Loan and Investment by Company under section 186 of companies Act, 2013

LOAN AND INVESTMENT BY COMPANY 

   

The provisions of Section 186 of the Companies Act, 2013 explains the laws in relation to loans and investment by Company. It also gives a detailed procedure for Inter-Corporate Loans/ Investment/Giving Guarantee/Providing Security by Company. After going through this article, we are certainly able to understand the procedures relating to inter-corporate loans, investments, guarantees and security. Let’s discuss;

RESTRICTION ON INVESTMENT BEYOND TWO LAYERS OF INVESTMENT COMPANIES

Section 186(1) says that:

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:

For Instance: –

H = holding company

A = subsidiary company of H

B = subsidiary company of A

The investment moves from H to A is the one layer and similarly, investment moves from A to B is the second layer. Therefore, we can say it is an indirect investment by H to B. So as per section 186(1), Holding company (H) shall not make investment beyond B.

EXCEPTION: The provisions of 186(1) shall not affect,—

(i)                 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;

(ii)               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.

Meaning of Investment:

Investment for the purposes of section 186(1) would mean as used in section 186(2)(c) of the Act, 2013. Thus the following will be counted as “investments”:

- Subscription or purchase of shares, share warrants, debentures bonds or similar debt securities

The following will not be counted as investments:

– Making of loans or advances

– Any other financial transactions such as leases, purchase of receivables, or other credit facilities

The expression “investment company” means:

A company whose principal business is the acquisition of shares, debentures or other securities and

A company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities:

- if its assets in the form of investment in shares, debentures or other securities constitute not less than 50% of its total assets, or   -if its income derived from investment business constitutes not less than 50% as a proportion of its gross income.

LIMITS FOR LOANS /GUARANTEE/SECURITY/INVESTMENT

Section 186(2) says that:

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 the securities of any other body corporate, by way of subscription, purchase or otherwise

                                                             ⇓⇓⇓⇓

exceeding 60 % of its paid-up share capital, free reserves and securities premium account	Whichever is more.
or
exceeding 100 % of its free reserves and securities premium account

Explanation: "Person" does not include any individual who is in the employment of the company

APPROVAL OF BOARD AND PUBLIC FINANCIAL INSTITUTION

Section 186(5) says that:

Investment shall not be made or loan or guarantee or security given by the company unless:

The Board Resolution passed at a Board Meeting with the consent of all the directors present at the meeting for sanctioning it and

The prior approval of the public financial institution (PFI) concerned where any term loan is subsisting, is obtained.

EXCEPTION: Prior approval of a PFI 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 section 186(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.

Note: In case of Specified IFSC Public/ Private Company - The Board can pass Board Resolution by means of resolutions passed at Board meeting or through resolutions passed by circulation. -Notification Date 4th January, 2017.

APPROVAL FROM MEMBERS

Section 186(3) says that:

Where the aggregate of:

The loans and investment so far made,

The amount for which guarantee or security so far provided to or in all other bodies corporate along with

The investment, loan, guarantee or security proposed to be made or given by the Board,

⇓⇓⇓⇓

exceed the limits specified under 186(2) then no investment, loan, guarantee or security shall be given/provided unless previously authorised by a special resolution (SR) passed in a general meeting.

EXCEPTION:

Section 186(3) shall not apply:

No requirement to pass SR, where a loan or guarantee is given or where security has been provided by:

A company to its wholly-owned subsidiary (WOS) company or

A company to a joint venture (JV) company, or

Holding company acquire securities of its WOS company, by way of subscription, purchase or otherwise.

Commentary:

It means Company can give any loan to any person or other body corporate, give the guarantee or provide security in connection with such loan and acquire by way of subscription, purchase or otherwise, the securities of any other body corporate upto the higher of the said limit specified i.e. 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account with the unanimous resolution passed by the Board of the Company and if Company wants to give or provide Loan/ Guarantee/ Security/ Subscription beyond that limit specified then company has to pass the Special Resolution in General Meeting.

DISCLOSURE OF PARTICULARS OF LOAN, GUARANTEE GIVEN AND SECURITY PROVIDED

Section 186(4) says that:

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.

