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Posted on November 13, 2021
Section 186 Of The Companies Act 2013
Sec 186 imposes restrictions on Investments / Loans made / given by the company. Mainly Three approvals required: Unanimous Resolution (Board); passed at a Board meeting with the consent of all the directors present at the meeting, in all cases.
Section 186 of the Companies Act is dealing with the provisions of loans and investments which are made by the company.
Investments here as per the section means or includes the following:
- Subscription or purchase of shares
- Subscription of 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 lease, purchase of receivables, or other credit facilities.
Section 186 also states further that, a company cannot directly or indirectly:
- give 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 or otherwise the securities of any other body corporate
- which is exceeding 60% of the pai-up share capital, free reserves and the securities premium account or 100% of its free reserves and securities premium account, whichever is more.
Inter-corporate investments which is the investment made by one company in another company should not be made through more than 2 layers of investment companies as per section 186 of the Companies Act, but this excludes or provides exceptions that includes the company incorporated outside India.
And here, ‘Layer’ in relation to a holding company means the subsidiary or subsidiaries owned by them as per the explanation which is given to the section.
Say, X Ltd. is the holding company and has invested in Y Ltd making the same it subsidiary company. Y Ltd holds the company Z Ltd. So here the investment being made by X Ltd. in Y Ltd. is a movement of investment making this one layer, and 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 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 security. And this shall be obtained by means of a unanimous resolution which is passed at a Board Meeting by the quorum or directors present during the meeting held for the same.
It should also be noted that, resolution by circulation or resolution of committee of directors shall not be considered sufficient for the stating of approval of board.
Approval from Members
When the aggregate of the loan, investment, guarantee or security which has been made by the company along with the loan, investment, guarantee or security which is proposed to be made is exceeding the limit of 60% or 100% specified by section 186, then it is necessary to obtain special resolution from the members.
The Special Resolution should include the total amount which the company is authorized to make loans, guarantee, investment or security. But no approval or passing of Special Resolution shall be required if:
- Loan is given by a company to its Wholly Owned Subsidiaryor Joint Venture Company,
- Guarantee is given or security is provided by a company to its Wholly Owned Subsidiary or Joint Venture Company
- Where the acquisition of securities of its wholly owned subsidiary 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 Public Financial Institution, then they shall take prior approval from such PFI before any loan, guarantee, security or investment is made. And this shall not be mandated if:
- The aggregate of loans, guarantee, investments or security already made together with the loan, investment, guarantee or security proposed to be made does not exceed the limit given.
- There is no default in repayment of loan instalments or interest to PFI as per the terms and conditions of such term loan taken by the company from such PFI.
Rate of Interest
The rate of interest on 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 of Default made
A company which 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 make any investment until such default continues or is subsisting.
Non-Applicability of Section 186
In case of Government Company
A Government Company which is involved in the defence production shall not comply with the section 186 of the Companies Act.
And a government company, other than a listed company, in case such company obtains approval of the Ministry or Department of Central Government which is administratively in charge of the company or State Government, as the case may be.
In case of Acquisition of Shares
Acquisition of shares allotted in pursuance of right shares, shall not be applicable with Section 186.
And any acquisition made by a company whose principal business is the acquisition of securities i.e.,an investment company shall also not be applicable with the same.
In case of Loans, Guarantee or Security
The applicability of section 186 is not required in case of loans, guarantee or security 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 of companies or of providing infrastructural facilities.
In case of acquisition of Shares and Loan
In case of an acquisition made by a non-banking financial company whose principal business is the acquisition of securities, this shall not be applicable.
The exemption to NBFC (Non-Banking Financial Institution), shall be with respect to investment and lending activities.
Maintaining Register of Loans, Investments, Guarantee or Security
- Every company which makes a loan, investment, guarantee or security shall maintain a register.
- The register shall contain the prescribed particulars such prescribed manner.
- The register shall be kept at the registered office of the company.
- The register shall be open for inspection at the registered office of the company.
- The Copies or extractsof the register may be obtained by any member on payment of prescribed fees.
- The register shall be maintained in Form MBP – 2.
- The register shall be maintained with effect from the date of its incorporation and preserved permanently.
- Company secretary of the company or any other person authorized by the Board is required to maintain the register under its custody.
- The register shall be maintained either manually or in electronic mode.
Penalty for Contravention of Section 186
The punishment for contravention of section 186 would be:
- The company shall be levied with a fine of minimum INR 25,000 to a maximum of INR 5,00,000.
- For any official in default a maximum imprisonment of 2 years and fine which shall be minimum of INR 25,000 and a maximum of INR 1,00,000.