Loan and investments by a Company (Sec-186)

This article will help you to get to know about the provisions related to the loans and investments made by the company in accordance with the Companies Act 2013. Sec- 186 of Companies Act – 2013 deals with the provisions of loans and investments by a company.

> What does this term “investment” means?

For the purposes of section 186(1) the following will be counted as “investments”: –

√ Subscription or purchase of shares;

√ Subscription or purchase of share warrants;

√ Subscription or purchase of debentures bonds or similar debt securities.

The following will not be counted as investments: –

√ Making of loans or advances

√ Any other financial transactions such as lease, purchase of receivables, or other credit facilities.

Let’s have a look on the provisions of sec-186 of the Companies Act – 2013

♦ Loans and investments by a company (Sec-186(1)):-

According to the provisions of sec-186, Inter-corporate investments (i.e. investment by one company in another company) not to be made through more than two layers of investment companies, subject to exceptions which includes company incorporated outside India.

• “Layer” according to explanation (d) of Section 2(87) of the Act in relation to a holding Company means its subsidiary or subsidiaries.

For Example: – X is the holding company and Y is the subsidiary company of X and Z is the subsidiary company of Y, then the investments moves from X to Y is the one layer and similarly, investment moves from Y to Z is the second layer. Hence, results an indirect investment by X in Z.

• ‘Investment Company’ means a Company whose principal business is the acquisition of shares, debentures or other securities”

♦ Non-applicability of provisions of Sec-186:-

The provisions of Section 186 (1) shall not have effect in the following cases:

• If a company acquires any company which is incorporated outside India and such company has investment subsidiaries beyond two layers as per the laws of such country.
• A subsidiary company from having any investment subsidiary for the purposes of meeting the requirement under any law/ rule/ regulation framed under any law for the time being in force.
• Section 186(1) shall not apply on a Specified IFSC public and private company.

♦ Limits for Loan/Guarantee/Security/Investments (Sec-186(2)) :-

According to the provisions of sec-186(2) of the Companies Act 2013, No company shall directly or indirectly, give any loan, guarantee, provide any security to a person or other body corporate or make any investment in the securities of any other body corporate, exceeding-

√ 60% of its Paid-up Share Capital + Free reserves + Securities Premium Account;

OR

√ 100% of its Free reserves + Securities Premium Account;

Whichever is more.

The Board of directors of the company can give loan, guarantee, or provide security and make investment within the limits specified u/s 186(2), by passing a board resolution at the meeting of Board of Directors of the company.

Note: – Section 186(2) shall not apply on Specified IFSC public and private company if a company passes a resolution either at a meeting of the Board of Directors or by circulation.

♦ Approval from Members (Sec-186(3)):-

According to the provisions of sec – 186(3) of the Companies Act 2013, a Company can give loan, guarantee or provide any security or make any investment beyond the limits specified u/s 186(2), subject to prior approval of members by a special resolution passed at a general meeting.

♦ Disclosure Requirement (Sec- 186(4)):-

According to the provisions of sec – 186(4) of the Companies Act 2013, the company shall disclose the full particulars of the loans, guarantee given or security provided or investment made and the purpose for which the loan, guarantee or security is proposed to be utilized by the recipient of the loan, guarantee or security.

♦ Approval of Public Financial Institution(Sec- 186(5)):-

According to the provisions of sec – 186(4) of the Companies Act 2013 prior approval of a Public Financial Institutions is required in following cases:-

1) The aggregate amount of loan or guarantee given, security provided or investment made exceeds the limits specified u/s 186(2).

2) In case of any 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.

• Exemptions to wholly owned subsidiary company:

 (i) Where a loan or guarantee is given or security provided by a company to its wholly owned subsidiary company or a joint venture company, or an investment  made by a holding company, in the securities of its wholly owned subsidiary company, the requirement of sub- section (3) of section 186 shall not apply.

(ii) In such case, the company is required to disclose the details of such loans or guarantee or security or investment in the financial statement as provided under sub- section (4) of section 186.

♦ Companies Registered Under SEBI (Sec- 186(6)):-

No company registered u/s 12 of the Securities and Exchange Board of India Act, 1992 and also covered under such class or classes of companies which may be notified by the Central Government in consultation with the Securities and Exchange Board, shall take any intercorporate loan or deposits, in excess of the limits specified under the regulations applicable to such company, pursuant to which it has obtained certificate of registration from the Securities and Exchange Board of India.

♦ Rate of Interest (Sec-186(7)):-

No loan shall be given 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.

♦ No Loan by Defaulter Company (Sec-186(8)):-

A company, who has committed any default in repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an investments till such default is subsisting.

♦ Register of Loan (Sec- 186(9 )&(10)):-

According to the provisions of sec – 186(9) of the Companies Act 2013, shall keep and maintain a register, in Form MBP 2, which shall contain particulars of loan or guarantee given or security provided or investment made, (either manually or in electronic form) shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose, at registered office of the company.

Non Applicability of provisions of Sec-186:-

The provisions Sec- 186 (except Sub-Section 1) of the Companies Act, 2013 does not apply to the following:

a) Where any loan, guarantee has been given or any security provided or investment made in the ordinary course of its business by-

◊ A banking company, or

◊ An insurance company, or

◊ A housing finance company,

◊ A company engaged in the business of financing of companies or of providing infrastructural facilities;

b) to any acquisition –

◊ made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities:

Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;

◊ made by a company whose principal business is the acquisition of securities;

◊ Of shares allotted in pursuance of clause (a) of sub-section (1) of section 62.

Penal Provisions in case of default:-

Disclaimer: The contents of this article have been prepared in accordance with the relevant provisions, and information available at the time of preparation. The views and opinions expressed in this article are those of the authors and the author does not take any responsibility of the same and this cannot be quoted without the consent of the author. 

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