Section 186 of Companies Act, 2013

Loans, Investment, Guarantee and Security

A Company can:

1. Give loan to any person or body corporate

2. Give guarantee or provide security for any loan taken to any body corporate

3. Make investment in any body corporate

Approving Authority

1. Board of Directors– Any of the above mentioned transactions shall be approved by the Board of Directors of the Company-

Where the aggregate of loan, guarantee, security and investment made by the Company does not exceed, higher of the following:

60% of the paid up share capital, free reserves and securities premium account or

100% of the securities premium account and free reserves

#The resolution shall be approved by all the Directors present in the meeting

2. Members- The above mentioned transactions shall be approved by a special resolution (members present in the meeting and holding 75% of the share capital)-

Where the aggregate of loan, guarantee, security and investment made by the Company is more than, higher of the following:

60% of the paid up share capital, free reserves and securities premium account or

100% of the securities premium account and free reserves

3. Public Financial Institutions- Where the Company has any term loan outstanding from any Public Financial Institution (PFI), prior approval of such PFI shall be taken before making any investment, granting loan or providing guarantee or security.

Approval is not required where the threshold limit as stated above is not crossed and there is no default in payment of the installment or interest to the PFI.

Interest Rate

1. Any loan given by the Company to any person or body corporate shall carry an interest rate.

2. The interest rate should be equal to or more than the interest rate given on the Government Security having the same tenure.

Reporting of the Transaction:

1. For a Public Company-

Board Resolution: Pursuant to Section 117 of the Companies Act, 2013, Form MGT-14 shall be filed for all resolutions passed under Section 179(3) of the Act. Thus resolution for granting of loan, making an investment or provision of guarantee or security shall be filed with the Registrar of Companies within 30 days of passing the resolution.

Special Resolution passed by Members: Pursuant to Section 117 of the Companies Act, 2013, Form MGT-14 shall be filed for all special resolutions passed by the Members, thus special resolution passed pursuant to Section 185 of the Act shall be filed within 30 days of passing the resolution.

2. For a Private Company-

Board Resolution: Private Companies are exempted from filing of Form MGT-14 for resolutions passed under Section 179(3). Thus, filing of Form MGT-14 is not required.

Special Resolution passed by Members: Pursuant to Section 117 of the Companies Act, 2013, Form MGT-14 shall be filed for all special resolutions passed by the Members, thus special resolution passed pursuant to Section 186 of the Act shall be filed within 30 days of passing the resolution.

Disclosure

1. In the Financial Statements:

  • The details of the loan, guarantee, security and investment (total amount, interest rate)
  • Purpose of giving loan, guarantee or security or making an investment

2. In the Board’s Report- Pursuant to Section 134(3)(g) the details of the loan, guarantees or investments granted under section 186 shall be disclosed in the Board’s Report.

3. Maintain a register in Form MBP-2

Exemptions

1. The word person in the Section does not include any individual who is in the employment of the Company. Thus, a loan can be given to such a person without attracting the provisions of Section 186.

2. Where a loan or guarantee or security is given by a Company to its wholly owned subsidiary or a joint venture company exceeding the limits as prescribed under this section, such a company may do so without passing a special resolution i.e., it can give such loan or guarantee or security with the approval of the Board even where the threshold limit is crossed.

3. Where a holding company acquires the securities of its wholly owned subsidiary in excess of the limits prescribed under this section, such a company may do so without passing a special resolution i.e., it can make such investment with the approval of the Board even where the threshold limit is crossed.

Section 185 of Companies Act, 2013

Loan to Directors

1. A Company cannot give loan or give any guarantee or provide any security in connection with any loan taken by-

  • Its Directors or the Directors of its holding company or any partner or relative of any such director.
  • Any firm in which the Director or their relative is a partner

2. A Company can give loan to

  • A Private Company in which the Director of the Company is a Director or Shareholder
  • A body corporate in which the Director(s) of the Company holds more than or equal to 25% of the voting rights
  • A body corporate, the Board of Directors, managing director or manager, is accustomed to act in accordance with the directions or instructions of the Board, or of any director or Directors, of the lending company.

By complying with the following:

  • A special resolution is passed by Shareholders in the General Meeting and
  • The loan is used by the borrowing company in its principal business activities

3. A Company can give loan to it Managing Director or Whole time Director-

  • If the loan is provided as part of the employment agreement or
  • If the loan is given under any scheme approved by the shareholders by a special resolution

Exemptions

The above provisions shall not apply to a private company that satisfies the following 3 conditions:

1. The Company does not have any body corporate as its shareholder

2. The borrowings of the Company from banks or financial institutions or body corporates is less than:

  • Twice of its paid up share capital or
  • 50 Lakhs

(lower of the above two values shall be considered)

3. The Company has not defaulted in repayment of borrowings.

That is, any company satisfying the above conditions can give loan to its directors and any entity in which the director is interested without complying with any of the conditions mentioned in points 1&2.

General Exemption

1. Loan given to a managing director or whole time director-

  • As a part of the services extended by the Company to all its employees or
  • Pursuant to any scheme approved by the members by a special resolution

2. A Company that has its objects as granting of loan or giving guarantee or security and such company charges an interest for provision of loan.

3. any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company

4. any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company

Reporting of the Transaction:

1. For a Public Company-

Board Resolution: Pursuant to Section 117 of the Companies Act, 2013, Form MGT-14 shall be filed for all resolutions passed under Section 179(3) of the Act. Thus resolution for granting of loan, making an investment or provision of guarantee or security shall be filed with the Registrar of Companies within 30 days of passing the resolution.

Special Resolution passed by Members: Pursuant to Section 117 of the Companies Act, 2013, Form MGT-14 shall be filed for all special resolutions passed by the Members, thus special resolution passed pursuant to Section 185 of the Act shall be filed within 30 days of passing the resolution.

2. For a Private Company-

Board Resolution: Private Companies are exempted from filing of Form MGT-14 for resolutions passed under Section 179(3). Thus, filing of Form MGT-14 is not required.

Special Resolution passed by Members: Pursuant to Section 117 of the Companies Act, 2013, Form MGT-14 shall be filed for all special resolutions passed by the Members, thus special resolution passed pursuant to Section 185 of the Act shall be filed within 30 days of passing the resolution.

Author: Neha Bung

Disclaimer: The views, information or opinions expressed herein are compiled by the Legal team of M&K Associates, Company Secretaries, Hyderabad. The above information is solely for disseminating knowledge and private circulation. We are hereby not liable for any loss, damage or inconvenience caused as a result of reliance on such information and we accept no legal liability or other responsibility by or on behalf of any errors, omissions, or statements on this content.

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