Section 186: Loan and investment by company
This section regulates loans, investments, guarantees, and securities made by companies, specifying limits, disclosure requirements, and exceptions for certain types of companies or investments.
Penalty
(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.
The section, clause by clause
What the section says
In plain terms
(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:
A company can make investments through not more than two layers of investment companies, unless otherwise prescribed, with certain exceptions for companies incorporated outside India or for meeting specific legal requirements.
provisoProvided that the provisions of this sub-section shall not affect,—
(1)(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;
(1)(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.
(2)No company shall directly or indirectly —
A company cannot give loans, guarantees, or securities, or acquire securities of another company, 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.
(2)(a)give any loan to any person or other body corporate;
(2)(b)give any guarantee or provide security in connection with a loan to any other body corporate or person; and
(2)(c)acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, 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.
explanation1[Explanation.—For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company.]
(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:
If the aggregate of loans and investments exceeds the specified limits, no further investment or loan can be made unless authorized by a special resolution, with certain exceptions for wholly owned subsidiaries or joint ventures.
provisoProvided 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:
provisoProvided 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.
The company must disclose details of loans, investments, guarantees, or securities in its financial statements, including the purpose for which they are utilized.
(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:
Investments, loans, guarantees, or securities can only be made with the consent of all directors present at a Board meeting and prior approval of the public financial institution, if applicable, unless the aggregate of loans and investments is within the specified limits.
provisoProvided 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 (15 of 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.
Certain companies registered under the Securities and Exchange Board of India Act, 1992, cannot take inter-corporate loans or deposits exceeding the prescribed limit and must furnish details in their financial statements.
(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.
Loans cannot be given 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.
A company in default of deposit repayment or interest payment cannot give loans, guarantees, or securities, or make acquisitions until the default is resolved.
(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.
Companies must keep a register of loans, guarantees, securities, or acquisitions, containing prescribed particulars and maintained in a prescribed manner.
(10)The register referred to in sub-section (9) shall be kept at the registered office of the company and —
The register must be kept at the registered office, open to inspection, and extracts can be taken by members on payment of prescribed fees.
(10)(a)shall be open to inspection at such office; and
(10)(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.
(11)Nothing contained in this section, except sub-section (1), shall apply—
This section does not apply to certain companies, such as banking or insurance companies, or to specific investments, such as those made by investment companies or in shares allotted in pursuance of rights issues.
(11)(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;
(11)(b)to any investment—
(11)(b)(i)made by an investment company;
(11)(b)(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;
(11)(b)(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 (2 of 1934) and whose principal business is acquisition of securities.]
(12)The Central Government may make rules for the purposes of this section.
The Central Government can 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.
Contravention of this section can result in a fine of not less than 25,000 rupees but up to 5 lakh rupees for the company, and imprisonment and fine for officers in default.
explanationExplanation.—For the purposes of this section,—
(13)(a)the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities 2[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.];
(13)(b)the expression “infrastructure facilities” means the facilities specified in Schedule VI.
The right-hand column is written from the section text, not quoted from it, and it has no legal force. Where the two differ, the left-hand column is the law.
Amendment notes
- 1. Ins. by Act 1 of 2018, s. 62 (w.e.f. 7-5-2018).
- 2. Subs. by s. 62, ibid., for sub-section (3) (w.e.f. 7-5-2018).
- 1. Subs. by Act 1 of 2018, s. 62, for sub-section (11) (w.e.f. 7-5-2018).
- 2. Ins. by Act 1 of 2018, s. 62 (w.e.f. 7-5-2018).
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Reproduced from the official India Code print for reference. Check the current text on India Code before you rely on it, and read the section alongside its Rules. Nothing here is legal advice.