Section 186 of Companies Act, 2013 – Loan and investment by company

SECTION 186. LOAN AND INVESTMENT BY COMPANY

[Effective from 1st April, 2014]

(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 the provisions of this sub-section 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.

Exemption

In case of a Specified IFSC private company Sub-section (1) shall not apply vide Notification no. G.S.R. 9(E).dated 04th January, 2017.

In case of a Specified IFSC public company Sub-section (1) shall not apply vide Notification no. G.S.R. 08(E).dated 04th January, 2017.

(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,

exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.

[5] [Explanation.—For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company]

Exemption

In case of a Specified IFSC private company Sub-section (2) shall not apply, if a company passes a resolution either at meeting of the Board of Directors or by circulation, vide Notification no. G.S.R. 9(E).dated 04th January, 2017.

In case of a Specified IFSC public company Sub-section (2) shall not apply if a company passes a resolution either at meeting of the Board of Directors or by circulation,  vide Notification no. G.S.R. 08(E).dated 04th January, 2017.

[6] [(3) 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 sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

Provided that where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section shall not apply.

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4).]

Exemption

In case of a Specified IFSC private company Sub-section (3) shall not apply, if a company passes a resolution either at meeting of the Board of Directors or by circulation, vide Notification no. G.S.R. 9(E).dated 04th January, 2017.

In case of a Specified IFSC public company Sub-section (3) shall not apply if a company passes a resolution either at meeting of the Board of Directors or by circulation,  vide Notification no. G.S.R. 08(E).dated 04th January, 2017.

(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 utilised by the recipient of the loan or guarantee or security.

(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 instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

[2] [Provided further that in case of a Specified IFSC private company, the Board can exercise powers under this sub-section by means of resolutions passed at meetings of the Board of Directors or through resolutions passed by circulation.]

[3] [Provided further that in case of a Specified IFSC public company, the Board can exercise powers under this sub-section by means of resolutions passed at meetings of the Board of Directors or through resolutions passed by circulation.]

(6) No company, which is registered under section 12 of the *Securities and Exchange Board of India Act, 1992 (15 of 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.

EXEMPTION

[4][Provided that nothing contained in this sub-section shall apply to a company in which twenty-six per cent. 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 of its objects as stated in its memorandum of association.

The above proviso to 186(7) shall apply to a Section 8 Company vide Notification No. G.S.R. 584E) dated 13th June, 2017.

The above exceptions/modifications/adaptations shall be applicable to section 8 Company which has not committed a default in filing its financial statements under section 137 or annual return under section 92 of the said Act with the Registrar.]

(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.

(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 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.

[7] [(11) Nothing contained in this section, except sub-section (1), shall apply—

(a) to any loan made, any guarantee given or any security provided or any investment made by a 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 and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;

(b) to any investment—

(i) made by an investment company;

(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;

(iii) 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 acquisition of securities.]

(12) The Central Government may make rules for the purposes of this section.

(13) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

Explanation.—For the purposes of this section,—

(a) the expression investment company” means a company whose principal business is the acquisition of shares, debentures or other securities [8] [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 fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.];

(b) the expression infrastructure facilities” means the facilities specified in Schedule VI.

EXEMPTIONS

Section 186 shall not apply to –

(a) a Government Company engaged in defence production;

(b) a Government Company, other than a listed 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 making any investment under the section; vide Notification No. GSR 463(E) dated 5th June, 2015.

The above mentioned exception shall be applicable to a government company which has not committed a default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said Act with the Registrar, vide amendment notification F. No. 1/2/2014- CL-V dated 13th June 2017. 

Applicable Rules

Companies (Meetings of Board and its Powers) Rules, 2014

[Effective from 1st April, 2014]

Rule 11. Loan and investment by a company under section 186 of the Act.—(1) Where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of sub- section (3) of section 186 shall not apply:

Provided that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4) of section 186.

(2) For the purposes of clause (a) of sub-section (11) of section 186, the expression [14][business of financing industries enterprises] shall include, with regard to a Non-Banking Financial Company registered with Reserve Bank of India, 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”.

(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.

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 seven 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 sub-section (9) of section 186 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 ten rupees for each page.

[9] [Rule 13. Special Resolution. A resolution passed at a general meeting in terms of sub-section (3) of section 186 to give any loan or guarantee or investment or providing any security or the acquisition under sub-section (2) of section 186 shall specify the total amount up to which the Board of Directors are authorised to give such loan or guarantee , to provide such securityor make such acquisition.

