Section 186 of the Companies Act, 2013, plays a pivotal role in regulating and overseeing financial transactions and investments made by companies in India. Enacted to safeguard the interests of shareholders, ensure fiscal responsibility, and promote corporate transparency, this section outlines a comprehensive framework for loans, guarantees, and investments by companies. It lays down stringent guidelines and provisions that companies must adhere to while engaging in various financial transactions.
Section 186 encompasses a series of subsections, each addressing specific facets of corporate financial dealings. These subsections collectively form a robust regulatory framework that governs how companies extend loans, offer guarantees, provide security, and make investments. The primary objective of Section 186 is to strike a balance between facilitating business growth and protecting the financial stability of companies.
In the subsequent sections of this article, we will delve into each subsection of Section 186, dissecting its key elements and implications. By the end of this exploration, you will have a well-rounded understanding of the regulatory landscape governing loans and investments made by companies under the Companies Act, 2013.
Section 186 of the Companies Act, 2013 – Loan and Investment by Company
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Sub-section |
Particulars | Limit | Exemption | Explanation |
| (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 | (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. |
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| (2) – Limit | The company shall not 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 the limit speci ied |
60% of its paid-up share capital, free reserves and securities premium account
Or 100% of its free reserves and securities premium account, Whichever is more. |
“person” does not include any individual who is in the employment of the company | |
| (3) – Members Resolution | If the aggregate of the loans and investment made, the amount for which guarantee or security provided to or in all other bodies corporate
+ The investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits speci ied above i.e. (2) Should be authorised by a Special Resolution |
1. A loan or guarantee is given or security has been provided by a company to
♦ its wholly owned subsidiary company or ♦ a joint venture company, or 2. Acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company. |
the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement. | |
| (4) – Disclosure | 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) – Board Resolution | The investment or loan or guarantee or security shall be made only after passing the Board resolution with the consent of all the directors present at the meeting
And Prior approval of the Public Financial Institution (PFI) concerned where any term loan is subsisting, is obtained. |
1. Prior approval of PFI shall not be required where the aggregate of the loans, investments, guarantee or security already provided plus proposed to be provided, does not exceed the limit as specified in subsection (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.2. Specified IFSC public company and Specified IFSC private company can exercise powers under this sub- section by means of Board resolutions passed at meetings or through resolutions passed by circulation. |
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| (6) | No company which is –
1. registered under section 12 of the Securities and Exchange Board of India Act, 1992 AND 2. 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 |
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| (7) – Rate of Interest | Loan given under this section shall be at a rate of interest not lower than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security closest to the tenor of the loan. | A company in which 26% or more of the paid-up share capital is held by the Central Government or 1 or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its MOA. | ||
| (8) – Non- eligible Companies | The 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, shall not give any loan or guarantee or provide any security or make an acquisition till such default is subsisting. | |||
| (9) – Maintenance of Register | Companies giving loan or guarantee or providing security or making an acquisition under this section shall keep a register containing such particulars as may be prescribed. | Register in Form MBP 2 | ||
| (10) – Inspection & Extracts of Register | The register shall be kept at the registered of ice of the company and –
(a) shall be open to inspection at such of ice; and (b) extracts may be taken therefrom by any member, and copies thereof maybe furnished to any member of the company on payment of such fees as may be prescribed. |
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| (11) – Exemption | This section shall not apply except sub-section (1) to the following: (Only sub-section (1) shall apply to the following)
(a) to any loan, guarantee or security or investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of inancing industrial enterprises, or of providing infrastructural (b) to any investment— (i) made by an investment company; (ii) made in shares allotted in pursuance of section 62(1)(a) or in shares allotted in pursuance of rights issues made by a body corporate; (iii) made, in respect of investment or lending activities, by a NBFC registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities. |
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| (12) | The Central Government may make rules for the purposes of this section. | |||
| (13) – Punishment | If a company contravenes the provisions of this section, the company with ine not be less than Rs. 25,000 but which may extend to Rs. 5,00,000
and every of icer of the company who is in default with imprisonment for a term which may extend to 2 years and with ine not be less than Rs. 25,000 but which may extend to Rs. 1,00,000. |
(a) “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.
(b) “infrastructure facilities” means the facilities specified in Schedule VI.
Conclusion: Section 186 of the Companies Act, 2013, is crucial in regulating loans and investments by companies in India. It sets limits, requires disclosures, and promotes transparency and accountability. Companies must be well-versed in these regulations to ensure compliance and avoid legal repercussions. Understanding these provisions is essential for maintaining financial integrity and corporate responsibility in the business world.
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