• Nov
  • 21
  • 2013

Loan and Investment by Company -Section 186 – Companies Act, 2013

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CS Akhilesh Kumar Jha

Loan and Investment by Company Under section 186 of the Companies Act, 2013

1-      Notified Section

This section is not covered under notification which was issued on 12th September, 2013, Hence this section is not applicable at the time of issue of this Article.

2-      Applicability of Section

A) The Sub Section (1) of Section 186 is applicable on all Companies either private Companies or public Companies.

B) Considering the Sub Section (11) of Section 186 of the Act, whole section except sub section (1) shall be applicable on Private Company as well as Public company also.

3-      Non Applicability of Section

The Section 186 (Except Section (186 (1)) of the Companies Act, 2013 does not apply in following:-

1- Banking Company, Insurance Company, Housing Finance Company etc

2-Any company whose main business of acquisition of shares or securities etc

The intention of sub section 11 is clear that if the companies are involved in the area of banking, insurance, funding, facilitating of loan etc, In that case, this section cannot be applicable.

4-      Meaning of layers

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries; (Explanation (d) of Section 2 (87))

5- Investment (u/s 186 (1))

It means a company may not make investment its money more than Two Layer. The limit has been fixed. It is showing a good sign for transparency.

6-      Investment not affects (Proviso of section 186(1))

The provisions of Section 186 (1) shall not be make compulsion on following cases:-

1- A company acquires any company which is incorporated outside India. Such company has Investment Subsidiary beyond Two layers as per the law of host country.

2- A subsidiary company from having any investment subsidiary for the purpose of meeting of the requirement under any law framed under any law for the time being in force.

7-      Limits for Investment and Guarantee (u/s 186 (2) )

The Limit is fixed in the Section 186 (2), that 60% of Paid up capital + Free Reserve + Security Premium or 100% of Free Reserve + Security Premium (whichever is More). In this Section, the company cannot give loan, guarantee or provide any security or acquisition as per fixed limit. This sub section restricts within limit.

8-      Approvals for Investment and Guarantee etc (u/s 186 (3))

The Sub section (2) of Section 186 makes restriction, but Section 186(3), gives power to the company, that it may  give loan, guarantee or provide any security or acquisition beyond the limit but before taking prior approval from Shareholder in the General Meeting.

It means once we need to take approval from Shareholder in the General Meeting, thereafter we may make investment beyond the limit.

9-      Disclosures (u/s 186 (4))

It is duty of the Company to disclose in the Financial Statement the full particulars of the loan given, security provided and guarantee given. The Company shall also disclose in its Report about its utilization.

10-     Approvals of  Board and Public Financial Institutional u/s 186 (5))

The company must take 100% consent from Board to give loan and guarantee and provided security. In case of Company has already taken loan etc from any financial institutions, banks etc. Then, it is mandatory to take prior approval also from public Financial Institution, banks etc.

The approval from Public Financial Institution shall not be required where the company has not been make default to pay interest and comply the limits and provisions of section (186 (2))

10-    Companies Registered under SEBI u/s 186 (6))

Those companies or prescribed companies which are registered under SEBI can take interoperate loans or deposited exceeding the prescribed limit.

The intention of government is clear, if the company is registered under SEBI, this section is not applicable for the part of limit. But, simultaneously, it is prescribed a condition in Section i.e.:-

At the end of the Financial Year, such companies shall furnish details of loans or deposit in its Financial Statement.

So, the company can utilize the benefit mentioning the information and details in the Financial Statement of the Company.

11-    Register (u/s 186 (9 and 10))

The Company shall must maintain a Register under this section and it shall be kept at the Registered office of the Company which shall be prescribed.

This register shall be opened for inspection and in case of any member, if demand its extract, the company shall provide them as per prescribed fee.

12- Penalty

For Company:-

If company contravenes this provision, the company shall be penalized with fine which shall not be less than Rs. 25000/- but which may extend to Rs. 5 lacs.

For Officers:-

Every officer of the Company who is default shall be punishable with imprisonment for a term which may extend to Two Years and find which shall not be less than Rs. 25000/- but which  may extend to Rs. 5 lacs.

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Full Text of the Section 186 of the Companies Act, 2013 is as follows :-

Loan and investment by company- Section 186

186 . (1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:

Provided that the provisions of this sub-section shall not affect,—

(i)    a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

(ii)  a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

(2) No company shall directly or indirectly —

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.

(3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.

(4) The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

(5) No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:

Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

(6) No company, which is registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and covered under such class or classes of companies as may be prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits.

(7) No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

(8) No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.

(9) Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed.

(10) The register referred to in sub-section (9) shall be kept at the registered office of the company and —

(a) shall be open to inspection at such office; and

(b) extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

(11) Nothing contained in this section, except sub-section (1), shall apply—

(a) to a loan made, guarantee given or security provided by a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;

(b)  to any acquisition —

(i) made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 (2 of 1934) and whose principal business is acquisition of securities:

Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;

(ii)    made by a company whose principal business is the acquisition of securities;

(iii) of shares allotted in pursuance of clause (a) of sub-section (1) of section 62.

(12) The Central Government may make rules for the purposes of this section.

(13) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

Explanation.—For the purposes of this section,—

(a) the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities;

(b) the expression “infrastructure facilities” means the facilities specified in Schedule VI.


7 Responses to “Loan and Investment by Company -Section 186 – Companies Act, 2013”

  1. Pankhuri says:

    Can a company with negative net worth make investments in Mutual Funds?

  2. Prithwish Chatterjee says:

    Limit is mentioned-
    60% of paid up cap+free reserve+sp a/c
    or
    100% of free reserve+sp a/c
    which ever is higher.bt my qs is
    Whether at calculation dis limit for investment already made+proposed to b made or only for new proosed investment.
    Cz act here mention only limit.bt in saying pfi approval it express investment already made nd proposes to ade separately.
    Plz notify my quary….

  3. anto says:

    12 – Penalty

    For officer the highest penalty is one lakh not 5 lakhs rupees

  4. ANKITA LADIA says:

    Hello All,

    Reading sub section (6) it seems that the companies which are registered under SEBI or any such companies shall not take inter-corporate loan or deposits exceeding the prescribed limit but in the above interpretation in point (10) it is written that those companies can take loan exceeding the prescribed limit. please kindly clarify it

  5. Saswata Chakravartty says:

    Hello Everyone

    The point that strikes me is that A Company can take loan from its shareholders. Now if the director is also a shareholder of the said company, Will he be able to take or give advances to the company.

  6. Ankit says:

    Hello All,

    Reading sub section (1) it seems that a company can not invest by more than two layer “investment subsidiary”, but my question is; what it mean? Is it possible that the company may invest in the more than 2 layer subsidiaries whose object are not as investment comapny but manufacturing, trading in goods, education,etc…

  7. Ankit says:

    Hello All,

    Reading sub section (1) it seems that a company can not invest by more than two layer “investment subsidiary”, but my question is; what it mean? Is it possible that the company may invest in the more than 2 subsidiaries whose object is not as investment comapny but manufacturing, trading in goods, education,etc…

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