Intercorporate Loans Under Section 186

There are many instances where a company is making its regular transactions but still somehow got stuck in non-compliances of any laws. This is most common when the company has made investments or making loans or buying shares or any other securities. So, if your company is giving a loan or guarantees or thinking about the acquisition of shares or other securities, then you should first read this. Section 186 of the companies act, 2013 explain all the provisions relating to investments/securities/loan/guarantee.

Applicability:

But first, see whether this section is even applicable to you. Companies act, 2013 has given many exemptions to the private company from compliances. However, this section does not include such an exemption. In simple words, section 186 is applicable to both kinds of companies i.e. private companies as well as private companies.

Now we will proceed with each subsection

Section 186(1): It states that the company cannot make investments in more than 2 layers of the investment companies i.e. a company whose main business is of the acquisition of shares, debentures or other securities.

Although, there are some exemptions has been provided in this subsection which are:

Acquisition of any Company through investment incorporated outside India: 

• If such other company, which has incorporated outside India, 
• Has already made the investment by making its subsidiary company in more than 2 companies as per the laws of such country
• Then also, your company shall be eligible for making the investments in such other company, which has incorporated outside India.

The subsidiary company from having any investment subsidiary:

A subsidiary company can make an investment in its subsidiary for the purposes of complying with the requirement under any law framed for the time being in force.

Now, we have come to the most important part of this section i.e. Section 186(2) 

Limits for Loans/Investment/Guarantee/Security [Section 186 (2)]

As per the provisions of the subsection of 2 of Section 186 of the Companies Act, 2013, Company shall not directly or indirectly

• Give any loan to any person or any body corporate,
• Give any guarantee or provide security to any other body corporate or person and
• Acquisition of the securities by way of subscription, purchase or otherwise of  any body corporate exceeding 

60% of its paid-up capital + free reserves + securities premium account 

Or 

100% of its free reserves + securities premium account, 

Whichever is more

Section 183(3): Member’s Approval 

In the above, we have discussed the limit within which the company can give a loan, guarantee, provide security and make investments. Now we will discuss the exceptions given in this subsection from these limits.

As per Section 186(3), Company may have the power to give a loan, guarantee, security, investment or acquisition beyond the limit when it takes the prior approval of members in a special resolution passed at the general meeting.

Section 186(4): Disclosure of Particulars of Loan, Guarantee, Security, And Investment 

Section 186 (4) of the Act provides that it’s the obligation for the company to disclose the following details in the financial statement:-

• Details of the loan, guarantee, acquisition, security, and investment made by the company
• The purpose for which such loan, guarantee, security, and investment has been made

Section 185(5): Approval of Board and Public Financial Institutions

As per this section, before making any investment, giving loans and guarantee and providing security, every Company would be required to take the consent of all the directors present at the board meeting. 

Where the company has already taken the loan from any Public Financial Institutions (hereinafter PFIs), then it is compulsory for such a company to take prior approval from such PFIs before making any investment, giving loans and guarantee and providing security.

Although, the above provisions are not required to be complied by the company i.e. prior approval of PFIs would not be required where the aggregate of loan, investment, guarantee, and security proposed is within the limits as mentioned in the sub Section 2 of section 186

And 

Where the company has not made any default in repayment of such loan installments or interest thereon to the PFIs.

Section 186(6): Provisions for the Companies which are registered under Securities Exchange Board Of India 

As per subsection 6 of section 186 of the company Act, 2013, There is an exemption from subsection 2 of section 186, given to those companies which are registered under Section 12 of SEBI Act, 1992 and covered under such class or class of companies which may be notified by the Central Government in consultation with the SEBI Board/ In simple words, these companies can take inter-corporate loans or deposits exceeding the prescribed limit but they have to furnish the details of loans or deposit in their financial statements.

Section 186(6): Rate of Interest Section 

As per this subsection, the company cannot give a loan at a rate of interest less than the rate prevailing yield of 1 year, 3 years, 5 years, or 10 years Government Security closest to the tenor of the loan. Although, the said section does not apply to Section 8 Company.

Section 186(8): Defaulter Company 

Under the provision of Sections 186(8), any company which has made a default in the repayment of any deposit accepted before or after the commencement of this Act or in payment of interest thereon, such company shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is continuing.

Section 186(9): Loan Register Section 

Section 186 (9) of the Act states that it compulsory for the company to keep a register in form MBP-2 which contains particulars of loans, guarantee, security or investment of the Company as prescribed under this Act.

Section 186(10): Place Of Register Section 

The registered as specified in Section 186(9) shall be required to maintain at the registered address of the company. 

It should be open for the inspection at such office and;

Extracts of such register may be taken therefrom by any member of the company by paying the cost of such copies

Section 186(11): Non-Applicability of Section 

Now we will discuss those companies on which this section shall not be applicable:

• banking company, or 
• an insurance company, or 
• a housing finance company in the ordinary course of its business, or 
• a company established with the object of providing financing industrial enterprises, or
•  infrastructure company;

which has made any investment in – (a) made by an investment company, (b) made in the shares allotted in pursuance of clause (a) of subsection (1) of section 62 of the Act or in shares allotted in pursuance of rights issues made by a body corporate;

Or

Made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III B of the Reserve Bank of India Act, 1934 and whose principal business is the acquisition of securities

Penalty for Contravention of [Section 186(13)]

If any person or any other bode corporate does not comply with the provisions of this Section,

For Company

Every company shall be liable for the penalty which shall be not less than 25,000/- rupee but may extend to 5,00,000/- rupees.

For officer

Every officer who has made default shall be punishable with imprisonment for a period which may extend to 2 years and fine which shall be not less than 25,000/- rupees, which may extend to 1,00,000/- rupees.

Summary:

I hope by reading this article, you will get your all answers related to section 186. If still, you have any queries, you can mail us or WhatsApp. We will be happy to assist you.