Section 186 Of Companies Act 2013

Section 186 provides for the loans and investments that could be made by the company. It states that the company could make investments through more than two layers of the investment companies.

Section 186 of the Companies Act 2013 also says that a company cannot directly or indirectly-

  • Lend money to anyone or anything,
  • Give any guarantee or security in conjunction with a loan to another individual or legal entity.
  • And purchase, subscribe for, or otherwise get the securities of any other corporate entity.
  • Exceeding 60% of the company's paid-up share capital, 100% of the company's free reserves, and 100% of the company's free reserves and the securities premium account, whichever is greater.

Requirements

1) Approval of the Board

  • The approval of the board is needed in all cases irrespective of the amount of investment, loan, guarantee, and security.
  • The approval of the board could be availed by means of a unanimous resolution that's passed at the board meeting with the consent of all of the directors who are present at the meeting.
  • Resolution by the circulation or the resolution of the committee of directors is not sufficient.

2) Approval of the Members Who Pass Special Resolution

  • When the aggregate of the loan, guarantee, investment, or security already made together with the loan, guarantee, investment, or security proposed to be made is more than the limit that is specified under Section 186(2) before the approval by means of a special resolution is needed.

  • The limit under Section 186(92) is higher than - 60% of (paid share capital + securities premium + free reserves) or 100% of (free reserves + securities premium).

  • The contents of the special resolution could contain the entire amount up to which the board is authorized to make loans, investments, guarantees, or security. There is no approval by way of SR is needed, where - the loan is given by the company to its completely owned subsidiary or a joint venture company, where the acquisition of the securities of its completely owned subsidiary is made by a holding company by way of subscription, or guarantee is given, or the security is provided by the company to its WOS or JVC.

3) Approval of the Public Financial Institution

  • The firm will obtain the prior approval of PFI from where it has taken a term loan.

  • Approval of PFI is not needed when - the aggregate of loans, investments, guarantees, or security already made together with the loan, guarantee, investment, or security proposed to be made will not exceed the given limit, and there is no default in repayment of loan EMIs or interest to PFI according to the terms and conditions of such term loans.

4) Interest Rate

The rate of interest chargeable needs to be more than the prevailing yield of the Government Security that is closest to the period of the loan.

5) No Subsisting Default with Respect to Deposits

A company that has defaulted in repayment of any deposits accepted by it or in the payment of the interest on a deposit will not make any loan, guarantee, security, or investments until such default in subsisting.

In other words, where the company fails to repay the deposits or interest thereon the due date, it would make a loan, investments, guarantee, or security only after the default has been made good. 

6) Disclosures in Financial Statements

The company would disclose to the members in the financial statement - 

  • The full particulars of loans given, guarantee, security, and investments.
  • The need for which the loan or the guarantee or the security is proposed to be used by the recipient.

Penalty

Companies that disregard the aforementioned rules and their evaders are subject to fines under Section 186. (13). The companies will be subject to fines of not less than 25,000 but also not more than 5 lakh rupees. Every firm official who violates the law faces a fine of up to one lakh rupees and a jail sentence of up to a period of two years.

Exceptions of Section 186

Government Company

  • A government-run business that manufactures weapons.
  • A Government company, other than a listed firm, if the company receives approval from the State Government, if appropriate, or the Ministry or Department of CG that is administratively in charge of the company.

Acquisition of Shares

  • Any purchase of shares issued in accordance with the right shares.
  • Any purchase made by a business whose primary activity is buying securities (i.e., investment company).

Loans, Guarantee, or Security

  • A financial institution conducting business as usual;
  • An insurance provider conducting business as usual;
  • A lender for housing acting in the regular course of its business;
  • A business that specializes in funding businesses or offering infrastructure facilities.

Loan Acquisition

  • Any purchase performed by a non-banking financial institution whose primary activity is the purchase of securities.
  • With regard to lending and investing activities, NBFCs are exempt.
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