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Section 186- Loan and investment by company

Introduction- A Company can give loans and guarantees, acquire securities or make investments in another company or body corporate with the consent of the board or shareholders. Such loans given by a company to other companies or body corporates are known as inter-corporate loans. When a company invests in another company, it is known as inter-corporate investment.

Applicability- Private as well as Public companies

186(1)

Interpretation- As per Section 186(1) a company can invest in not more than two layers of investment companies;

Here “layer” in relation to a holding company means its subsidiary or subsidiaries;

What does investment mean- Investment means investments such as purchase of shares, share warrants or debenture bonds or similar debt securities.

Exemption- Provided that the provisions of this sub-section shall not affect,—

(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

186(2)

Interpretation- No Company shall directly or indirectly give

-Loan to any person or body corporate

-Guarantee or provide security for any loan to any person or body corporate

-Acquire securities of anybody corporate

Exceeding

60% of its Paid-up Share Capital + Free Reserves + Security Premium

Or

100% of its Free Reserves + Security Premium,

Whichever is more

1. In case a company wishes to exceed limits under sub-section (2) then it can pass a special resolution and do so.

2. Company shall disclose in its financial statement the reasons for providing such loans etc. the purpose for which such amount will be utilized

3. No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the Directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

4. States that if limit of loan etc is as per sub section (2) and no defaults were made in installments of loan/interest then no approval of public financial institution is required

5. No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

Penalty– If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

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