Section 186 Of the Companies Act 2013

Introduction

Section 186 of the Companies Act 2013 deals with loan and investment restrictions imposed on companies. This section outlines the rules and regulations governing a company's acquisition of loans, guarantees, or securities. It also lays down the conditions under which a company can invest in another company. 

Understanding the implications of this provision is crucial for companies to ensure compliance and avoid penalties. This blog explores the various aspects of Sec 186 of the Companies Act 2013 and discusses its implications for companies.
 

What is Section 186 Of the Companies Act 2013?

Section 186 of the Companies Act 2013 lays down the regulations regarding investments and loans made by a company. According to the Act, a company can make investments through multiple layers of investment companies. However, there are certain restrictions that a company must adhere to.

A company cannot directly or indirectly provide a loan, security, or guarantee to any person or corporate body. Additionally, the company cannot acquire securities of any other corporate body through purchase, subscription, or any other means.

Furthermore, the Act specifies that the total investment amount cannot exceed 60% of the paid-up share capital, free reserves, and securities premium account. Suppose the free reserves and securities premium account is more than the paid-up share capital. In that case, the total investment amount cannot exceed 100% of the free reserves and securities premium account.
 

Requirements

1) Approval of the Board

●    Board approval is necessary for all cases, regardless of the investment, guarantee, loan, and security amount involved.
●    The board approval can be obtained through a unanimous resolution passed at a board meeting, with all the directors' consent.
●    It is not sufficient to obtain approval through a resolution by circulation or a resolution passed by a committee of directors.

2) Approval of the Members Who Vote in Favour of the Special Resolution

●    If the total sum of existing and proposed loans, guarantees, investments, or securities exceeds the limit specified in Section 186(2), a special resolution is required before approval.
●    Sec 186 of Companies Act 2013 (2) sets a limit higher than either 60% of (paid share capital + securities premium + free reserves) or 100% of (free reserves + securities premium).
●    The special resolution may specify the total amount authorised by the board for loans, investments, guarantees, or securities. However, if the company lends to a wholly-owned subsidiary or a joint venture, a holding company subscribes to acquire securities from its wholly-owned subsidiary, or the company provides a guarantee or securities to its WOS or JVC, no special resolution approval is necessary.

3) Approval of the Public Financial Institution

●    To obtain a term loan from PFI, the firm must first obtain prior approval from PFI.
●    If the sum of loans, investments, guarantees, or securities, along with the proposed amount, does not exceed the specified limit and there is no default in the repayment of loan EMIs or interest to PFI, PFI approval is not required.

4) Interest Rate

●    The loan Interest charged must be greater than the yield of the Government Security closest to the loan period.

5) No Subsisting Default for Deposits

Until a default in repayment of any accepted deposits or the interest on such deposits is rectified, a company cannot engage in any loans, guarantees, securities, or investments. 

If a company fails to repay the deposits or the interest on time, it can only proceed with making a loan, investment, guarantee, or security after fixing the default.

6) Disclosures in Financial Statements

The company will disclose the following to its members as part of the financial statement.

●    Details on loans, guarantees, security, and investments.
●    The purpose for which the recipient is proposing to use the loan, guarantee, or security.
 

Penalty

Sec 186 of the Companies Act 2013 specifies that companies failing to comply with the regulations mentioned earlier will face penalties. The penalty will be a minimum of INR 25,000 and a maximum of INR 5 lakh. Furthermore, any company official who breaches the law may be fined up to INR 1 lakh and face imprisonment of up to two years. These penalties ensure that companies and their officials abide by the rules and regulations related to loans, guarantees, investments, and securities.

Exceptions of Section 186

Non-applicability of Section 186

For the Government Company
●    Defence production company owned by the government
●    Governmental companies other than listed companies, if they obtain approval from the Ministry or Department of CG, which is administratively in charge of them or the State Government, as applicable

For the acquisition of shares
●    A purchase of shares assigned per the right shares
●    Acquisition by an investment company whose primary business is the acquisition of securities

For loans, guarantees or security
●    In the ordinary course of business, a banking company
●    In the ordinary course of business, an insurance company
●    In the ordinary course of business, a housing finance company
●    A company that provides infrastructure or finances companies
 

Restrictions for Layers of Investment Companies

Section 186 of the Companies Act 2013 imposes certain restrictions on the layers of investment companies. As per this section, an investment company must have less than two layers of subsidiaries. This means that if Company A is an investment company, it can have subsidiaries (Company B) and those subsidiaries can have their subsidiaries (Company C), but Company C cannot have its subsidiaries.

This provision aims to prevent the creation of complex structures that make it difficult to identify the ultimate beneficiaries of investments, which can lead to the misuse of funds or tax evasion. The restriction on the number of layers promotes transparency and ensures that investment companies are held accountable for their actions.
 

Penalty For Contravention Of Section 186 of the Companies Act 2013

The following punishments are imposed if a company violates this section.

●    For Company
Fine – Minimum Rs. 25000 and,
Maximum Rs. 5,00,000

●    For an official in default
Maximum Imprisonment – 2 years; and
Fine – Minimum Rs. 25,000 and,
Maximum Rs. 1,00,000