Loan and Investment by Company under Section 186

     

 Loan and Investment by Company under Section 186

In pursuant to provisions of Section 186(2) of the Act, 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.

Key Notes:Since Section 186(2)(c) provides for acquisition by way of subscription, purchase or otherwise, the securities of any other body corporate. It is not necessary that the target entity into which investment flows must be a company. It can be any type of body corporate. But it is to be kept in mind that the intermediary company through which investments are made must have to be a company.This section mandates a company to make investment only through two layers of investment companies. It is the investor company which shall be held liable in case of any violation of the section; therefore, It is prudent and advisable that the investee company to seek a declaration from the investor company whether the investment made by the investor is coming from more than two layers up.

Approval from Members [Section 186(3)]

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.

Disclosure of Particulars of Loan, Guarantee given and Security Provided [Section 186(4)]

Section 186(4) of the Act provides that the Company shall disclose following details to the members in the financial statement.

– the full particulars of the loans given,investment made or guarantee given or security provided.

–  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.

The notice of the general meeting for passing resolution shall indicate that

(a)     The limits that will be required in excess of the prescribed limits involved in the proposal;

(b)    The particulars of the body corporate in which the investment is proposed to be made or to which the loan or guarantee or security proposed to be given.

(c)     The purpose of the investment, loan, guarantee or security;

(d)     The source of funding for meeting the proposal; and

(e)     Other details as may be specified.

Approval of Board and Public Financial Institution [Section 186(5)]

In 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 loan 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.

Exception:

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 instalments or interest thereon to the Public Financials Institution.

Companies Registered Under Securities Exchange Board of India (SEBI) [Section 186(6)]

Section 186(6) of the Act provides that those Companies which are registered under Section 12 of SEBI Act, 1992 and 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 can take inter-corporate loans or deposits exceeding the prescribed limit and shall furnish details of loans or deposit in their financial statements.

Rate of Interest on Loan [Section 186 (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.

No Loan by Defaulter Company [Section 186 (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.

Register of Loan [Section 186 (9 And 10)]

Section 186(9) 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. 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 entered therein separately, the particulars of loan and guarantee given, securities provided and acquisitions made as aforesaid.

This register shall be kept at registered office of the company and the register shall be preserved permanently and shall be kept in the custody of company secretary of the company or any person authorized by the Board for the purpose.

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

The extracts of the register may be opened for inspection and copies may be furnished to members who demands for the same on payment of prescribed fee as mentioned in the Articles which shall not exceed ten rupees for each page.

Non-Applicability of Section 186

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

(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 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.

Related Post :

Procedure For Inter Corporate Loans and Investments

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