INSIGHT ON SECTION 186 OF THE NEW COMPANIES ACT, 2013

Section 186 of the Companies Act 2013 – Loan and Investment by Company:

Introduction:

The Companies Act, 2013 (Act) has come up with a change in the concept of ‘Loan and Investment by Company. The new Act provides that inter-corporate investments not to be made through more than two layers of investment companies. There is no such provision under section 372A of erstwhile Companies Act, 1956.

Applicability:

In pursuance to the provisions of Section 186(1) of the Act, 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 the acquisition of shares, debentures or other securities”

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

  • A Company acquires any Company which is incorporated outside India. 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 of the requirement under any law framed under any law for the time being in force.

Limits for Loans /Guarantee/Security/Investment:

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.

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.

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

In pursuant to provisions of Section 186(4) of the Act, it is duty of the Company to disclose in the Financial Statement the full particulars of the loan, guarantee given and security provided and its utilization.

Approval of Board and Public Financial Institution:

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.

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.

Companies Registered under 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 deposit 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 to members who demands for the same on payment of prescribed fee.

Non Applicability:

The 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.,

Penalty:

For Company:

Every 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.

For Officers:-

Every officer of the Company who is 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.

Note: Ministry of Corporate Affairs has issued a clarification through General Circular No. 18/2013. dated 19.11.2013 with regard to applicability of provision of Section 372A of the Companies Act, 1956. It was unequivocally clarified in the said Circular that Section 372A of the Companies Act, 1956 dealing with inter-corporate loans continue to remain in force till section 186, of the Companies Act, 2013 is notified.

 

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Disclaimer: The entire contents of this document have been developed on the basis of 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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