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Companies Act, 2013

By CS Mamta BinaniPast Chairperson (Year 2010), EIRC of ICSI

Practising Company Secretarymamtab@mamtabinani.com

SECTION 186Under chapter XII

Room No.6, 4th Floor, Commerce House2A, Ganesh Chandra Avenue, Kolkata 700013

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Section 186

LOAN AND INVESTMENT BY COMPANY

(Corresponding Section)(372 A- Inter-corporate Loans & Investments)

UNDER THE COMPANIES ACT, 2013

Section 186 (1)NEW

A company shall make investment through:

Not more than 2 layers of

investment companies. (unless otherwise prescribed)

Exceptions:(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.

contd…. Section 186 (1)

Section 186 (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

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate

contd….section 186 (2) exceeding: i. 60% of its paid-up share capital, free reserves and securities premium account; or

ii. 100% of its free reserves and securities premium account;

whichever is more

Section 186 (3)

If exceeds the limits specified, prior approval by means of a:

i. special resolution ii. passed at a general meeting shall

be necessary.

Section 186 (4)NEW

Disclosure requirements: The company to disclose to the

members: i. in the financial statement ii. the full particulars of the

loans/investments/guarantee/security and

iii. the purpose for which the same is proposed to be utilized by the recipient of it.

Section 186 (5) No investment or loan etc. to be

made: i. unless the resolution sanctioning

it is passed at a meeting of the Board ii. with the consent of all the

directors present at the meeting and iii. the prior approval of the public

financial institution concerned where any term loan is subsisting

Prior approval of a PFI shall not be required:

i. where the aggregate of the loans and investments made along with the proposed ones does not exceed the limit as specified in sub-section (2); and

ii. if there is no default in repayment of loan installments or payment of interest thereon

Contd…. Section 186 (5)

Section 186 (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.

Section 186 (7)

No loan shall be given under this section at a rate of interest:

i. lower than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security closest to the tenor of the loan

Section 186 (8) NEW

No loan/investment etc. can be made if:

i. It is in default in repayment of any deposits accepted before or after the commencement of this Act; or

ii. Has defaulted in payment of interest thereon;

Till the defaults are subsisting

Section 186 (9)Maintenance of Register:Every company- giving loan giving a guarantee providing security making an acquisition to keep a register (in form 12.2)

which shall contain such particulars of loans and guarantees given, securities provided and acquisitions made

Draft RulesAs per draft rules:Entries in the register to be made

chronologically in respect of each such transaction within 7 days of the event date

The register shall be kept at the registered office of the company.

The register shall be preserved permanently

The register shall be kept in the custody of the secretary of the company or any other person authorized by the Board for the purpose.

Draft Rules

As per draft rules:Entries in the register shall be

authenticated by the secretary of the company or by any other person authorized by the Board for the purpose

Section 186 (10)The said register:(a) shall be open to inspection at such

office; and (b) extracts may be taken there from by any

member; and (c) copies thereof may be furnished to any

member of the company on payment of such fees as may be prescribed in the Articles of the company

(which shall not exceed Rs.10 for each page)

Section 186 (11) Nothing contained in this section,

except sub-section (1), shall apply— To a loan/guarantee/security made

by: i. a banking company; or ii. an insurance company; or iii. 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;

contd….section 186 (11)

Nothing shall apply to any acquisition:

(i) made by a NBFC 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 section 62(1).

Section 186 (12)

The Central Government may make rules for the purposes of this section.

Contd….section 186 (12)

For the purpose of sub-section (12) of section 186, 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 prescribed under section 186, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a special resolution passed in a general meeting.

Contd….section 186 (12)

A resolution passed at a general meeting in terms of subsection (3) of section 186 to give guarantee may specify the total amount up to which the Board of Directors is authorized to give guarantee;

Provided, that the company shall disclose to the members in the financial statement the full particulars of the guarantee given and the purpose for which the guarantee is proposed to be utilized by the recipient of the guarantee.

Section 186 (13)Contravention: If company contravenes: Company shall be punishable with fine

(not less than Rs.25000 but which may extend to Rs.5 lakhs)

Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years and with fine not less than Rs.25000 but which may extend to Rs.1 lakh

Contd….section 186 (13)

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;

(b) the expression “infrastructure facilities” means the facilities specified in Schedule VI.

For sake of clarity

This PPT covers the actual provisions envisaged in the new law. As, it is quite important to first know the letter of law.