Loans and Investment By Company – An Overview

Lokesh Jain 20 Jul 2020 4,863 Views 0 comment Print Company Law | Articles

♦ Section – 186: Loan and Investment by Company:

> “investment company” means a company:

whose principal business is the acquisition of shares, debentures or other securities and
will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its:

√ assets in the form of investment in shares, debentures or other securities constitute not less than 50% of its total assets, or

√ income derived from investment business constitutes not less than 50% as a proportion of its gross income.

> “infrastructure facilities” means the facilities specified in Schedule VI.

> “person”does not include any individual who is in the employment of the company.

Investment

> “Layer”: As per explanation (d) of Section 2(87) of the Act in relation to a holding company means its subsidiary or subsidiaries.

♦ Sec-186(1): This states that a company shall make investment through not more than 2 layers of investment companies:

√ Exception of the provisions:

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond 2 layers as per the laws of such country;

(ii) 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.

(iii) in case of Specified IFSC Public Company – Section 186(1) shall not apply. [Notification Date 4th January, 2017.]

(iv) in case of Specified IFSC Private Company – Section 186(1) shall not apply. [Notification Date 4th January, 2017.]

♦ Sec-186(2): Limits prescribed for Loans, Guarantee, Security, Investments:

No company shall directly or indirectly:

(a) give any loan to any person or other body corporate;

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

60% of its paid-up share capital + free reserves + securities premium account

100% of its free reserves + securities premium account,

whichever is more.

√ Exception of the provision:

> In case of Specified IFSC Public Company: if a company passes a resolution either at meeting of the Board of Directors or by circulation. [Notification Date 4th January, 2017.]

> In case of Specified IFSC Private Company: if a company passes a resolution either at meeting of the Board of Directors or by circulation. [Notification Date 4th January, 2017.]

Sec-186(3): Prior approval of Members by a Special resolution at General Meeting required:

Where the aggregate of the loans and investment so far made, the amount for which:

guarantee or security so far provided to or in all other bodies corporate
along with the investment, loan, guarantee or security proposed to be made or given by the Board,
exceed the limits specified U/s. 186(2),
no investment or loan shall be made or guarantee shall be given or security shall be provided.

√ Exception of the provision:

> where a loan or guarantee is 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,

> company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided U/s. 186(4)

> In case of Specified IFSC Public Company: if a company passes a resolution either at meeting of the Board of Directors or by circulation. [Notification Date 4th January, 2017.]

> In case of Specified IFSC Private Company: if a company passes a resolution either at meeting of the Board of Directors or by circulation. [Notification Date 4th January, 2017.]

Sec-186(4): Disclosure requirement:

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 utilised by the recipient of the loan or guarantee or security.

Sec-186(5): Prior Approval of Board and Public Financial Institution (PFI) needs to be obtained:

No investment shall be made or loan or guarantee or security given by the company:

unless the resolution sanctioning it is passed at a Board Meeting ,
with the consent of all the directors present at the meeting and
prior approval of PFI concerned, where any term loan is subsisting.

√ Exception of the provision:

> where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given :

does not exceed the limit as specified in Sec-186(2), and
there is no default in repayment of loan installments or payment of interest thereon
as per the terms and conditions of such loan to the public financial institution.

> in case of a Specified IFSC public company, the Board can exercise powers under this sub-section by means of resolutions passed at meetings of the Board of Directors or through resolutions passed by circulation.”.[Notification Date 4th January, 2017.]

Sec-186(6): Companies Registered U/s. 12 of SEBI Act, 1992:

No company, which is:

registered under section 12 of the Securities and Exchange Board of India Act, 1992
and covered under such class or classes of companies as may be prescribed,
shall take inter-corporate loan or deposits exceeding the prescribed limit and
shall furnish in its financial statement the details of the loan or deposits.

Sec-186(7): Rate of Interest as per Government Security:

No loan shall be given under this section:

at a rate of interest lower than the prevailing yieldof one year, three year, five year or ten year Government Security closest to the tenor of the loan.
even in case where the loan is given by a holding to its subsidiary, the interest shall be charged at the rates prescribed.

√ Exception of the provision:

> In case of Section 8 Company: a company in which 26% or more of the paid-up share capital is held by the Central Government or one or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its memorandum of association.”. [Notification Dated 13th June, 2017.]

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

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.

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

Every company giving loan or giving a guarantee or providing security or making an acquisition under this section:

shall keep a register in Form – MBP 2, which shall contain such particulars,
shall be maintained in such manner as may be prescribed(either manually or in electronic form),
shall be kept at the registered office of the company,
shall be open to inspection at such office; and
extracts may be taken therefrom by any member, and
copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

Sec-186(11): Non-Applicability of Provisions of Sec-186:

Except sec – 186(1), provision of sec – 186 shall not apply:

(a) 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 sec – 62(1)(a) 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

Note:

In case of Government Company sec – 186(1) shall not apply to:

(a) a Government company engaged in defence production;

(b) a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section. [Notification dated 5th June, 2015.]

Sec-186(12): The Central Government may make rules for the purposes of this section.

Sec-186(13): Penal provision in case of default:

For Company: Fine – Minimum Rs. 25,000 and Maximum Rs.5,00,000

and

For every officer who is in default:

√ Maximum – Imprisonment up to 2 years and

√ Fine – Minimum Rs. 25,000 and Maximum Rs.1,00,000

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