Manoj Sethia, FCA, ACS, ACMA

CA  Manoj SethiaThere has been much confusion about applicability of section 185 and regarding Lending, giving of guarantee, making investment by companies in the light of section 185 and 186 of the Companies Act, 2013.

Sub-section (1) of section 185 starts with “Save as otherwise provided in this Act”

The implication is obvious – if there is any other provision of the Act permitting lending as covered by this section, then such specific permission shall prevail over this section. Now let us examine section 186 , which deals with “Loans and investment by company”

While analyzing Section 186, one must analyse it part by part.

Section 186(1) is an over-riding provision as it starts with the words “Without prejudice to the provisions contained in this Act”. Section 186(1) prohibits only making of investment through more than two layers of investment companies, subject to exceptions as provided in the Proviso to sub-section (1) of section 186.

It is pertinent to note that exemption as given by sub section (11) of section 186 is exclusive of sub-section (1) of section 186.

In none of the other sub-sections of section 186, the words “Without prejudice to the provisions contained in this Act” have come.

Hence Lending (giving of loan), granting of guarantee and investment (either by subscription, purchase or otherwise) is governed by sub-section (2) to sub-section (13) of section 186.

Sub-section (1) of section 186 has no applicability regarding Loans, Guarantee and investment (except that it expressly prohibits making of investment through more than two layers of investment companies).

Hence in my view, if Loans, Guarantee and investment {other than expressly prohibited by section 186(1)} are carried out in compliance with sub-section (2) to sub-section (13) of section 186, section 185 do not come with play.

Now the question arises as to why there are two penal clauses separately as stated in sub-section (13) of section 186 and sub-section (2) of section 185.

The most important aspect of section 185(1) is that it applies to Loans given to or guarantees given for either the directors or any other person in whom the director is interested. It nowhere mentions about related parties or entities controlled by the promoters or shareholders.

Related party transactions are separately covered by section 188. But section 188 do not talk about Lending (giving of loan), granting of guarantee and investment (either by subscription, purchase or otherwise). Hence it is permitted even in related parties.

It clearly implies that if there is violation of the provisions of sub-section (2) to sub-section (12) of section 186 , the penal provisions of sub-section (13) of section 186 will apply.

And if the violation is with regard to Loans to directors and/or persons in whom directors are interested, section 185 will come into play and penal provisions as stated in section 185(2) will be attracted in addition to the penal provisions of section 186(13).

Hence it can be deduced from the discussion hereinabove, that:

A company, whether it is NBFC or not, not having any term loan from any public financial institutions, can give loans to, guarantee for and/or make investment in any person, whether related or otherwise subject to :

  1. Limits upto 60% of CRP (Share Capital + Free Reserves + securities premium account ) or 100% of RP, whichever is higher ;
  2. At a rate not lower than the prevailing yield on government securities for such period;
  3. Disclose in the financial statements full particulars oof loan alongwith the purpose for which the loan is/was proposed to be utilized ;
  4. Maintain register as prescribed and keep it open for inspection and taking extracts by member.

If the lender is having any term loan, unanimous consent of all directors present should be taken.

Further if there is default in repayment of installments of loan or payment of interest on a term loan, prior approval from such PFI is required.

My understanding is that a law should be understood first in its simple interpretation. When simple interpretation is not possible, only then one should go into complex possibilities.

The focus of Companies Act, 2013 is on proper compliance and adequate disclosure. It should not mean restricting normal business activities and creating unnecessary hardship.

(Authored by – CA. Manoj Sethia, FCA, ACS, ACMA –  Email- msethiaco@gmail.com)

Disclaimer: This article is being circulated for facilitating discussion among professional fraternity. Any person before making any decision or taking any action should properly consult and take expert opinion. It is just a humble attempt to clarify and circulate the views of the author.

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0 responses to “Loans, Guarantee & Investment U/s. 185 & 186 of Companies Act, 2013”

  1. Shivendra says:

    Your interpretation that Section 186(1) is overriding provision is wrong . Please check the meaning of “without Prejudice”. If the section started with the words “Notwithstanding” then it would had been an overriding provision.

  2. CA Deepa Goyal says:

    A Ltd and B Ltd are partner in XYZ partnership firm. In addition to this relatives of Mr. Q and MR. R which are DIRECTORS in B ltd. are also partners in XYZ. Now both the companies are deciding to give guarantee to XYZ which is exceeding 60% of paid up capital and free reserves. Now my question is since the company A ltd and B ltd are giving guarantee being partner in XYZ whether they need to file special resolution u/s 186. Whether provision of section 185 will be applicable? Whether guarantee given in the mentioned case will convene any provision of companies act 2013?

  3. Divesh Goyal says:

    Hello sir,

    Yes, a private company can give loan , advance and investment if not fall in seciton 185, then can give by fulfilling the conditions of seciton 186.

    If company under same directorship, according to me in that condition also private company can purchase share. bcoz secton 185 prohib loan not to purchase of shares.

    correct me if i am wrong.

  4. pramodbasotia says:

    Can A Private limited company provide loan, advances or invetment ( Purchases of shares ) to others which include company, firm or individuals.

    Can One Private limited company subscribe or purchases shares of other pvt. limited company under the same directorship, Please clarify the points under the examination of Section 185 & 185 of companies act,2013

  5. tushar vora says:

    good analysis. i do agree with the interpretation. but only point is if we consider in this way then seems that section 185 will get nullified and will not have have any importance. so in my view, the said sections needs redrafting keeping in view industry problems.

    more, i m of the strong opinion that the provisions of the Act and the intention of this Act framers is against the basic rights of people of India to carry on business. it restricts business freedom. instead of governing business freedom, it curtails business freedom.

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