Analysis of Sec-186 of Companies Act i.e. Loan and Investment by Company, Notified date of section is 1st April 2014
It explains Inter-corporate Loans and Investments (i.e. investment by one company in another company).
Sec-185 applicable where Company gives Loan / Guarantee / Security to Director or any person in which he is interested.
Sec-186 applicable where Company gives Loan / Investment / Guarantee / Security to Third Party (persons not included in Sec 185).
Sec 186 imposes restrictions on Investments / Loans made / given by the company.
|S#||Loan and Investment by a Company to the Third party||Sec- 186|
|1||Company gives directly / indirectly
> Loan to Any Person,
> provides Guarantee / Security in connection with a loan to any other person,
> Acquisition of securities (body corporate)
|2||Mainly Three approvals required:
I. Unanimous Resolution (Board); passed at a Board meeting with the consent of all the directors present at the meeting, in all cases.
II. Special Resolution (Members);
a. When the aggregate of the Loan, investment, guarantee or security already made together with the loan, investment, guarantee or security proposed to be made exceeds the limit u/s 186(2)*, prior approval by means of a special resolution (SR) is required in General Meeting. SR shall contain the total amount up to which the Board is authorized to make loans, guarantee, investment or security.
*186(2) limit; Higher of; 60% of (Paid-up share capital + free reserves + securities premium) or 100% of (free reserves + securities premium).
b. Exception; i.e. No approval of SR, if the loan, guarantee, security is given by a company to its Wholly Owned Subsidiary [WOS] or joint venture company [JVC], or Where the acquisition of securities of its wholly owned subsidiary is made by a holding company, by way of subscription or otherwise.
c. Disclosures in financial statements; The details of any loans given, investments made, guarantee or security provided, and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient.
III. Approval of Public Financial Institution (PFI);
Need to obtain prior approval of PFI from which it has taken a term loan.
Exception; i.e. No approval of PFI if –The aggregate of loans, guarantee, investments or security already made together with the loan, investment, guarantee or security proposed to be made does not exceed the limit given u/s 186(2), and no default in repayment of loan installments or interest to PFI as per the terms and conditions of such term loan.
|3||Other few compliances:
I. Inter-corporate investments not to be made through more than two layers (its subsidiaries) of investment companies*
*Investment Co’: whose principal business is the acquisition of shares, debentures or other securities.
Exception; The Company. incorporated outside India (Having Investment subsidiaries beyond two layers.
The Subsidiary Co., any investment
II. Interest Rate chargeable be more than the prevailing yield of Government Security closest to the period of the loan.
III. No subsisting default: A company which has defaulted in repayment of any deposits accepted by it or in payment of interest on deposits, shall not make any loan, guarantee, investments or security till such default is subsisting (i.e. only after the default has been made good).
IV. Every company which makes a loan, investment, guarantee or security shall maintain a register.
V. Register kept at the registered office of the company, and be open to inspection at such office, and taken extracts by any members.
VI. No Co, which is registered u/s 12 of SEBI and covered under such class of Cos as prescribed shall take Inter-corporate loan / deposit exceeding the prescribed limit
Sec- 186 (except Sub-Section 1) does not apply to the following:
a. Where any loan, guarantee or security provided or investment made in the ordinary course of its business by-
A banking company / An insurance company / A housing finance company. A company engaged in the business of financing of companies or of providing infrastructural facilities;
b) to any Investment –
made by an investment co; made in shares (u/s 62(1)(a)), or in shares allotted in pursuance of rights issues made by a body corporate.
Made in respect of investment / lending activities, by a NBFC and whose principal business is acquisition of securities.
Monetary Penalty / Imprisonment in Contravention of the provisions of Sec-186
|S.No.||Punish to||Monetary Limit (Rs.)||Imprisonment||Section 186|
|1||For the Company
|25 K to 5 Lakh||–||13|
|2||For Officer of the company in default
(imprisonment or fine)
|25 K to 1 Lakh||Upto 2 years||13|