Provided that the  company shall disclose to the members in the financial statement the full particulars in accordance with the provisions of sub-section (4) of section 186.]

Applicable Circulars

Clarification regarding maintaining register in new format [sub-section (9) of section 186] – reg.

Circular No. 15/2014 dated 9-6-2014

1. This Ministry has received various. communications seeking clarification regarding sub-section (9) of section 186 read with sub-rule (1) of Rule 12 of the Companies (Meeting of Board and its Powers) Rule, 2014 with regard to maintenance of register of loans/guarantee/ security/making acquisition in new format.
2. In this connection, it is hereby clarified that registers maintained by companies pursuant to sub-section (5) of Section 372A of Companies Act, 1956 may continue as per requirements under these provisions and the new format prescribed vide Form MBP2 shall be used for particulars entered in such registers on and from 1.4.2014.

Clarification with regard to section 185 and 186 ofthe Companies Act 2013 – loans and advances to employees – rcq.

General Circular No. 04/2015, dated 10-3-2015

The Ministry has received a number of references seeking clarification on the applicability of provisions of section 186 of the Companies Act, 2013 relating to grant of loans and advances by Companies to their employees.

2. The issue has been examined and it is hereby clarified that loans and/or advances made by the companies to thelr employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013. This clarfication will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.

Clarification under sub-section (7) of section 186 of the Companies Act, 2013

General Circular No. 06/2015 dated 9-4-2015

Attention of this Ministry has been drawn to General Circular No 06/2013 dated 14.03.2013 vide which it was clarified that in cases where the effective yield (effective rate of return) on tax free bonds is greater than the yield on prevailing bank rate, there was no violation of Section 372A(3) of Companies Act, 1956. Stakeholders have requested for similar clarification w.r.t. corresponding section 186(7) of the Companies Act, 2013.

2. The matter has been examined in the Ministry and it is hereby clarified that in cases where the effective yield (effective rate of return) on tax free bonds is greater than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan, there is no violation of sub-section (7) of section 186 of the Companies Act, 2013.

[1] Inserted by the Companies (Removal of Difficulties) Order, 2015 vide S.O. 504 (E) dated 13th February, 2015 as in clause (b) of sub-section (11) of section 186, in the absence of provisions for exemption to a banking company or an insurance company or a housing finance company making acquisition of securities in its ordinary course of business, a difficulty had arisen that such companies cannot make any acquisition of securities in their ordinary course of business.

[2] Inserted vide Notification no. G.S.R. 9(E).dated 04th January, 2017.

[3] Inserted vide Notification no. G.S.R. 9(E).dated 04th January, 2017.

[4] Inserted vide Notification no. G.S.R. 584(E) dated 13th June, 2017.

[5] Inserted by the Companies (Amendment) Act 2017 vide Notification No. S.O. 1833(E) dated 7^th May, 2018.

[6] Substituted by the Companies (Amendment) Act 2017 vide Notification No. S.O. 1833(E) dated 7^th May, 2018. Prior to the substitution it read as under:

“(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.”

[7] Substituted by the Companies (Amendment) Act 2017 vide Notification No. S.O. 1833(E) dated 7^th May, 2018. Prior to the substitution it read as under:

“(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 (2 of 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.

(iv) made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business.”

[8] Inserted by the Companies (Amendment) Act 2017 vide Notification No. S.O. 1833(E) dated 7^th May, 2018.

[9] Substituted by the Companies (Meetings of Board and its Powers) Amendment Rules, 2018  vide Notification No. F. No. 1/32/2013- CL-V-Part dated 7^th May, 2018. Prior to the substitution it read as under:

“Rule 13. Special Resolution. —(1) 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 section 186 no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

Explanation.—For the purpose of this sub-rule, it is clarified that it would sufficient compliance if such special resolution is passed within one year from the date of notification of this section.

(2) A resolution passed at a general meeting in terms of sub-section (3) of section 186 to give any loan or guarantee or investment or providing any security or the acquisition under sub section (2) of section 186 shall specify the total amount up to which the Board of Directors are authorised to give such loan or guarantee, to provide such security or make such acquisition:

Provided, that the company shall disclose to the members in the financial statement the full particulars in accordance with the provision of sub-section (4) of section 186.”

 

[14] Substituted for the words “business of financing of companies” by  Companies (Meetings of Board and its Powers) Amendment Rules, 2019 vide notification dated 11th October, 2019