No company shall directly or indirectly —
♠ Give any loan to any person or other body corporate;
♠ Give any guarantee or provide security in connection with a loan 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 share capital + free reserves + securities premium account) OR
- 100 % of its (free reserves + securities premium account), whichever is more.
For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company. So, Loans to employee of the company are exempted from the purview of Section 186. This was inserted by Companies (Amendment) Act, 2017.
APPROVALS REQUIRED UNDER SECTION 186
1. BOARD APPROVAL
The approval of the Board is required in all cases irrespective of the amount of loan, investment, guarantee or security. The approval shall be obtained by means of a unanimous resolution passed at a Board meeting with the consent of all the directors present at the meeting. Resolution by circulation or resolution of the committee of directors is not sufficient.
2. SHAREHOLDERS’ APPROVAL
Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified above, approval from shareholders’ is required by way of special resolution.
Post transaction and Omnibus approval – Whether Permitted?
In the Section 186, nowhere word “Prior approval” is mentioned. So, it’s sufficient to take post transaction approval of members. The rules mention that the contents of the Special Resolution shall contain the ‘total amount up to which the Board is authorized to make loans, guarantee, investment or security’. The reading of this suggests that Shareholders may grant omnibus approval for loans, investments, guarantee and securities.
Exemption from Shareholders’ Approval
Companies (Amendment) Act, 2017 exempts certain transactions within the ambit of shareholders’ approval for ease of doing business and to increase investment powers of the Company. The following transactions are exempt:
♠ 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 it’s wholly owned subsidiary company.
3. APPROVAL FROM BANK AND PUBLIC FINANCIAL INSTITUTION
The company shall obtain the prior approval of bank and public financial institution from which it has taken a term loan in following cases:
♣ Where the investments, loans, guarantee or security proposed to be made and already made exceeds the limit specified section 186;
♣ If there is default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan.
Reporting of Loans and Investments in Financial Statements
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.
Layers of Subsidiary
A company shall make investment through not more than two layers of investment companies. ‘Two layers of investment companies’ would mean the flow of investment or loan or any such transaction stated in section 186 from a holding company to its 2nd step-down subsidiary.
For computing the number of layers under this rule, one layer which consists of one or more wholly-owned subsidiary (WOS) or subsidiaries shall not be taken into account.
For e.g: if A Ltd is a Holding Company of B Ltd and B Ltd is a Holding Company of C Ltd then, C Ltd becomes step down subsidiary of A Ltd. Further, C Ltd cann’t make new subsidiaries. If B ltd is a Wholly Owned Subsidiary of A Ltd then it is exempted and 1 more layer can be done.
Note: There are no restrictions on horizontal subsidiary. A Company may have as many number as subsidiaries horizontally.
However, these provisions don’t apply where:
♠ 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;
♠ 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.
A LTD
(Holding Company)
B LTD
(Subsidiary of A Ltd)
C LTD
(Subsidiary of B Ltd)
So, C Ltd is a Step Down Subsidiary of A Ltd
Rate of Interest
The rate of interest on loan provided should not be less than the prevailing yield of Government Security closest to the period of the loan.
Deposit Default
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.
Register of Loans and Investments
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. The register shall be kept at the registered office of the company and shall be open to inspection and extracts may be taken there from by any member, and copies thereof may be furnished to any member of the company on payment of specified fees.
EXEMPTION FROM SECTION 186
Section 186 doesn’t 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.
♣ Any investment made:
- By an investment company;
- In shares allotted in pursuance of Section 62(1)(a) or in shares allotted in pursuance of rights issues made by a body corporate;
- 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.
Investment Company
“Investment Company” means a company whose principal business is the acquisition of shares, debentures or other securities and a company. A Company 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 more than 50 % of its total assets, or
- Its income derived from investment business constitutes more than 50 % as a proportion of its gross income.
PENAL PROVISIONS
If a company contravenes the provisions of this section,
- The company shall be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/- 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 Rs. 25,000/- but which may extend to Rs. 1,00,000/-.
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