Inter- corporate Loans and Investments by Companies

Section 186 of the Companies Act, 2013 guides all about the provisions related to inter-corporate loans and investments which a company is permitted to do. For companies, it specifies all rules, limits, conditions, and procedures to undergo before extending any corporate loan/guarantee or security to any individual or body corporate.

Section 186 – Overview

The section prescribes rules for the lending of any company to any individual or body corporate and further, it states that :

Section 186 (1) – ‘A company unless otherwise prescribed, can invest in not more than two layers of investment companies.’’, where;

* Layers mean its subsidiary or subsidiaries;

* Investment Company means companies whose principal business is of acquisition of shares, debentures or other securities.

Note: Section 186(1) shall not have an effect on any company incorporated outside India and holds subsidiaries over two layers and; any subsidiary company having any investment subsidiary for meeting any requirements/law/rule under any law for the time being.

For instance, DBC ltd invests in GTX ltd, and further GTX ltd invests PBC LLP. Even if PBC LLP makes further investment in SHG Ltd, there is no violation of Section 186 (1) as there are not more than two layers of investment.

It is prudent and advisable for companies/body corporate receiving investments/grants from companies to obtain a declaration from the investor company, to know whether the investment is coming from two layers up or not.

Section 186 – Applicability

Section 186 applies on all Companies including the Private and the Public companies registered under the Act but excludes companies involved in the business of;

  • Granting corporate loans or making investments if registered as a Banking Company, Insurance Company, Housing Finance Company / NBFC, Companies engaged in the business of granting finance or infrastructural facilities to companies.
  • Granting corporate loans or securities to its wholly-owned subsidiaries or joint venture companies.
  • Making investments in Investment companies
  • Shares allotted in pursuance of Section 62.

Note: 

Section 186 (8) – No company which is in default of payment of any loan or security before the commencement of the Act, shall be allowed to grant any loan or make an investment under Section 186.

Section 186 – Transactions Covered 

Section 186 (2) – The provisions of the section specifically limits companies from entering into any transaction of credit with parties including:

  • Grant of loan to any person or body corporate.
  • Grant of any guarantee/security in connection to loan to any other person or body corporate.
  • Acquisition of securities by way of purchase, subscription or otherwise of anybody corporate exceeding
  • 60% of (its paid-up capital + free reserves + balance in Security premium account ) or ;
  • 100% of (its free reserves + balance in Security premium) whichever is more.

Note: Section 186(6) – The above limits shall not be applicable for companies registered under Section 12 of SEBI Act, 1992, or other companies as prescribed by the Central Government.

Section 186 – Conditions 

#1. Passing of resolution (Section 186(3)):  

To grant corporate loans to any person or body corporate, above the limit as prescribed in Section 186(2), it is mandatory to obtain approval of members by passing a special resolution at a general meeting of the company.

The copy of the resolution is to be filed with Form MGT – 14 with the required fee to ROC within 30 days of passing such resolution.

#2. Approval of board and Public financial institution (Section 185 (5)):  

Prior approval of the board as indicated in Section 186(3) shall have to be taken from directors before granting any loan/guarantee /security or making any investment. If any loan is already taken from any Public financial institution, then approval from such an institution shall also be taken except when loan/security granted is within the limits specified under Section 186(2).

#3. Disclosure of Grants (Section 186 (4)):  

For loans /securities /guarantees given some disclosures have to be made in the financial statements of the company stating;

  • Full particulars of inter-corporate loans /investments made.
  • Purpose of such corporate loans/investments.

To enclose some documents with the financial statements, including the resolution passed which is also required to mention – the particulars of the body corporate, the purpose of investment/grants allowed, source of funding and other details as may be prescribed.

#4. Rate of Interest (Section 186(7)): 

The rate of interest on loans granted should not be less than the prevailing yield of government securities closest to the period of the loan.

#5. Maintenance of Register of Loan (Section 186 (9 & 10)):  

Since incorporation, a company is required to maintain a register in Form MBP 2 including in particulars of loans and investments made by the company.

Section 186 – Penal Provisions 

For Company: Any contravention to the provisions of Section 186, shall make the company in default liable to pay Rs 25,000 as penalty which might even extend to Rs 5 lakh.

For officers: For any officer or person of the company, found in default of any provision of Section 186, shall be imprisoned for 2 years with fine of not less than Rs 25,000 to up to Rs 1 lakh.

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