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Analysis of Section 186 pursuant to Companies (Amendment) Act, 2017

October 24, 2019
Section 186- Loans and Investments by Companies

Section 186- Loans and Investments by Companies

Loans & Investments under Section 186(1) of the Act:

Section 186 of the Companies Act, 2013 deals with the Loans and Investments by a Company. Section 186(1) of the Act states that a Company shall make investment through not more than two layers of investment companies.

'layer' in relation to a holding Company means its subsidiary or subsidiaries [explanation (d) of Section 2(87) of the Act]

‘Investment Company’ means a Company whose principal business is

  • Acquisition or purchase of shares
  • Acquisition or purchase of debentures
  • Acquisition or purchase of other securities

Investment Company ‘A’ cannot invest beyond step down subsidiary ‘C’

The provisions of Section 186 (1) shall not affect in the following cases:

  • If a Company acquires any Company which is incorporated outside India and such Company has Investment Subsidiary beyond two layers as per the law of such country.
  • A subsidiary Company from having any investment subsidiary for the purpose of meeting the requirement under any law or under any rule or regulation framed under any law for the time being in force.

Non-Applicability: Section 186 (except Sub Section 1) of the Companies Act, 2013 does not apply to the following:

  • Banking Company, Insurance Company, Housing Finance Company, etc.,
  • Any Company whose main business of acquisition of shares or securities etc.,
  • A Company acquiring Shares on Right Issue basis under section 62(1)(a)
  • 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

Old Act (1956 Act) to the New Act (2013 Act)

The Companies Act 2013 came into force on 12th September 2013 intending to ease business, streamline the compliance process and resolve various issues faced under Companies Act 1956.

In the new Act, many sections from the old Act were amended among which one section 372A which dealt with Inter Corporate Loan, Investment, Guarantee, and security was also amended in the concept of 'Loan and Investment by Company. Section 186 of Companies Act, 2013 provides that inter-corporate investments not to be made through more than two layers of investment companies was not required Section 372A of the erstwhile Companies Act, 1956. The restriction is imposed to check misuse of multiple layers of subsidiaries for diversion of funds/siphoning off funds.

Modifications to Companies Act, 2013 vide Companies (Amendment) Act, 2017

To address the concerns raised in the 2013 Act, the Government of India enacted the Companies (Amendment) Act, 2017 (the 2017 Act) which received the President’s assent on 1st January 2018 and was notified in the Official Gazette on 7th May 2018. The key amendments that were brought about under the 2017 Act were the changes to Sections 185 and 186 of the 2013 Act, which deals with loans to directors

loans to directors and loans and investments by companies and their corresponding rules.

The new act with modification made it easy for the investors/businessman to ease the business process, now any Company can give loan to other Company where its Directors, Shareholders/promoters are related subject to limitations specified therein.

Loan/Guarantee/Security/Investments under Sec-186(2)

Section 186(2) of the Act states that no Company shall directly or indirectly:

  • give any loan to any person or other body corporate,
  • give any guarantee or provide security in connection with a loan to any other body corporate or person
  • and acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding 60% of its paid-up share capital plus free reserves plus securities premium account

or

100% of its free reserves plus securities premium account, whichever is more.

Free reserves mean such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend

Provided that:

(i) any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

(ii) any change in carrying an amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;

Body Corporate means a Company incorporated outside India but does not include

 i)A cooperative society registered under any law relating to cooperative societies;

ii) Any other body corporate not being a company as defined in this Act, which the Central Government may, by notification, specify in this behalf.

Individual doesn’t include any individual who is in the employment of the Company

Requirements under Section 186:

Approval from members

Though the Section 186(2) makes restriction as above, Section 186(3), empowers a Company to give loan, guarantee or provide any security or acquisition beyond the limit but subject to prior approval of members by a special resolution passed at a general meeting.

Approval of Board and Public Financial Institution:

Pursuant to provisions of Section 186(5) of the Act, every Company shall take consent of all the directors present at the board meeting before making any investment, giving loans and guarantee and providing security. In case of Company has already taken loan etc., from any Public Financial Institutions, then it is mandatory to take prior approval from such Public Financial Institution.

Provided that prior approval of Public Financial Institution shall not be required where the aggregate loan, investment, guarantee and security proposed is within the limits as specified under section 186(2) and there is no default in repayment of loan or interest thereon to the Public Financials Institution as per the terms and conditions placed thereon.

Disclosure of particulars of loan, guarantee given and security provided:

Pursuant to provisions of Section 186(4) of the Act, the Company must disclose in the Financial Statement the full particulars of the loan given, investment made, guarantee given and security provided and utilization of the same.

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. Such disclosure has to be in the Board's Report  also.

Companies Registered under the Securities Exchange Board of India (SEBI):

Section 186(6) of the Act provides that those Companies which are registered under Section 12 of SEBI Act, 1992 and other prescribed Companies can take inter-corporate loans or deposits exceeding the prescribed limit. The intention of government is clear if the Company is registered under SEBI, this section is not applicable for the part of limit but, simultaneously, prescribed a condition that:

Provided that such companies shall furnish details of loans or deposits in their Financial Statements.

Register to be maintained:

Section 186(10) of the Act mandates every Company to maintain a register which shall contain particulars of loan or guarantee given or security provided or investment made. This register shall be opened for inspection and copies may be furnished to members who demand the same on payment of prescribed fee.

Interest on loan

No company can give loans 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.

The penalty imposed for contravention of Section 186:

On CompanyEvery Company which contravenes the provisions of this Section shall be liable to a penalty which shall not be less than Rs. 25000/- but which may extend to Rs. 5.00 lacs.

On Officers: Every officer of the Company who is in default shall be punishable with imprisonment for a term which may extend to two years and fine which shall not be less than Rs. 25000/- but which may extend to Rs. 1.00 lacs.

 Disclaimer: The entire contents of this document have been developed based on relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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