Section 186 The Companies Act, 2013

Loan and investment by company

(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.]

⁴^&⁷[(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

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.

¹⁰[Explanation.—For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company]

¹¹[(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)]

(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.

³^&⁸[(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.

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

⁹[(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.

(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.

¹²[(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 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;¹³[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.]

Amendment

^1. Inserted by Order Companies (Removal of Difficulties) Order Dated 13th Feb 2015.

^10. Inserted by The Companies (Amendment)Act,2017– Amendment Effective from 7th May 2018

^11.Substituted by the Companies (Amendment) Act,2017– Amendment Effective from 7th May 2018

In sub-section (3) for the words:-

“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.”

The following Clause shall be substituted, namely :-

“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 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).”

^12. Substituted by the Companies (Amendment) Act,2017- Yet to be notified by Central Goverment

In sub-section (11) for the words:-

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

(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.

¹[“(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.”]]

The following Clause shall be substituted, namely :-

[(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;

^13.Inserted by The Companies (Amendment)Act,2017– Amendment Effective from 7th May 2018

Exceptions/ Modifications/ Adaptations

^2. In case of Government Company – 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. – Notification dated 5th june, 2015.

^3.In case of Specified IFSC Public Company — In Sub-section (5) of section 186 after the proviso, the following proviso shall be inserted —

“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.”. –

Notification Date 4th January, 2017.

^4. In case of Specified IFSC Public Company – In Sub-sections (2) and (3) of section 186 shall not apply if a company passes a resolution either at meeting of the Board of Directors or by circulation. – Notification Date 4th January, 2017.

^5. In case of Specified IFSC Public Company — In Sub-section (1) of section 186 shall not apply. — Notification Date 4th January, 2017.

^6. In case of Specified IFSC Private Company — In Sub-section (1) of section 186 shall not apply. — Notification Date 4th January, 2017.

^7. In case of Specified IFSC Private Company — In Sub-sections (2) and (3) of section 186 shall not apply if a company passes a resolution either at meeting of the Board of Directors or by circulation. — Notification Date 4th January, 2017.

^8. In case of Specified IFSC Private Company — In Sub-section (5) of section 186 after the proviso, the following proviso shall be inserted —

Notification Date 4th January, 2017.

^9. In case of section 8 Company- In Sub-section(7) of Section 186, the following shall be inserted namely :- Notification Dated 13th June, 2017.

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 objects as stated in its memorandum of association.”.

Analysys of Section 186 of Companies Act 2013

A company can invest in other companies through a maximum of two layers of investment companies, unless specified otherwise.
The company cannot directly or indirectly give loans, guarantees, or acquire securities of other companies exceeding 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is more.
If the company’s loans, investments, guarantees, or securities exceed the limits mentioned above, they can only be made with prior approval through a special resolution passed in a general meeting.
The company must disclose the full details of loans, investments, guarantees, and securities in its financial statements, along with the purpose for which they are intended.
Any investment, loan, guarantee, or security made by the company requires the consent of all the directors present at a board meeting, and the approval of a public financial institution, if there is an existing term loan.
A company registered under the Securities and Exchange Board of India Act, 1992, and falling under certain prescribed classes, should not take inter-corporate loans or deposits exceeding the prescribed limit, and must disclose details of such loans or deposits in its financial statements.
The company cannot provide loans at an interest rate lower than the prevailing yield of government securities closest to the loan’s tenor.
If a company is in default of repayment of deposits, it cannot give loans, guarantees, provide security, or make acquisitions until the default is resolved.
The company must maintain a register containing details of loans, guarantees, securities, and acquisitions made under this section.
The register should be kept at the company’s registered office and can be inspected by members, who can also request extracts or copies on payment of prescribed fees.
Certain exceptions and modifications apply to specific types of companies and transactions.
The Central Government has the power to make rules regarding this section.
Any company that violates the provisions of this section may be fined, and the officers responsible may face imprisonment and fines.

