PROVISIONS FOR INTER CORPORATE LOAN
Article on Section 186
In this article we are going to discuss provisions of Section 186 of Companies Act 2013, under this article we are discussing about Loan and investment by company and what are the conditions to give such loans and investments.
This section is applicable to both Private as well as Public companies.
As per Section 186(1) a company can invest in not more than two layers of investment companies;
Here layers meaning is taken from section 2(87)(d) which is in relation to a holding company means its subsidiary or subsidiaries
Investment means investments such as purchase of shares, share warrants or debenture bonds or similar debt securities.
The proviso to sub section 1 is an exemption to above stated section
First proviso: If a company acquire any other company which is incorporated outside India whether it has invested in more than two layers of investment company
Second proviso: In investment in more than two layers of subsidiary company as per any framework of any law or rules there in.
As per section 186(2) no company shall directly or indirectly give
- Loan to any person or body corporate
- Guarantee or provide security for any loan to any person or body corporate
- Acquire securities of anybody corporate
Exceeding
60% of its Paid-up Share Capital + Free Reserves + Security Premium
Or
100% of its Free Reserves + Security Premium
Whichever is more
As per Section 186(3), in case a company wishes to exceed limits under sub-section (2) then it can pass a special resolution and do so.
As per Section 186(4), company shall disclose in its financial statement the reasons for providing such loans etc. the purpose for which such amount will be utilized.
As per Section 186(5) no investment shall be made unless board resolution is passed unanimously (by directors present in board meeting) and prior approval of public financial institution is obtained.
Provision to sub-section (5) states that if limit of loan etc is as per sub section (2) and no defaults were made in installments of loan/interest then no approval of public financial institution is required
As per Section 186(6), no company which is registered under section 12 of SEBI Act (i.e. stock brokers, sub-brokers, share transfer agents, etc.) or such class or classes of companies which may be notified by the Central Government in consultation with the SEBI shall take inter-corporate loan or deposits exceeding sub-section (2) and they shall furnish details of such loans in their financial statements
As per section 186(7) the interest rate of loan shall not be lower than yield of 1, 3, 5 or 10 years (of govt securities)
As per section 186(8) if a company do any default in payment of interest or deposit etc. then such company cant give loan, security or guarantee till the default is subsisting.
As per section 186(9) every company shall maintain a register (i.e. MBP-2) which shall contain particulars of loans etc.
As per section 186(10) registers shall be kept at registered office, shall be open for inspection and extracts of same may be provided to a member on payment of fees prescribed in the Articles of the company which shall not exceed ten rupees for each page.
As per section 186(11) provisions only of sub-section 1 shall be applicable no other provision is applicable in following cases:
Loan etc. provided by a company in ordinary course of business
Any acquisition by
1. NBFC company of securities (in respect of its investment and lending activities)
2. by a company whose principal business is acquisition of securities Shares allots u/s 62(1)(a) (i.e. further issue of capital)
As per section 186(12), CG may make rules in respect of this section
As per section 186(13) in case of contravention of this section then
Fine on company Rs. 25000/- which may extend to Rs. 500000/- and
Every officer in default imprisonment for a term which may extend to 2 years and fine Rs. 25000/- which may extend to Rs. 100000/-.
Conclusion:
As per above discussion its clear that inter corporate borrowing may be possible only if provisions of section 186 are followed. In case of non-compliance of the above stated provisions every officer in default has to face dual penalties i.e. imprisonment as well as fine, and fine for company is also there. Hence companies shall be very careful while complying with inter corporate loans.
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