The power to invest funds of the company is derived by Board under section 179 of the Act.
However, the Companies Act, 2013 contains provisions for restrictions on investments that a company can make and loans it can made.
Apart from loan and investments, restrictions are also placed on the guarantees which the company can give or security it can provide for the loan.
Cases when section 186 get attracts
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 person, body corporate or person
c) Acquire, by way of subscription, purchase or otherwise the securities of any other body corporate.
The term “Person” here does not include an employee of the company if such loan/advances are in accordance with the condition of service and also in accordance with the remuneration policy if any such policy required to be formulated.
What Are Requirements Of Making Inter Corporate Loans And Investment By Companies?
Section 186(5) – The approval of all Board of Directors is required prior to making any inter-corporate loan, investment, guarantee or security of any amount. ( i.e. unanimous resolution in a board meeting)
The unanimous resolution shall be passed in Board Meeting only not by resolution by circulation.
Section 186(2) Restriction on Inter Corporate Transaction
No Company shall, directly or indirectly:
Section 186(3) Approval of Shareholders
When the aggregate of loan and investment already made, the amount of guarantee or security so far provided to or in all other body corporate along with the investment, loan, guarantee, or security proposed to be made (i.e. existing loan, investment, guarantee or security amount + proposed loan, investment, guarantee or security amount), exceeds the limit specified under subsection (2), Special Resolution shall be passed in a General Meeting.
Provided that where a loan or guarantee is given, or 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, In the securities of its wholly-owned subsidiary company, there is no requirement to pass a special resolution.
Special point: The requirement of passing special resolution not applicable for Government Companies engaged in defence production and other unlisted government companies which seek prior approval of their administrative Ministry or Department for the proposed transaction.
Section 186(5) Prior Approval of Public Financial Institution
If any term loan from a public financial institution is subsisting, then
What If the limit is not breached but default made by the company in repayment?
In such case prior approval also required.
Section 186(9) (10) read with Rule 12: Every company from the date of incorporation shall maintain a register in the form MBP-2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisition made as aforesaid.
Section 186(8): No Company which is in default in the repayment of any deposit 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.
Section 186(11): Non – Applicability of Section 186(1)
This section does not apply to a loan made or guarantee or security provided or investment made by:
i. A Banking Company
ii. An Insurance Company
iii. A Housing Finance Company
iv. A company engaged in the business of Financing of Companies or of providing Infrastructural Companies.
Section 186(1) does not apply if Investment made by the following Companies:
i. A company whose principal business is the acquisition of share, stock, debenture or other Securities
ii. An NBFC
iii. While making an investment in the Right Share under section 62(1)(a) of companies act, 2013. (Note: at the time of further investments, investments already made in the right share shall be taken account.
What I Understand From The Above Provisions
As we all know that Company is an artificial person on whose behalf company’s Board takes a decision. Giving loan could be essential for company’s operation, therefore section 179(3) giving power to Board of the company that Board of Directors by passing board resolution at the meeting of the Board can grant a loan or give guarantee or provide security in respect of a loan, But stakeholders of the company have direct and indirect interest over the affairs of the company and to protect their interest our regulatory body has made quite a strict provision under section 186 regarding loan/investment by the company by fixing limit and through the intervention of shareholders if such limit exceeds.