Inter-Corporate Loans And Investments

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The following article contains in an exhaustive manner about Section 186 of the Companies Act, 2013. The section entails when a company can invest, where a company can invest, what is the upper cap of investment, et al.

Section 186 of the Companies Act, 2013 comprises of ‘Loans and investment by company.’ Explanation (a) of the section defines ‘investment company’ as a company whose principle business is in the acquisition of shares, securities and debentures. Explanation (b) talks about ‘infrastructural facilities’ which entails the facilities provided as per the specifications of Schedule VI.[1]

The first sub-section of Section 186 states that a company should not invest through more than two layers of the investment companies. But it shall also be kept in mind that the sub-section will not affect in any manner any company which wishes to acquire some other company which is incorporated in a foreign country if the other company has subsidiaries of investment beyond two layers (as the laws of that country state). Also, Section 186 (1) (ii) states that any subsidiary company will not be affected by the said sub-section from having an investment subsidiary serving the purpose of fulfillment of requirements as per a statute in force at that point of time.[2]

The sub-section (2) of Section 186 of Companies Act, 2013 lays down stringent guidelines with regard to giving a loan or a guarantee or securities. In Section 186 (2) (a) it is clearly mentioned that a company will not be giving any kind of loan;which exceeds 60% of the said company’s either paid up capital or free reserves or security premium or the entire amount of its accounts of securities premium or its free reserves, whichever one being more; to either a person or other corporate body in whatsoever ways. Clause (b) states that a company will not provide any kind of security or guarantee in lieu of any loan which exceeds 60% of the said company’s either paid up capital or free reserves or security premium or the entire amount of its accounts of securities premium or its free reserves, whichever one being more; and clause (c) finally states that a company will in no way acquire the security of any corporate body by means of either subscription or purchase or any other method which exceeds 60% of the said company’s either paid up capital or free reserves or security premium or the entire amount of its accounts of securities premium or its free reserves, whichever one being more.[3]

Next in the sequence comes sub-section (3) of Section 186 which discusses that should any loan be sanctioned or a guarantee or a security or an acquisition be done which is exceeding the cap provided in Section 186 (2), then there must be a General Meeting organized which shall approve the aforementioned things by a special resolution prior to the transaction.[4]

Coming over to Sub-section (4) of Section 186, it states that the members should always be well informed of the financial statements in detail which will include investments, loans et al.[5]

Sub-section (5) states that the passing of a loan or a guarantee or a security or an investment will not be make until and unless all the Directors are present for the Board meeting and all of them approve such an action. The prior approval of the Public Finance Institution is not required if the Company does not exceed the cap mentioned in Sub-Section (2).[6]

Section 186 (6) covers that a Company registered under the Securities and Exchange Board of India Act, 1992 is not allowed to take any loan of an inter-corporate nature exceeding the upper cap stated. It is only allowed to take loans within the limit and it must furnish the details in its financial statement.[7]

Next, Section 186 (7) states that a loan which is to be provided will not be given at an interest rate which is lower than the actively prevailing yield of one/three/five or ten years Government Security which is nearest to the tenure of the said loan.[8]

Section 186 (8) says that a defaulting company will not be allowed to give out more loans or acquire anything before the default is made good.[9]

Sub section (9) states the maintenance of documentations of all such nitty-gritties with regard to the giving of loans or acquisitions or any of the above.[10] The register will be maintained at the office which is registered and it will be kept open for inspection [as per Section 186 (10) (a)] and the copy will be made available to any member in need of it along with a prescribed amount of payment [as per Section 186 (10) (b)].[11]

Sub section (11) (a) mentions that any of the provisions of Section 186; in exception to subsection (1) of Section 186; will not be applicable on the companies whose ordinary course of business incorporates financing and providing infrastructural facilities. Clause (b) (i) mentions that nothing stated in Section 186 [except sub section (1)] will be applicable to any acquisition which is made by any ‘Non-banking financial company’ whose principal business is in acquisition of securities; and which is duly registered under Chapter IIIB of the Reserve Bank of India Act, 1934 given that the exemption to the same is in respect of the investments and lending activities made by the same.

Also, sub-clause (ii) states that in exception to sub-section (1) of Section 186, nothing shall be applied to any kind of acquisition made by any company whose principal business is acquiring securities.

Sub-clause (iii) lays down that in exception to sub-section (1) of Section 186, nothing shall be applied to any kind of acquisition of shares which are in pursuance of Section 62 (1) (a).[12][13]

The Central Government is duly authorized to make rules as it may deem fit with respect to this section. This has been laid down in sub-section (12).[14]

Sub-section (13) discusses that in case a company contravenes any of the provisions which have been stated in this section, then the punishment for the same will be minimum fine of Rs. 25,000/- and maximum fine of Rs. 5,00,000/-. Also, every defaulting officer of the company will be punished individually with a fine of minimum Rs. 25,000/- and maximum of Rs. 1,00,000/- along with an imprisonment which may extend for up to two years.[15]

(Edited by – Ankita Jha)

Reference

[1] Companies Act, 2013. Section 186; http://www.mca.gov.in/SearchableActs/Section186.htm

[2] Companies Act, 2013. Section 186 (1); http://www.mca.gov.in/SearchableActs/Section186.htm

[3] Companies Act, 2013. Section 186 (2); http://www.mca.gov.in/SearchableActs/Section186.htm

[4] Companies Act, 2013. Section 186 (3); http://www.mca.gov.in/SearchableActs/Section186.htm

[5] Companies Act, 2013. Section 186 (4); http://www.mca.gov.in/SearchableActs/Section186.htm

[6] Companies Act, 2013. Section 186 (5); http://www.mca.gov.in/SearchableActs/Section186.htm

[7] Companies Act, 2013. Section 186 (6); http://www.mca.gov.in/SearchableActs/Section186.htm

[8] Companies Act, 2013. Section 186 (7); http://www.mca.gov.in/SearchableActs/Section186.htm

[9] Companies Act, 2013. Section 186 (8); http://www.mca.gov.in/SearchableActs/Section186.htm

[10] Companies Act, 2013. Section 186 (9); http://www.mca.gov.in/SearchableActs/Section186.htm

[11] Companies Act, 2013. Section 186 (10); http://www.mca.gov.in/SearchableActs/Section186.htm 

[12] Companies Act, 2013. Section 186 (11); http://www.mca.gov.in/SearchableActs/Section186.htm

[13] Companies Act, 2013. Section 62; http://www.mca.gov.in/SearchableActs/Section62.htm

[14] Companies Act, 2013. Section 186 (12) ; http://www.mca.gov.in/SearchableActs/Section186.htm

[15] Companies Act, 2013. Section 186 (13) ; http://www.mca.gov.in/SearchableActs/Section186.htm