Section 186 imposes restrictions on Investments / Loans made/given by Company NY. Three approvals are required: a unanimous resolution (Board) passed at a Board meeting with the consent of all the directors present at the meeting.
Section 186 of the Companies Act is in line with the provisions of loans and investments made by a company.
Investment Companies, as per the section, means or includes the following:
- Subscription or purchase of shares
- Subscription for the purchase of share warrants
- Subscription or purchase of debentures, bonds, or such other similar debt securities.
And the following shall not be included in the meaning or definition of investments:
- Making of loans and advances
- Any other financial transactions, such as leases, purchases of receivables, or other credit facilities.
Section 186 also states further that a company cannot directly or indirectly:
- Give a loan to any person or body corporate
- Give any security or provide a guarantee in connection with a loan to any other person or body corporate
- and purchase, subscribe to, or otherwise acquire the securities of any other body corporate
- Which exceeds 60% of the paid share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is more.
Inter-Corporate Investments
Inter-corporate investments, which are investments made by one Company in another Company, should not be made through more than two layers of investment companies as per section 186 of the Companies Act. However, this excludes or provides exceptions that include corporations incorporated in relation to a holding company, which means the subsidiary or subsidiaries owned by them, as per the explanation given in the section.
Say X Ltd. is a holding company with Company Y Ltd. as a subsidiary. Y Ltd Company Z td. A company investment made by X Ltd. in Y Ltd. is a movement of investment, making this one layer. An investment moving from Y Ltd. to Z Ltd. is the second layer, which now results in an indirect investment by X Ltd. in Z Ltd.
Legal Requirements as per Section 186
Approval of the Board
It is mandatory to get the approval of the Board of Directors in every case without considering the amount involved in the loan, investment, guarantee, or secur ty. This shall be obtained by means of a unanimous resolution, which is passed at a board meeting by the quorum of directors present during the meeting held for the same.
It should also be noted that a resolution circulated or passed by a committee of directors is not considered sufficient for the Board’s approval.l
Approval from Members
When the aggregate of the loan investment, guarantee, or security that the Company has made, along with the Company’s investment, guarantee, or security that is proposed to be made, exceeds the limit of 60% or 100% specified by section 186, a special resolution from the members is necessary.
The Special Resolution should include the total amount that the Company is authorized to take, invest, or secure. But, no approval or passing of Special Resolution shall be required if:
- The loan is given by a company to its Wholly Owned subsidiary or Joint Venture Company.
- A guarantee is given, or a company provides security to its Wholly Owned Subsidiary or Joint Venture Company.
- Where the Acquisition is made by a holding company, by way of subscription or in such other manner.
- Approval of Public Financial Institution (PFI)
In case the Company has taken a loan from a Public Financial Institution, then they shall take prior approval from such PFI before any loan, guarantee, security, or investment is made. And this will not be mandated if:
- The aggregate of loans, guarantees, investments, or securities already made, together with the loan, investment, guarantee, or security proposed to be made, does not exceed the limit given.
- There has been no default in repayment of loan instalments or interest to PFI as per the terms and conditions of the term loan taken by the Company from PFI.PFI Company of Interest
The rate of interest on the loan given shall not be lower than the prevailing yield of one-year, three-year, five-year, or ten-year Government Security closest to the tenure of the loan.
No Loan made by the Company in case the Company made
A company that has committed default in repayment of any deposits before or after the commencement of the Companies Act, or in payment of the interest due on such deposits, shall not give any loan or give any guarantee or security, or make any investment until such default continues or is subsisting.
Non-Applicability of Section 186
In the case of a Government Company
A Government Company that is involved in the defence production shall not comply with section 186 of the Companies Act.
And a government company, other than a listed company, in case Company obtains approval from the Department of Central Government, which is administratively in charge of Company or the State Government, the Government.
If the Acquisition is acquired in pursuance of rights, it is not applicable—section 186.
Any acquisition by a company whose principal business is the Acquisition of companies,i.e., an investment company, shall also not apply to it.
In case of Loans, guarantees, or security
The applicability of section 186 is not required in case of loans, guarantees, or securities made by:
- A banking company in the ordinary course of its business;
- An insurance company in the ordinary course of its business;
- A housing finance company in the ordinary course of its business;
- A company engaged in the business of financing companies or providing infrastructural facilities.
Acquisitions shall not apply to an acquisition made by a non-banking financial company whose principal business is the Acquisition of companies. With respect to NBFCs (Non-Banking Financial Institutions), it shall apply to investment and lending activities.
Maintaining Register of Loans, Investments, Guarantees, or Securities
- A company that makes an investment, guarantee, or security shall maintain a register.
- The register shall contain the prescribed particulars in the prescribed manner.
- The register shall be kept at the Company’s office.
- The registered Company held its election at the Company’s office.
- Any member can obtain copies of the Company contract upon payment of the prescribed fees.
- The register shall be maintained in Form MBP–2.
- The register shall be maintaMBP–2th effect from the date of its incorporation and preserved permanently.
- The company secretary authorizes the company secretary to have custody of the company register, which shall be kept either manually or electronically.
Penalty for Contravention of Section 186
The punishment for contravention of section 186 would be:
- The Company will be liable for a fine of a minimum of INR 25,000 to a maximum of INR 5,00,000.
- FoAnyfficial in default a will be imprisoned for a maximumf 2 years and fifined ainimum of INR 25,000 and a maximum of INR 1,00,000.