Some Examples to understand section 186

Example for investment through layers of investment companies: Let’s say Company A wants to invest in Company B. According to Section 186, Company A can make this investment directly or through one layer of an investment company. However, it cannot make the investment through more than two layers of investment companies unless specified otherwise.
Example for restrictions on loans, guarantees, and securities: Company X wants to provide a loan to Company Y. As per Section 186, Company X cannot give a loan exceeding 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is more. The same restrictions apply to giving guarantees or providing security in connection with a loan to another body corporate or person.
Example for aggregate limits on loans and investments: Suppose Company M has already made several loans and investments to other bodies corporate. If the aggregate amount of these loans, investments, guarantees, and securities exceeds the limits specified in Section 186(2), then Company M cannot make any further investments or loans unless authorized by a special resolution passed in a general meeting.
Example for disclosure requirements: Company Z has provided loans, made investments, given guarantees, or provided securities to other entities. Section 186 requires Company Z to disclose the full particulars of these transactions in its financial statements. The purpose for which the loan, guarantee, or security is intended should also be mentioned.
Example for obtaining board approval and public financial institution’s consent: If a company wants to make an investment or provide a loan, guarantee, or security, it must obtain the consent of all the directors present at a board meeting. Additionally, if any term loan is subsisting, the prior approval of the relevant public financial institution is necessary, unless the aggregate of loans, investments, guarantees, and securities falls within the limits specified in Section 186(2).

These examples illustrate how Section 186 of the Companies Act, 2013 regulates investments, loans, guarantees, and securities provided by companies, ensuring transparency and proper governance in these transactions.

Here's a table summarizing the key provisions and exceptions mentioned in Section 186 of the Companies Act, 2013:

Provision	Explanation
Investment through layers of investment companies	A company can make investments through a maximum of two layers of investment companies, unless otherwise prescribed. However, there are exceptions for companies acquiring foreign entities with investment subsidiaries beyond two layers or for subsidiary companies having investment subsidiaries to meet legal requirements.
Restriction on loans, guarantees, and securities	A company cannot directly or indirectly give loans, guarantees, or provide security exceeding 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is more. The term “person” does not include individuals employed by the company.
Aggregate limits on loans and investments	If the aggregate of loans, investments, guarantees, and securities made by a company exceeds the limits specified in Sub-section (2), any further investments or loans require prior authorization through a special resolution passed in a general meeting. However, there are exceptions for loans/guarantees to wholly owned subsidiaries, joint ventures, or acquisitions by holding companies of securities in wholly owned subsidiaries.
Disclosure requirements	Companies must disclose the full particulars of loans given, investments made, guarantees given, or securities provided in their financial statements. The purpose for which these loans, guarantees, or securities will be utilized by the recipient must also be disclosed.
Board approval and public financial institution consent	Investment, loans, guarantees, or securities require a resolution passed at a Board meeting with the consent of all directors. Additionally, if a term loan is subsisting, prior approval from the relevant public financial institution is necessary, unless the aggregate of loans, investments, guarantees, and securities falls within the specified limits.
Inter-corporate loans or deposits by certain companies	Companies registered under section 12 of the Securities and Exchange Board of India Act, 1992, and falling under specified classes have limits on inter-corporate loans or deposits, which must be disclosed in their financial statements.
Minimum interest rate for loans	Loans given under this section must have an interest rate not lower than the prevailing yield of government securities closest to the loan’s tenor (one year, three years, five years, or ten years).
Restrictions for defaulting companies	Companies in default in the repayment of deposits cannot give loans, guarantees, provide security, or make acquisitions until the default is resolved.
Maintenance of register	Companies giving loans, guarantees, providing security, or making acquisitions must maintain a register containing specified particulars, as prescribed.
Inspection and access to register	The register must be kept at the registered office of the company, open for inspection at that office, and extracts can be taken by any member. Copies of the register can be provided to members on payment of prescribed fees.
Exemptions for certain loans, guarantees, investments, or acquisitions	Several exemptions are provided for loans, guarantees, securities, or investments made by banking companies, insurance companies, housing finance companies, companies engaged in financing or providing infrastructural facilities, investment companies, non-banking financial companies engaged in securities acquisition, and certain shares allotted in compliance with specified provisions.
Punishments for contravention	Companies contravening the provisions of this section may be punishable with fines ranging from INR 25,000 to INR 5,00,000. Officers of the company who are in default may be punishable with imprisonment for a term up to two years and fines ranging from INR 25,000 to INR 1,00,000.

Please note that this table provides a summary and it’s essential to refer to the complete text of Section 186 and related amendments for comprehensive understanding and legal accuracy.

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