The Companies Act, 2013 ( hereinafter known as Act) has come with a change in the theory of “Loan and Investment by Company“. The new Act provides that inter-corporate investments not to be made through more than two layers of investment companies. There was no such provision in the erstwhile Companies Act 1956 (see section 372A of Companies Act 1956).
Subsection 1 of 186 of the Act says that a Company shall make the investment through not more than 2 layers of investment companies.
The provisions of Section 186 (1) shall not apply in the following cases:
1. From acquiring any Company incorporated outside India. If such other company has investment subsidiaries beyond two (2) layers as per the laws of such country.
2. A subsidiary company having any investment subsidiary for the purposes of meeting the requirement under any law framed for the time being in force.
LIMITS FOR LOANS/INVESTMENT/GUARANTEE/SECURITY [Section 186 (2)]
As per the provisions of Section 186 (2) of the Act, no company shall directly or indirectly
APPROVAL FROM MEMBERS [SECTION 186(3)]
Although Section 186 (2) makes restrictions as above, however, Section 186(3) gives powers to a company to give loan, guarantee, security, investment or acquisition beyond the limit but subject to prior approval of members by a special resolution passed at a general meeting.
DISCLOSURE OF PARTICULARS OF LOAN, GUARANTEE, SECURITY, AND INVESTMENT [ SECTION 186 (4)]
Section 186 (4) of the Act says, that it’s the duty of the company to disclose the following details in the financial statement:-
APPROVAL OF BOARD AND PUBLIC FINANCIAL INSTITUTIONS [SECTION 185(5)]
As per the provisions of Section 186(5) of the Act, every company shall take consent of all the directors present at the board meeting before making any investment, giving loans and guarantee and providing security. In the case, the company has already taken loans, etc., from any Public Financial Institutions (hereinafter PFIs), then it is mandatory to take prior approval from such PFIs.
The above provisions are subject to the condition that prior approval of PFIs shall not be required where the aggregate loan, investment, guarantee, and security proposed is within the limits as specified under Section 186 (2) and there is no default in repayment of the loan installments or interest thereon to the PFIs.
COMPANIES REGISTERED UNDER SECURITIES EXCHANGE BOARD OF INDIA [SECTION 186 (6)]
Sections 186 (6) of the Act says that those companies which are registered under Section 12 of SEBI Act, 1992 and covered under such class or class of companies which may be notified by the Central Government in consultation with the SEBI Board, shall take inter-corporate loans or deposits exceeding the prescribed limit and shall furnish details of loans or deposit in their financial statements.
RATE OF INTEREST SECTION [186(7)]
As per Section 186 (7), no company shall be given a loan at a rate of interest lower than the prevailing yield of one year, three years, five years, or ten years Government Security closest to the tenor of the loan. However, this section does not apply to Section 8 Company.
DEFAULTER COMPANY SECTION [186(8)]
Provision of the Sections 186(8) says that any company who is a defaulter in the repayment of any deposit accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is continuing.
LOAN REGISTER SECTION [186 (9)]
Section 186 (9) of the Act makes it compulsory to keep a register that contains particulars of loans, guarantee, security or investment of the Company as prescribed under the Act.
PLACE OF REGISTER SECTION [186(10)]
The registered mentioned in Section 186(9) shall be kept at the registered address of the company:-
NON-APPLICABILITY OF SECTION [186 (11)]
Nothing contained in this section, except subsection 186 (1), shall apply-
PENALTY FOR CONTRAVENTION OF [SECTION 186 (13)]
If any person or persons contravenes the provisions of this Section,
Every company shall be liable to a penalty which shall be not less than 25,000/- rupees, which may extend to 5,00,000/- rupees.
Every officer who is in default shall be punishable with imprisonment for a term which may extend to 2 years and fine which shall be not less than 25,000/- rupees, which may extend to 1,00,000/- rupees.
The Author, Mr. Romichand Rajput, is a Law graduate from the University of Mumbai and a member of The Institute of Company Secretaries of India (ICSI) and certificate holder from NISM (SEBI) in Merchant Banking and Issuers Compliance Certification.
He is reachable at Email:- firstname.lastname@example.org and on Call +91 9768 28 1457.
The above article is the result of the research of the author which is for educational and informational purposes and not a substitute for professional advice. Accordingly, before taking any actions based upon such information, we encourage you to consult with appropriate professionals. The use and reliance on the information contained in the above article are solely at your own risk. In any case, Mr. Romichand Rajput will be not liable for any legal liability or any other risk and consequences arising out of it.