Loan and Investment by Company | Section 186

Loan and Investment by Company (FAQs)  –Updated Up-to 19/07/2021

FAQs on Section 186 of Companies Act, 2013

Q.1 What is maximum limit thorough which a company can make investment through layers of companies? [Sec 186(1)]

Ans. 

• Company is not allowed to make investment through not more than two layers of investment companies;
• However, this provision is not applicable in below listed cases:

(a) 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;

(b) 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.

Q.2 What are the ceiling limits for providing Loan / Guarantee/ making Investments in Securities by Companies? [Sec 186(2), (3) and (6)]

Ans. 

• No company shall directly or indirectly: –

(a) give any loan to any individual who is not in employment of the Company or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding the ceiling limit as pre bellow mentioned chart unless a Special Resolution is passed by the members.

However, loan or guarantee if given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of above limit shall not apply.

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement.

Further, no company, which is registered under Section 12 of the Securities and Exchange Board of India Act, 1992 shall take inter-corporate loan or deposits exceeding the limit stated above and such company shall furnish in its financial statement the details of the loan or deposits.

Q.3 What all disclosures to be made when a Company provides Loan, gives Guarantee and makes Investments? [Sec 186 (4) & (5)]

Ans. 

• The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.

Q.4 What all consent/ prior approval are needed making Investment/ providing Security / giving Loan? [Sec 186 (5)]

Ans. 

• Resolution sanctioning is to be 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 to be obtained;
• However, prior approval of public financial institution is not required if the limit as mentioned as under is not exceed and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

Q.5 What shall be minimum rate of interest to be charged against loan provided? [Sec 186 (7)]

Ans.

• No loan shall be given under section 186 of Companies Act, 2013 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.

Q.6 Which are the Companies prohibited for giving loan, providing Security or making Investments? [Sec 186 (8)]

Ans.

• No company which is in default in the repayment of any deposits 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 subsisting.

Q.7 What all registers to be maintained by the Company for Loan/ Guarantee / Investment and the points to be kept in mind while maintaining it? [186 (9) & (10)]

Ans.

• Every Company shall keep a register in From MBP 2 in respect of every investment or loan made, guarantee given or acquisition of securities in Body corporate;
• The details are to be entered within 7 days from date of event in From MBP 2;
• Entries to be authenticated by Company Secretary or any other authorized person by Board in From MBP 2;
• From MBP 2 should be kept at the Registered Office;
• From MBP 2 should be in Custody of Company Secretary or any other authorized person by Board;

Q.8 Which are the Companies exempted from the applicability of Section 186 of Companies Act, 2013? [Sec 186 (11)]

Ans.

• Nothing contained in this section, except sub-section (1), shall apply—
• to any loan made, any guarantee given or any security provided or any investment made by a 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 and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;

(b) to any investment—

(i) made by an investment company;

(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;

(iii) 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 acquisition of securities]

Q.9 What are the penalties / Consequences for violation of Section 186 of Companies Act, 2013? [Sec 186 (13)]

Ans. 

• 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.

Procedure – Inter-Corporate Loan-Investment-Guarantee-Security

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(Author – CS Nayan Pitroda proprietor of Pitroda Nayan & Co., Company Secretary in Practice can be contacted at +91 8866021210 and / cs.nayanpitroda@gmail.com)