Loan and Investment by Company Under section 186 of the Companies Act, 2013

1- Notified Section

This section is not covered under notification which was issued on 12th September, 2013, Hence this section is not applicable at the time of issue of this Article.

2- Applicability of Section

A) The Sub Section (1) of Section 186 is applicable on all Companies either private Companies or public Companies.

B) Considering the Sub Section (11) of Section 186 of the Act, whole section except sub section (1) shall be applicable on Private Company as well as Public company also.

3- Non Applicability of Section

The Section 186 (Except Section (186 (1)) of the Companies Act, 2013 does not apply in following:-

1- Banking Company, Insurance Company, Housing Finance Company etc

2-Any company whose main business of acquisition of shares or securities etc

The intention of sub section 11 is clear that if the companies are involved in the area of banking, insurance, funding, facilitating of loan etc, In that case, this section cannot be applicable.

4- Meaning of layers

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries; (Explanation (d) of Section 2 (87))

5- Investment (u/s 186 (1))

It means a company may not make investment its money more than Two Layer. The limit has been fixed. It is showing a good sign for transparency.

6- Investment not affects (Proviso of section 186(1))

The provisions of Section 186 (1) shall not be make compulsion on following cases:-

1- A company acquires any company which is incorporated outside India. Such company has Investment Subsidiary beyond Two layers as per the law of host country.

2- 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.

7- Limits for Investment and Guarantee (u/s 186(2) )

The Limit is fixed in the Section 186(2), that 60% of Paid up capital + Free Reserve + Security Premium or 100% of Free Reserve + Security Premium (whichever is More). In this Section, the company cannot give loan, guarantee or provide any security or acquisition as per fixed limit. This sub section restricts within limit.

8- Approvals for Investment and Guarantee etc (u/s 186 (3))

The Sub section (2) of Section 186 makes restriction, but Section 186(3), gives power to the company, that it may give loan, guarantee or provide any security or acquisition beyond the limit but before taking prior approval from Shareholder in the General Meeting.

It means once we need to take approval from Shareholder in the General Meeting, thereafter we may make investment beyond the limit.

9- Disclosures (u/s 186 (4))

It is duty of the Company to disclose in the Financial Statement the full particulars of the loan given, security provided and guarantee given. The Company shall also disclose in its Report about its utilization.

10- Approvals of Board and Public Financial Institutional u/s 186 (5))

The company must take 100% consent from Board to give loan and guarantee and provided security. In case of Company has already taken loan etc from any financial institutions, banks etc. Then, it is mandatory to take prior approval also from public Financial Institution, banks etc.

The approval from Public Financial Institution shall not be required where the company has not been make default to pay interest and comply the limits and provisions of section (186 (2))

10- Companies Registered under SEBI u/s 186 (6))

Those companies or prescribed companies which are registered under SEBI can take interoperate loans or deposited 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, it is prescribed a condition in Section i.e.:-

At the end of the Financial Year, such companies shall furnish details of loans or deposit in its Financial Statement.

So, the company can utilize the benefit mentioning the information and details in the Financial Statement of the Company.

11- Register (u/s 186 (9 and 10))

The Company shall must maintain a Register under this section and it shall be kept at the Registered office of the Company which shall be prescribed.

This register shall be opened for inspection and in case of any member, if demand its extract, the company shall provide them as per prescribed fee.

12- Penalty

For Company:-

If company contravenes this provision, the company shall be penalized with fine which shall not be less than Rs. 25000/- but which may extend to Rs. 5 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 find which shall not be less than Rs. 25000/- but which may extend to Rs. 5 lacs
CS Akhilesh Kumar Jha

Source :Taxguru

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