Summary: Sections 186 and 187 of the Companies Act, 2013 regulate inter-corporate loans, guarantees, investments, and the holding of investments by companies. Section 186 applies to all companies except specified entities such as banking companies, NBFCs, insurance, financing, and infrastructure companies, while Section 187 generally applies to all companies. Section 186 restricts loans, guarantees, securities, and investments to 60% of paid-up share capital, free reserves, and securities premium, or 100% of free reserves and securities premium, whichever is higher, unless approved by a special resolution. It also mandates board approvals, prescribed interest rates, statutory registers, MGT-14 filings, and disclosures in financial statements and board reports. Section 187 requires investments to be held in the company’s own name, subject to limited statutory exceptions. Non-compliance attracts substantial monetary penalties and, in certain cases, imprisonment for officers in default. Regulatory authorities have commonly penalized companies for failure to maintain registers, delayed filings, inadequate disclosures, and exceeding statutory limits without requisite approvals.
APPLICABILITY :
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Section 186 : – Applicable to all the companies except – Banking companies, NBFC, insurance, financing companies and companies providing infrastructural facilities. |
Section 187 : – Applicable to all the companies |
PENALTY:
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Violation of section 186 – Loan and Investment by Company Company : Rs. 25,000/- – Rs. 5,00,000/- Officer in default: Rs. 25,000/- – Rs. 1,00,000/- and Imprisonment for a term with may extend to 2 years. |
Violation of section 187 – Investments of company to be held in its own name Company : Rs. 5,00,000/- Officer in default : Rs. 50,000/- |
IMPORTANT POINTS
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Under section 186 – Loan and Investment by Company – Two Layers Restriction Investment allowed only up to 2 layers of investment companies Exemption company acquiring any other company outside India, if such company has invested in subsidiaries beyond 2 layers to comply with the laws of such country Subsidiary company investing in other companies for the purpose of meeting the requirements of laws or rules or regulations framed under the laws for the time being in force. |
Under section 187 – Investments of company to be held in its own name – Investments made by the company in property or securities shall be held in its own name. Exemption: Shares in a subsidiary company may be held in the name of nominees to ensure that the number of members of the subsidiary does not fall below the statutory limit. Securities or shares may be deposited by the company with a bank for the collection of any dividend or interest payable. Securities or shares may be deposited by the company with the State Bank of India or any scheduled bank to facilitate transfer. If such shares or securities are not transferred within 6 months, they must be re-transferred to the company. – Securities or shares may be deposited or transferred to any person as security for the repayment of any loan or for the performance of any obligation undertaken by the company. – Investments may be held in the name of a depository where the company is the beneficial owner of such securities. |
RESTRICTIONS:
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Under section 186 – Loan and Investment by Company Loan or guarantee or investment given to body corporate (1-3) can not exceed 60% of (Paid-up share capital + Free reserves + Securities premium) OR 100% of (Free reserves + Securities premium) Which ever is higher. 1. Give any loan to any person or other body corporate. 2. Give any guarantee or provide any security in connection with a loan given to any person or other body corporate. 3. Acquire, by way of subscription, purchase, or otherwise, the securities of any other body corporate |
COMPLIANCE
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Under section 186 – Loan and Investment by Company 1- Board resolution for providing loans/ guarantee/ investment 2 – Special resolution in the event of loans/ guarantee/ investment is in excess of 60% of (Paid-up share capital + Free reserves + Securities premium) or 100% of (Free reserves + Securities premium) which ever is higher 3 – Interest rate >= Government Security yield – closest to the tenor of the loan 4 – Statutory Register of loans to be updated 5 – MGT 14 to be filed for special resolution (applicable for all the companies) and for board resolution (for all public companies) 6 – Inter corporate agreement 7 – Disclosure in the financial statements and board report |
Under section 187 – Investments of company to be held in its own name 1. Board resolution 2. Register of Investment 3. Disclosure in the financial statements and board report. |
VARIOUS BASES ON WHICH PENALTIES HAVE BEEN LEVIED (ROC/RD ORDERS ACROSS INDIA)
Failure to maintain MBP-2 Register as required under Section 186.
- Delay in filing Form MGT-14 for Board Resolution/Special Resolution.
- Board’s Report not properly updated, resulting in penalty under Section 186 read with Section 134.
- Missing or incorrect disclosures in the financial statements attracting penalties.
- Exceeding the limits prescribed under Section 186 without obtaining proper Board Resolution or Special Resolution.
- Non-disclosure of inter-corporate loans, guarantees, securities, or investments in statutory records or financial statements.
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