Section 186 of Companies Act, 2013 – Recent Proposals for IFSC Finance Companies & Issues with Interest Benchmark
Introduction
Section 186 of the Companies Act, 2013 regulates loans, guarantees, securities, and investments made by companies. The provision aims to prevent diversion of funds, ensure transparency, and protect shareholders’ and creditors’ interests.
The Ministry of Corporate Affairs (MCA) has proposed certain exemptions for IFSC-registered finance companies, while professionals continue to grapple with the interest rate benchmark requirement under Section 186(7).
Current Framework of Section 186
- Loan & Investment Limits (Sec. 186(2))
A company may give loans, provide guarantees, or make investments up to:
60% of its paid-up share capital, free reserves, and securities premium, OR
100% of its free reserves and securities premium, whichever is higher.
Beyond this threshold, approval by special resolution in general meeting is mandatory.
- Board Approval Requirement
Loan/investment/guarantee decisions must be approved by the Board with unanimous consent of directors present at the meeting.
- Restriction on Layers of Investment Companies (Sec. 186(1))
Companies are generally prohibited from having more than two layers of investment subsidiaries, with some exemptions.
- Prohibition for Defaulting Companies (Sec. 186(8))
A company in default of repayment of deposits or interest cannot make further loans/guarantees/investments until the default is cured.
Exemption for IFSC Finance Companies
The MCA, through a recent consultation, has proposed to exempt finance companies registered with IFSCA and operating from International Financial Services Centres (IFSCs) from the stringent requirements of Section 186.
Likely Benefits:
- IFSC finance companies will gain greater flexibility in lending and investing.
- Reduction in compliance burden will attract multinational corporations to set up entities in GIFT City.
- Easier access to capital for Indian corporates through IFSC-based structures.
The Grey Area: Interest Benchmark under Section 186(7)
Section 186(7) provides:
“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.”
Practical Implications
- Domestic Loans: Straightforward compliance since Indian G-Sec data is available.
- Cross-Border Loans: Ambiguity persists, leading to potential non-compliance risks or unviable loan terms.
- Documentation Burden: Companies must maintain proof of G-Sec yields (RBI/FBIL data) at the time of loan sanction.
Way Forward for Companies
- Stay Updated: Monitor MCA notifications on IFSC exemptions.
- Document Benchmarking: Keep records of G-Sec yields for every loan.
- Alternative Structuring: For foreign subsidiaries, consider equity infusion, corporate guarantees, or routing loans through IFSC entities (once exemption is notified).
- Board & Shareholder Resolutions: Ensure approvals clearly mention interest benchmarking and compliance with Section 186.
Compliance Checklist under Section 186
| Action Point | Applicable Section/ Rule | Practical Note |
| Verify loan / investment limits | Sec. 186(2) | Compare proposed amount with 60% of paid-up capital + free reserves + securities premium OR 100% of free reserves + securities premium. |
| Obtain Board approval | Sec. 186(5) | Requires unanimous consent of directors present at the meeting. Circular resolution not allowed. |
| Shareholder approval (if limit exceeded) | Sec. 186(3) | Pass special resolution in general meeting. Attach explanatory statement with details of loan/guarantee/investment. |
| Ensure interest rate compliance | Sec. 186(7) | Rate cannot be less than prevailing yield of G-Secs (1, 3, 5, 10 years) closest to the tenor of loan. Maintain RBI/FBIL data as proof. |
| Restriction for defaulting companies | Sec. 186(8) | Company in default of deposits cannot give loan/guarantee/investment until default is rectified. |
| Disclosure in Financial Statements | Sec. 186(4) | Include full particulars in financial statement / notes, along with purpose of loan/investment/guarantee. |
| Layers of investment companies | Sec. 186(1) | Restriction on more than 2 layers of investment subsidiaries (subject to prescribed exemptions). |
| IFSC companies exemption | MCA proposal (2025) | Likely exemption for IFSC-registered finance companies Check latest MCA notifications before structuring transactions. |
Conclusion
Section 186 remains a cornerstone compliance area for corporate finance under the Companies Act, 2013.
The proposed exemption for IFSC finance companies is a welcome step toward strengthening India’s global financial competitiveness.
However, the interest benchmark requirement under Section 186(7) continues to cause difficulties, particularly in overseas lending transactions.
Companies must carefully document compliance, take timely approvals, and monitor regulatory changes.
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