As you all know that inter corporate loans and investments play a vital role in flow of funds to group companies which face financial crisis.

As per Section 186(1) of Companies Act 2013 a company can make investment through not more than 2 layers of investment companies but having certain exceptions.

This provision is not applicable for Specified IFSC private and public companies.

Exceptions:

1. A company acquiring any other company incorporated outside India having more than 2 layers of investment as per the law of such country.

Example:

A ltd acquire a foreign company PLtd incorporated in Japan having Xltd, Yltd and Z Ltd as its subsidiaries as per law of Japan.

2. A Subsidiary company having any investment subsidiary for meeting the requirement of law.

As per section 186(2) any company directly or indirectly  gives any loan to any person or body corporate or provide any security or guarantee in connection with loan to any person or body corporate and acquire by way of subscription or purchase of security of any body corporate exceeding 60% of paid-up share capital , free reserved and securities premium or 100% of securities premium and free reserves whichever is more shall require the unanimous approval of Board of Directors as well as prior approval of members by special resolution.

In case of Specified IFSC Private and Public company the resolution passed at board meeting of directors or resolution by circulation is sufficient.

Exceptions to Shareholders approval exceeding the above mentioned limit:

1. Where the company give loan or provide guarantee or security to its wholly owned subsidiary company or joint venture or

2. Acquisition is made by a holding company, by way of subscription, purchase or otherwise of the securities of wholly owned subsidiary company.

Example

Suppose A td propose to give loan of rupees 35lakhs to Y td. A Ltd is having paid-up share capital of 10lakhs and free reserves of 40lakhs. Whether members’ approval required in the given case?

Analysis:

Member’s approval required where the aggregate value of loans and investment exceeds 60% of paid-up share capital, free reserves and securities premium or 100% of securities premium and free reserves whichever is higher.

In the given case 60% of 10lakh+ 40lakh = 30lakh and 100% of 40lakhs = 40lakhs out of this higher shall be considered i.e. 40lakhs. The loan proposed is only 35lakhs which is below the limit. So members approval is not required consent of all directors present at the meeting is sufficient.

The company shall disclose full details of inter corporate loans and investments to the members in the financial statement.

The rate of interest charged for the loan shall not be lower than the prevailing yield of 1yr, 3yr, 5yr or 10yr government security close to the tenure of the loan.

Approval of Public financial institution is required prior to making inter corporate loans and investment if the term loan is subsisting and exceeds the limit specified under subsection 2 of section 186.

A company which defaults in repayment of deposit or payment of interest shall not give loan, provide security or making acquisition till the default is subsisting.

Register of Loans and Investments

The company shall maintain the register of inter corporate loans and deposits in Form MBP-2 and the entries shall be made chronologically within 7 days of such transaction .It shall be kept at the registered office of the company and preserved permanently. The extracts from the register shall be provided to the member on payment of fee as may be prescribed. The register shall be open to inspection.

Non Applicability of Section 186 except layers of investment

  • Banking company, insurance company or a housing finance company provide any loan, guarantee or security in the ordinary course of business
  • Company engaged in the business of financing industrial enterprise or providing infrastructural facilities
  • NBFC undertaking lending and investment activities which is registered under RBI whose principal business is acquisition.

Contravention of provisions of this Section

  • Company shall be punishable with fine which shall not be less than 25000/- which may extend up to 5lakhs and
  • officer in default shall be punishable with fine which shall not be less than 25000/- which may extend to 1lakh and imprisonment for a term extend to 2 years.

Author Bio

Qualification: Student - CA/CS/CMA
Company: N/A
Location: Palakkad, Kerala, India
Member Since: 08 Jan 2023 | Total Posts: 2

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