RESTRICTION FOR COMPANIES REGISTERED U/S 12 OF SEBI ACT, 1992

Section 186(6) says that:

The Company which is registered u/s 12 of the Securities and Exchange Board of India Act, 1992 shall not take inter-corporate loan or deposits exceeding the prescribed limit, and covered under such class or classes of companies as may be prescribed, and such company shall furnish in its financial statement the details of the loan or deposits.

Rule 11(3): No company registered under section 12 of the Securities and Exchange Board of India Act, 1992 and also covered under such class or classes of companies which may be notified by the Central Government in consultation with the Securities and Exchange Board, shall take any inter-corporate loan or deposits, in excess of the limits specified under the regulations applicable to such company, pursuant to which it has obtained certificate of registration from the Securities and Exchange Board of India.

RATE OF INTEREST ON LOAN

Section 186(7) says that:

No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three years, five year or ten years Government Security closest to the tenor of the loan.

Rate of interest on Loan >= Prevailing interest rate on Govt. Security

As per notification Dated 13^th June, 2017, Section 186(7) shall not apply on those Section 8 Company:

In which 26% or more of the paid-up share capital is held by the Central Government or one or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its memorandum of association.

NO LOAN BY DEFAULTER COMPANY

Section 186(8) says that:

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.

REGISTER OF LOAN

Section 186(9):

Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register (form-MBP-2) which shall contain such particulars and shall be maintained in such manner as may be prescribed.

Rule 12:  Register

(1) Every company giving loan or giving guarantee or providing security or making an acquisition of securities shall, from the date of its incorporation, maintain a register in Form MBP-2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid.

(2) The entries in the register shall be made chronologically in respect of each such transaction within 7 days of making such loan or giving guarantee or providing security or making acquisition.

(3) The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.

(4) The entries in the register (either manual or electronic) shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.

(5) For the purpose of sub-rule (4), the register can be maintained either manually or in electronic mode.

(6) The extracts from the register maintained under section 186(9) may be furnished to any member of the company on payment of such fee as may be prescribed in the Articles of the company which shall not exceed Rs.10 for each page.

Section 186(10) says that:

The register 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 therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed in the Articles of the company which shall not exceed Rs.10 for each page.

NON-APPLICABILITY OF SECTION 186:

Section 186 (11) says that:

Except section 186 (1), Section 186 shall not apply to:-

(a) any loan made, any guarantee given or any security provided or any investment made by:
A banking company, or	in the ordinary course of its business
An insurance company, or
A housing finance company, or
A company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;
(b) any investment made :—
(i) by an investment company;
(ii) in shares allotted in pursuance of section 62(1)(a) or in shares allotted in pursuance of rights issues made by a body corporate;
(iii) by a non-banking financial company (NBFC) registered under Chapter III-B of the Reserve Bank of India Act, 1934, in respect of investment or lending activities and whose principal business is the acquisition of securities.

Rule 11(2):

The expression “business of financing industrial enterprises” shall include, with regard to a Non-Banking Financial Company registered with RBI, "business of giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business.

The expression “infrastructure facilities” means the facilities specified in Schedule VI.

PENALTY FOR CONTRAVENTION

Section 186(13): If a Company contravenes the provisions of this section:

The Company:	Punishable with fine which shall not be less than Rs. 25000/- but which may extend to Rs. 5 Lakhs.
Every officer in default:	Punishable with imprisonment upto 2 years and
	with fine which shall not be less than Rs. 25000 but which may extend to Rs. 1 Lakh.

EXCEPTIONS:

1.    As per Notification dated 5^th June 2015, Section 186 shall not apply to following Government Company:-

2.  In the case of Specified IFSC Public/Private Company - In Sub-sections (2) and (3) of section 186 shall not apply if a company passes a resolution either at a meeting of the Board of Directors or by circulation. -  Notification Date 4th January 2017.

(a) A Government company engaged in defence production;

(b) A Government company, other than a listed the company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security or make any investment under the section.

3.   Section 186(1) shall not apply to Specified IFSC Public/Private Company - Notification Date 4th January 2017.

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