Section 186 of Companies Act 2013 imposes restrictions on loans and investments that can by made by a company. The main aim of the provision is to ensure responsible financial management, prevent misuse of funds, and protect the interests of shareholders and creditors of the company.
Section 186(1) states that a company can make investments through more than two layers of investment companies. However, a company can acquire any other company incorporated in a company outside India if such other company has an investment subsidiary beyond two layers. Also, a subsidiary company can have an investment subsidiary company to meet the requirements of any law, rules or regulations.
Section 186(2) of the Companies Act 2013 states that a company cannot directly or indirectly:
- Grant 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 ;
- Acquire by way of purchase, subscription, or otherwise, the securities of any other body corporate
Exceeding sixty per-cent of its paid-up share capital, free reserves, and securities premium account or one hundred per cent of its free reserves and securities premium account whichever is more.
As per Section 186(3) of the Companies Act 2013, when the aggregate loan, investment, guarantee or security u/s 186(2) exceeds the limit specified u/s 186(2), prior approval by means of a special resolution is required.
In accordance with Section 186(4) of the Companies Act 2013, a company shall disclose in its financial statements:
- Full particulars of the loans given, investment made or guarantee given or security provided
- The purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.
As per Section 186(4) of the Companies Act 2013, a unanimous resolution passed at the Board meeting shall be obtained with the consent of all the directors present at the meeting in all cases irrespective of the amount of loan, investment, guarantee or security. Also, the company shall obtain prior approval from the Public Financial Institution from which it has taken a term loan.
However, prior approval from Public Financial Institution is not required if:
- The aggregate of loans, guarantees, investments or security already made together with the loan, investment, guarantee or security proposed to be made does not exceed the limit specified under Section 186(2).
- There is no default in repayment of loan instalments or interest to PFI as per the terms and conditions of such term loan.
According to Section 186(6), a company registered under section 12 of the Securities and Exchange Board of India (SEBI) Act, 1992 and covered under such class or classes of companies shall not take inter-corporate loan or deposits exceeding the prescribed limit u/s 186(2). Such a company shall furnish in its financial statement the details of the loan or deposits.
According to Section 186(7), the 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.
Under Section 186(8), if a company has defaulted in repayment of any deposits accepted by it or defaulted in payment of interest on deposits, such company shall not make any loan, guarantee, investments or security till such default is subsisting.
As per Section 186(9) and Section 186(10), every company that makes a loan, investment, guarantee or security shall maintain a register which shall contain such particulars and shall be maintained in such manner as may be prescribed. The register shall be kept at the registered office of the company and shall be open for inspection. Copies of the register may be obtained by any member on payment of prescribed fees. Also, the extracts may be taken out from the register by any member on payment of prescribed fees.
Section 186(11) provided for non-applicability of Section 186. This section of the Companies Act (except Section 186(1)) shall not apply to a loan made, guarantee given or security provided by:
- A banking company in the ordinary course of business ;
- An insurance company in the ordinary course of business ;
- A housing finance company in the ordinary course of business ;
- A company engaged in the business of financing industrial enterprises or of providing infrastructural facilities.
Section 186 (except 186(1)) shall also not be applicable to any acquisition made by a non-banking financial company registered under Section IIIB of the RBI Act 1934 and whose principal business is the acquisition of securities.
If a company contravenes any provision of Section 186, it shall be punishable as per Section 186(12) i.e., a fine not less than INR 25,000 which may extend up to INR 5,00,000 for the company 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 INR 25,000 but which may extend to INR 1,00,000.
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