INTRODUCTION:

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.

  • Layer as per explanation (d) of Section 2 (87) of the Act in relation to a holding company means its subsidiary and subsidiaries.
  • Investment Company means a company whose principal business is the acquisition of shares, debentures or other securities.

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

  • give any loan to any person or other body corporate,
  • give any guarantee or provide security in addition to any other body corporate or person and
  • acquire by way of subscription, purchase or otherwise, the securities of any other body corporate exceeding 60% of its paid-up capital plus free reserves plus securities premium account or 100% of its free reserves plus securities premium account, whichever is more.

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:-

  • the full particulars of the loan, guarantee, security, acquisition, and investment made by the company
  • the purpose for such loan, guarantee, security, and investment

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:-

  • they should be open for the inspection at such office and;
  • Extracts may be taken therefrom by any member of the company by paying the cost of the copies

NON-APPLICABILITY OF SECTION [186 (11)]

Nothing contained in this section, except subsection 186 (1), shall apply-

  • to 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 providing financing industrial enterprises, or infrastructure company;
  • to any investment – (a) made by an investment company, (b) made in the shares allotted in pursuance of clause (a) of subsection (1) of section 62 of the Act or in shares allotted in pursuance of rights issues made by a body corporate;
  • made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III B of the Reserve Bank of India Act, 1934 and whose principal business is the acquisition of securities.

PENALTY FOR CONTRAVENTION OF [SECTION 186 (13)]

If any person or persons contravenes the provisions of this Section,

For Company

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.

For officer

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.

ABOUT AUTHOR

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:- romichandrajput07@gmail.com and on Call +91 9768 28 1457.

DISCLAIMER

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.

Author Bio

Qualification: CS
Company: N/A
Location: Mumbai, Maharashtra, IN
Member Since: 22 Nov 2019 | Total Posts: 1

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2 Comments

  1. SUDHIR SHARMA says:

    NON-APPLICABILITY OF SECTION [186 (11)]
    Third point is not correctly worded as For NBFC exemption is only in respect of Investment made and not for lending

    1. ROMICHAND says:

      Yes, Sudhir Sir,
      Section 186 (11) point number 3 you have corrected
      NBFC exemption is only in respect of Investment made and not for lending.

      Thank you, Sudhir Sir

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