Summary: Section 186 of the Companies Act, 2013 governs intercorporate transactions, specifying restrictions and limitations on loans, guarantees, and securities acquisitions among corporate entities. The section mandates that these transactions remain within 60% of the paid-up share capital, free reserves, and securities premium account or 100% of free reserves and securities premium account, whichever is higher. Exceeding these limits requires a special resolution, although transactions between a company and its wholly-owned subsidiaries or joint ventures are exempt. Disclosure in financial statements is mandatory, detailing the purpose and utilization of funds. Unanimous board consent is essential for all Section 186 transactions, irrespective of limits. Companies with SEBI registration must adhere to specific conditions set during their registration, potentially bypassing the general 60% and 100% thresholds. Interest rates on intercorporate loans must align with prevailing government securities yields. Defaulting companies cannot engage in Section 186 transactions, and detailed registers of these transactions must be maintained and authenticated. Exceptions include transactions by banking, insurance, housing finance companies, and NBFCs in the ordinary course of business, as well as those between holding companies and their wholly-owned subsidiaries or joint ventures. Non-compliance can result in significant fines and imprisonment for responsible officers.
Introduction
1. Section 186 talks about intercorporate transactions only.
2. If a Company deals with Non-Corporate entity this section does not apply.
3. This sections basically provides certain restrictions and limitations within which Board of Directors can perform transactions, beyond which special resolution becomes compulsory.
Transactions covered under Section 186
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
Limit specified under section 186
1. Limit is 60% of paid-up share capital, free reserve and securities premium account
OR
100% of free reserves and securities premium account, whichever is higher.
2. Limit will be verified before every next transactions done between Companies.
What if the limits are exceeded
1. Special Resolution is required when the limit is exceeded.
2. Transactions between company and its wholly owned subsidiary, or a joint venture company will not need special resolution even if the limits is exceeded.
Disclosure Requirement
1.Transactions performed u/s 186, must be disclosed in the financial statements.
2. Utilization of money and purpose behind the transaction must also be disclosed.
Nature of Board Resolution
For transactions u/s 186, whether within limit or beyond limit, consent of all directors present is needed, i.e., unanimous board resolution is required.
Approval of Public Financial Institution
1. Approval of public financial institution is required before undertaking transactions of this section only if both the following conditions are fulfilled-
a. Limits are exceeded.
b. There is a default in repayment of loan or interest.
2. Approval of PFI has to be prior approval and ratification is not possible.
Special rule for Company registered with SEBI
1. When a company is registered with SEBI u/s 12, it has to follow conditions on which it was granted registration.
2. If such conditions contains some maximum limit of loan or deposits, it has to be followed.
3. It means limit of 60% and 100% do not apply when these companies take loans or deposits.
Rate of interest for Loan
1. When one company gives loan to another company, it will charge interest as per its own wish.
2. However rate of interest cannot be less than the prevailing yield of one year, three year, five year or ten year. Government security closest to the tenure of the loan.
Default in Repayment of Deposits
1. If the Company has defaulted in repayment of deposits or its interest, transactions under section 186 are prohibited.
2. Even if depositors give their consent, such transactions are not permitted.
Register of transactions under section 186
1. Every company performing transactions of this section, shall make a separate register in form no. MBP-2.
2. Entries in the register shall be made chronologically.
3. Entries shall be done within 7 days.
4. Register can be kept either manually or in electronic mode.
5. It shall be maintain at register office of Company.
6. It shall be preserved permanently.
7. They shall be kept in the custody of Company Secretary or any other person authorized by Board of Directors.
8. Entries in the register shall be authenticated by Company Secretary or any other person authorized by Board of Directors.
9. Member can demand copy of such register which will be provided to him upon payment of fees, which cannot be more than Rs. 10 per page.
Non-applicability of Section 186
Loans, guarantee, security or investment made by
a. banking company in the ordinary course of its business
b. insurance company in the ordinary course of its business
c. housing finance company in the ordinary course of its business
d. company engaged in the business of financing of industrial enterprises or of providing infrastructural facilities.
Shares allotted
a. any shares allotted in pursuant to right issue.
b. any acquisition made by the Company whose principal business is the acquisition of securities.
Investment or lending activities
made by Non Banking Financial Companies (NBFC) whose principal business is the acquisition of securities.
WOS or JV
It also doesn’t apply on transactions between holding & Wholly-owned subsidiary and Joint venture company.
Punishment for Non-Compliance
1. Company will pay minimum Rs. 25,000/- and maximum Rs. 5,00,000/-
2. Officer in default will pay minimum Rs. 25,000/- and maximum Rs. 1,00,000/-
3. Officer in default will be liable for imprisonment of maximum two years.
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