CS Keshav Sarda

Section 186 of Company Act 2013 (inter-corporate loans, investments, guarantee, security in connection with loan)

(1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:

Meaning of the two layer 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 it’s 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,

To illustrate: If A is the holding company and B is its subsidiary, then an investment flowing from A to B is one layer. In the same transaction, investment flowing from B to C is the second layer, where C is the subsidiary of B, thereby indirectly becoming the step-down subsidiary of A.

Provided that the provisions of this sub-section shall not affect,—

(i) 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;

(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.

Further Exemption to:

In case of a specified IFSC public company Sub Section (1) shall not apply vide Notification no. G.S.R. 8(E) dated 4th January 2017.

In case of a specified IFSC private company Sub Section (1) shall not apply vide Notification no. G.S.R. 9(E) dated 4th January 2017.

Sub-section (2) 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

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding 60% (Sixty per cent) of its paid-up share capital, free reserves and securities premium account or 100% (Hundred per cent) of its free reserves and securities premium account, whichever is more.

Further Exemption to:

In case of a specified IFSC public company Sub Section (2) shall not apply, if a company passes a resolution either at a meeting of the Board of Director or by Circulation, vide Notification no. G.S.R. 8(E) dated 4th January 2017.

In case of a specified IFSC private company Sub Section (2) shall not apply, if a company passes a resolution either at a meeting of the Board of Director or by Circulation, vide Notification no. G.S.R. 9(E) dated 4th January 2017.

(3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.

Further Exemption to:

In case of a specified IFSC public company Sub Section (3) shall not apply, if a company passes a resolution either at a meeting of the Board of Director or by Circulation, vide Notification no. G.S.R. 8(E) dated 4th January 2017.

In case of a specified IFSC private company Sub Section (3) shall not apply, if a company passes a resolution either at a meeting of the Board of Director or by Circulation, vide Notification no. G.S.R. 9(E) dated 4th January 2017.

(4) 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.

(5) No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained:

Provided that prior approval of a public financial institution shall not be required 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 sub-section (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.

(6) 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 such company shall furnish in its financial statement the details of the loan or deposits.

(7) No loan shall be given under this section 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.

Further Exemption to:

For section 8 Company, the following proviso shall be inserted vide Notification no. 1/2/2014-CL-I dated 13th June 2017. Provided that nothing contained in this sub-section shall apply to a company in which 26 (Twenty Six per cent) or more of the paid up share capital is held by the Central Government or State Government or both, in respect of loan provided by such company for funding Industrial Research and Development projects in the furtherance of its objects stated in its memorandum of association.

(8) 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.

(9) Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed.

(10) The register referred to in sub-section (9) shall be kept at the registered office of the company and —

(a) shall be open to inspection at such office; and

(b) extracts may be taken there from by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

(11) Nothing contained in this section, except sub-section (1), shall apply—

(a) to a loan made, guarantee given or security provided by a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies  or of providing infrastructural facilities;

(b) to any acquisition—

(i) made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities:

Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;

(ii) made by a company whose principal business is the acquisition of securities;

(iii) of shares allotted in pursuance of clause (a) of sub-section (1) of section 62.

(iv) made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business

Explanation.

;—For the purposes of this section,—

(a) the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities;

(b) the expression “infrastructure facilities” means the facilities specified in  Schedule VI.

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

(13) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees 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 twenty-five thousand rupees but which may extend to one lakh rupees.

Register of Loan

Every company giving loan or giving guarantee or providing security or making an acquisition of security shall maintain a register in form MBP 2 and enter therein separately the particulars of loan and guarantees given securities provided and acquisitions made.

 (The author can be reached at knsarda@gmail.com).

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Category : Company Law (3879)
Type : Articles (16959)
Tags : Companies Act (2343) Companies Act 2013 (2116) Section 186 (8)

4 responses to “Section 186 of Company Act 2013- Loan and investment by company”

  1. Ganesh Ratawa says:

    Two layers , i dont understand. it means if A is holding company and B is susidiary, B invest in C ..now so C is ultimate subsidiary of C…
    now as per you…C cant invest in others now as if it invest it becomes more than 2 layers for A.

    is it….

  2. Shwetal says:

    Sir whether the limit of 60% and 100% is to for a single individual or in aggregate to more than one individual?

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