Section 186 Inter-Corporate Loans and Investments

Inter-Corporate Loans and Investments.

In this speady marathon of section 186 of  Companies Act 2013, we will cover all the aspects of this section with different different interpretative prospective.

Loan and Invetments

Applicability Of Section 186

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

Provided that provisions of this subsection shall not apply,

(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.

(b) 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.

INTERPRETATION BY AUTHOR

# Here company shall not be allowed to make investment through more than two layers of it's subsidiary company, However it is possible if acquiring any company ( company include body corporate) outside India or subsidiary having investment subsidiary and that subsidiary making investment as per applicable law for time being in force.

e.g. Let's suppose if company A has 50 subsidiary companies and such company making investments in it's more than 2 subsidiaries, in that case this section shall not apply.

However if company A has company B as it's subsidiary and company B has its subsidiary C and company C has its subsidiary D, in that case maximum Company A can make investments through company B and C beyond that not allowed.

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 body corporate or person; and

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

Limits Specified under subsection.

60% of (Paid up share capital + free reserve + securities premium)or, 

100% of (free reserve + securities premium)

Whichever is higher

Loan and Investments

INTERPRETATION BY AUTHOR

# Meaning of Person has not been defined in companies act 2013, however same has been defined in section 2(42) of General clauses act 1897 which includes company, association, body of individual whether incorporated or not.

# Security includes shares, debenture, unit of mutual fund.

# whether section 186 attract, if Company A bought units of mutual funds. 

Ans. No, because mutual fund is a trust not a body corporate, however if company has invested in UTI mutual fund then section shall get attracts because it is a body corporate.

# Whether loan given to individual comes under section 186.

 Ans. No, because this section doesn't deal with loan given to individual and even definition of Person not include individual.

# Whether loan given to employee consider under section 186.

 Ans. No, because employee also not included in the definition of Person.

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.

INTERPRETATION BY AUTHOR

# If Investment or guarantee or securities is under limit, pass Board Resolution with unanimous approval, if breach pass special resolution.

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

INTERPRETATION BY AUTHOR

# It is mandatory for company to disclose in it's Financial Statement all information related with loan, security, investment or guarantee provided by company along with purpose of that loan to be utilized.

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.

INTERPRETATION BY AUTHOR

# Before loan or security or guarantee or investment made by company, every time it is required to pass unanimous board resolution in the board meeting

# Prior approval of PFI is only required if subsisting term loan exist, otherwise not required.

# PFI approval is required only if loan or security or guarantee or investments, is made along with existing and it is above the limit as specified in subsection (2).

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.

Loan and Investments

INTERPRETATION BY AUTHOR

# Loan can be given under this section at equal to or more than above prescribed rates.

What if Company has given loan at the end of 2 year, which rate should be considered 1st year or 3rd year?

Ans. If loan given between mid of two years in that case the highest prevailing rate shall be considered.

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.

INTERPRETATION BY AUTHOR

#Every company shall maintain register in NBP-2 and entry shall be made within 7 days the same is mentioned in the rules.

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.

INTERPRETATION BY AUTHOR

# Fees is payable maximum RS. 10 each copy and it is discretion of company whether to take or not.

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.

INTERPRETATION BY AUTHOR

# Following companies are exempted from applicability of this section for loan, security or guarantee;

(a) Banking company

(b) Insurance Company

(c) Housing finance company

(d) Finance Company

(e) Company engeged in infrastructure business

# Following companies are exempted only for investments made by them;

(a) Non Banking financial Company ( Only if Investment is principal business)

12. CG may make rule as it deems fit.

13. Penalty;

Company : - Min Rs 25000  

                      - Max Rs up to 500000

Officer in default :-  Imprisonment up to 2 years 

                                   - and Min Rs 25000

                                   - Max Rs 100000

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