section 186 of THE COMPANIES ACT, 2013

[CA C M JAIN]

SECTION 186 OF THE COMPANY ACT, 2013

1. Restriction on making investment through not more than 2 layers

Section 186 (1) provide that  Without prejudice to the provisions contained in this Act,2013 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, -

1. 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;
2. 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. Restriction on providing loans, guarantee and investments, security to other body corporate or person

Section 186 (2) provides that No company shall directly or indirectly -

1. give any loan to any person or other body corporate;
2. give any guarantee or provide security in connection with a loan to any other body corporate or person; and
3. acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

Limits up to 60 percent of CRP (Share Capital + Free Reserves + Securities Premium account) or 100 percent of RP, whichever is higher

3. Approval of Shareholders is mandatory where BOD needs to make loans, guarantee and investment, security in excess of prescribed limits (SR) u/s 186(3)

No loan or guarantee or providing any security or the acquisition exceeds the prescribed limits unless the proposal is previously authorised by special resolution passed in general meeting. In case of listed company the resolution needs to be passed by postal ballot process. [No blanket permission will be given by shareholders]

Sec.186 (12) + Rule 13(1) - Special Resolution as required under section 186 may be passed before 31^st March, 15.

4. Limit to Investment in Wholly owned subsidiary

Loan or guarantee given and security provided to its wholly owned subsidiary company or a JV, exempted from calculating the limits prescribed under section 186.

5. Disclose requirement in the notice of general Meeting

The Notice of general meeting for passing resolution shall indicate clearly the following:

1. the limits that will be required in excess of prescribed limits involved in the proposal;
2. the particulars of lending company or investing company
3. the purpose of loans, guarantee , security and investments
4. the source of funding for meeting the proposal and other details as may be specified

6. Unanimous consent of all directors at the board meeting is required

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

Proviso of section 186 (5) provide that No Requirement for prior approval of FI within the prescribed limits subject to no default of repayment of loans and interest thereon  ( Further if there is default in repayment of installments of loan or payment of interest on a term loan, prior approval from such PFI is required.)

7. Limitation on the power of a company
   1. Sec. 186(6) - Restriction on taking loan on the companies registered with SEBI u/s 12 of the SEBI Act.
   2. Sec. 186 (7)- Restriction on providing loans on lower rate of interest payable on the loans ( Clarification by MCA on 14.03.2014)
   3. Sec. 186(8) – Restriction on providing loan, guarantee or security in case of default committed in repayment of deposit and/or interest thereon
8. Register of loans, investment, guarantee or security provided by company
   1. Sec. 186(9) + Rule 12(1)- Maintain (in electronic mode or manually) the register in the Form MBP-2 from the date of its incorporation
   2. Sec. 186(9) + Rule 12(2)- Entries to be made in the register within 7 days
   3. Sec. 186(9) + Rule 12(3)- Place of Keeping the register- Registered office
   4. Sec. 186(9) + Rule 12(4)- Authentication of the Register by secretary or authorised person by BOD
   5. Sec. 186(9) + Rule 12(6) - Inspection charges not exceed Rs. 10/-for each page.
9. Record required to be maintained for such loans

Yes, Company shall maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid. The entries in the register shall be made chronologically in respect of each such transaction within seven days of making such loan or giving guarantee or providing security or making acquisition. The entries in the register (either manual or electronic) need to be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.

10. Exemption for the applicability of Section 186(1)

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

1. 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;
2. to any acquisition -
   1. 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 in respect of its investment and lending activities;
   2. made by a company whose principal business is the acquisition of securities;
   3. of shares allotted in pursuance of section 62(1) (a).
11. Penalty

• Lender Company: Fine Rs. 5 lakhs to Rs. 25 lakhs
• Officer: Director or other person -Imprisonment upto 2 years or fine Rs. 5 lakhs to Rs. 25 Lakhs, or both.

12. Compounding offence

The offence committed under this section is compoundable in accordance with the provisions of section 441 of the Act.