186 to Government Company;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As per the\nCentral Government\u2019s notification dated <strong>5th\nJune 2015, <\/strong>under <strong>Section 462 <\/strong>of\nthe Companies Act, 2013, Section 186 shall not apply to:<\/p>\n\n\n\n<ul><li>a Government company engaged in defence production;<\/li><li>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.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_penalty_of_contravention_of_Section-186\"><\/span>The penalty of contravention of Section-186;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<table class=\"table table-bordered\"><tr><td>\n  <strong>Liability of<\/strong>\n  <\/td><td>\n  <strong>Imprisonment<\/strong><strong><\/strong>\n  <\/td><td>\n  <strong>Fine<\/strong>\n  <\/td><\/tr><tr><td>\n  Company\n  <\/td><td>\n  NA\n  <\/td><td>\n  Not less than, Rs. 25,000\/- and\n  may extend to Rs. 1,00,000\/-\n  <\/td><\/tr><tr><td>\n  Officer in\n  default\n  <\/td><td>\n  May extend to 2 years&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; and\n  <\/td><td>\n  Not less than, Rs. 25,000\/- and\n  may extend to Rs. 1,00,000\/-\n  <\/td><\/tr><\/tbody><\/table>\n\n\n\n<ul><li><strong>Loan or investment to be made with the approval of all the directors at the Board Meeting {sub section 5 of section 186} <\/strong><\/li><\/ul>\n\n\n\n<p>No loan\/investment shall be made or guarantee\/security given by the\ncompany unless the resolution approving the same is passed at a meeting of the\nBoard with the <strong>consent of all directors\npresent at the meeting<\/strong>.<\/p>\n\n\n\n<ul><li><strong>Prior approval through Special\nResolution [Section 186 (3)]<\/strong><\/li><\/ul>\n\n\n\n<p><strong>Section 186(3) read\nwith Rule 13 of Companies (Meetings of Board and its Powers) Rules, 2014, states\nthat<\/strong><\/p>\n\n\n\n<p>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 <a href=\"https:\/\/corpbiz.io\/learning\/annual-general-meeting\/\"><strong><em>Annual general meeting<\/em><\/strong><\/a> by way of a special resolution. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Note\"><\/span>Note: <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Exemptions to wholly-owned\nsubsidiary company:<\/strong><\/p>\n\n\n\n<p>Where a\nloan\/guarantee is given, or security provided by a company to its <strong>wholly-owned subsidiary company or a joint\nventure company, or investment made by a holding company<\/strong>, <strong>in the securities of its wholly-owned\nsubsidiary company<\/strong>, the requirement of section 186(3) shall not apply. In such a case, the\ncompany is required to disclose the details of such loans or guarantee or\nsecurity or investment in the financial statement as provided under section 186(4).<\/p>\n\n\n\n<p><strong>Companies\nRegistered Under SEBI {Sec- 186(6)};<\/strong><\/p>\n\n\n\n<p>No company,\nwhich is registered under the section 12 (Registration of stockbrokers,\nsub-brokers, share transfer agents, etc.) of the SEBI Act, 1992 and covered\nunder such class or classes of companies as may be prescribed, shall take the\ninter-corporate loans or deposits beyond the limit as prescribed and Such\ncompany must furnish, in its financial statement, the details of the loan or deposits.&nbsp; <\/p>\n\n\n\n<p><strong>Disclosure\nin financial statements [Section 186(4)]:<\/strong><\/p>\n\n\n\n<p>The company\nshould disclose to the members in the financial statement the full details of\nthe loans given, the investment made\/guarantee given\/security provided and the\nobjective for which such loan\/guarantee\/security is ought to be utilised by the\nreceiver of the loan or guarantee or security.<\/p>\n\n\n\n<p><strong>Prior\nApproval of Financial Institution {Section 186(5)}:<\/strong><\/p>\n\n\n\n<p>The company has\nto obtain prior approval of the public financial institution or any other\nlending institution such concerned, where any term loan is subsisting.<\/p>\n\n\n\n<p><strong>Rate of interest {Section 186(7)}:<\/strong><\/p>\n\n\n\n<p>Loan given under\nthis section shall carry the rate of interest not lower than the prevailing\nyield of 1 year, 3 years, 5 years or 10 years Government Security closest to\nthe tenor of the loan.<\/p>\n\n\n\n<p><strong>Default exists concerning\nrepayment of deposits {Section 186(8)}:<\/strong><\/p>\n\n\n\n<p>No company,\nwhich is in default in repayment of any deposits accepted before or after the\ncommencement of the Companies Act, 2013 or in payment of interest thenceforth,\nshall give any loan\/guarantee\/security or make an acquisition until such\ndefault is pending.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Register_of_Loans_made_Guarantees_given_Securities_provided_and_Investments_made\"><\/span>Register of Loans made,\nGuarantees given, Securities provided and Investments made;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Rule 12<\/strong> 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, &#8216;Form <strong>MBP 2<\/strong>&#8216; and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made.<\/p>\n\n\n\n<p>The entries in\nthe register shall be done consecutively in respect of each such transaction <strong>within the 7 days<\/strong> of making such\nloan\/guarantee\/security or making any acquisition.&nbsp; <\/p>\n\n\n\n<p>The register shall be placed at the registered office of the company, and the <strong>register must be maintained permanently<\/strong>. It shall be kept in the safekeeping of the company secretary of the company or any other person so authorised.<\/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-to-directors\/\">Loan to Directors: A Complete Checklist<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>This article will help you know about the provisions related to the&nbsp;Loan and Investment 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 &amp; Rules; Section 186 of the Companies Act, 2013[1]. Rule 13 of Companies (Meetings of [&hellip;]<\/p>\n","protected":false},"author":26,"featured_media":6193,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[120,340],"tags":[461],"acf":{"service_id":"321"},"authorName":"Raj Shakya","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/03\/processed.jpeg","authorDescription":"Raj Shakya is working as an CS 'Intern' in Corpbiz. He has expertise in various corporate and allied laws.","postViews":21309,"readingTime":5,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/6189"}],"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\/26"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=6189"}],"version-history":[{"count":29,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/6189\/revisions"}],"predecessor-version":[{"id":50740,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/6189\/revisions\/50740"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/6193"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=6189"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=6189"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=6189"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}