Inter Corporate Loans and Investments – Section 186 under Companies Act, 2013

With the approval of the board of directors or shareholders, a corporation can provide loans and guarantees, purchase securities, or invest in another company or body corporate. Inter-corporate loans are loans made by one company to another company or body corporate. Inter-corporate investment occurs when one firm invests in another.
A corporation may lend, invest, guarantee, and sell securities to another company or body corporate with the approval of the board or the shareholders. This article discusses Section 186 of the Companies Act, 2013, which deals with Inter Corporate Loans and Investments.

Quick Look

A corporation may provide loans and guarantees, buy securities, make investments in other companies, or engage in other corporate activities with the consent of the board of directors or shareholders. Loans between companies are those given by one company to another company or body corporate. When one company invests in another, this is known as inter-corporate investment.

Inter-corporate loans and investments are governed under Section 186 of the Companies Act, 2013 (the “Act”). A company may only provide loans and guarantees, purchase securities, and make investments in accordance with the terms of Section 186 of the Act.

Meaning of Inter Corporate Loans and Investments

The maximum inter-corporate loan and the investment amount is limited and capped for each company. If a company’s paid-up share capital, free reserves, and security premium account total more than 60% of that amount or 100% of that amount, the firm should not guarantee loans, buy securities from other bodies corporate, or offer loans to them.

Inter-corporate loans and investments may be processed by board resolution with the approval of all directors present at the board meeting if the total amount of such loans, investments, guarantees, and securities in connection with loans already made and proposed to be made together does not exceed the established limit. If the same exceeds the designated limit, a previous special resolution must be enacted and the financial institution’s prior consent must be sought, the latter if there is an active term loan.

Inter-Corporate Loans and Investments under the Companies Act, 2013

A company may provide loans and guarantees to other companies and body corporates in accordance with Section 186(2) of the Act. It says a company can, either directly or indirectly:

• Give any other body corporate a loan.
• Furnish a guarantee or security in exchange for a loan to another corporate organization.
• Purchase, subscribe for, or otherwise acquire securities of other body corporates.

But up to 60% of its paid-up share capital, securities premium account, and free reserves—or 100% of those amounts, whichever is greater—can be borrowed against, guaranteed, or acquired in securities by a company.

A company may only invest through more than two layers of investment firms, according to Section 186(1) of the Act, with the following exceptions:

• For the purpose of purchasing any other company that was established outside of India if, in accordance with local legislation, the other company has investment subsidiaries that go beyond the first two tiers.
• The subsidiary company from acquiring any investment subsidiaries for fulfilling the conditions set out in the legislation, in regulation or rule created under the law, and in effect at the time.

Inter-Corporate Loans: Exceptions

The following will not be covered under the Act’s inter-corporate lending provisions:

• In the course of its regular commercial activities, a banking company, housing finance company, or insurance company.
• A company founded to finance industrial enterprises or offer infrastructural facilities.
• An authorized Non-Banking Finance Company (NBFC) focuses mostly on stock purchases.

Restrictions on Loan & Guarantee and Interest Rate

A company that has fallen behind on interest payments is not permitted to offer any inter-corporate loans, guarantees, or security. This ban will be in place until the company has fully resolved the default. Additionally, with a few exceptions, a company is not allowed to invest through two layers of investment companies.

Loans shouldn’t be granted at an interest rate that is less than the current yield of the ten-year, one-year, three-year, five-year, or three-year government security that is closest to the loan’s term. This rule does not apply when a loan is given for industrial research and development projects when the government owns 26% or more of the paid-up capital.

Disclosure necessary for Inter Corporate Loans and Investments

If an inter-corporate loan or investment is made, the company must report the following information to its shareholders in the financial statements:

• The number of loans offered, the investment made, the guarantee provided, and the security offered.
• The order to provide the same.
• The recipient suggested the use of the same.

Non- Application of Section 186: Inter-Corporate Loans and Investments under Companies Act, 2013

Lending money and investing money are two things that some companies do. In light of this, Section 186 will not apply to any loans or guarantees provided by:

• During the course of their regular business activities, a bank, an insurance company, or a mortgage lender.
• A company established with the goal of supplying infrastructure or funding an industrial company.
• A licensed Non-Banking Finance Company that prioritizes the purchase of equities.
• An organization that buys share rights.
• A company whose main activity is the purchase of shares.
• Government-owned businesses that produce weapons.
• Unlisted Businesses that the State or Federal Government’s Ministry or Department has granted legal authorization to operate.

The procedure under Section 186: Inter-Corporate Loans and Investments under the Companies Act, 2013

The company must adhere to the following method when lending money to other corporations, provide security or a guarantee in exchange for a loan or an acquisition made through subscription, or buy corporate stock.

• Step 1: Through a Board decision, a company may issue any loan, give any guarantee or security, and purchase securities of a body corporate up to 60% of its paid-up capital, security premium account, and free reserves, or 100% of its free reserves and security premium, whichever is greater.

• Step 2: After giving notice and taking into consideration the aforementioned criteria and requirements of the company, the Board of Directors will meet to examine proposals for approving a loan, guarantee, security, etc.

• Step 3: Unless the resolution sanctioning is passed at a Board meeting with the assent of all the directors present at the meeting, no investment, loan, guarantee, or security will be issued by the company.

• Step 4: If there is an existing loan from any public financial institution, that public financial institution’s prior permission is also necessary for any future loan from any other source. However, prior permission of the Public Financial Institution is not required if the aggregate loan, investment, guarantee, and security requested are within the limitations specified in section 186(2) and there is no default in the repayment of the loan or interest to the Public Financial Institution.

• Step 5: After determining the source of funds and the amount required, the Board will designate one of the directors or another individual to request for permission from public financial institutions.

• Step 6: Organize a general meeting of shareholders after providing proper notice, and pass the special resolution therein, where the granting of any loan or guarantee, or providing any security, or the acquisition that exceeds the specified limits of 60% of its paid-up capital, security premium account, and free reserves, or 100% of its reserves and security premium, whichever is greater.

• Step 7: Within 30 days after passing the resolution, file a copy of the special resolution in Form MGT-14 with the Registrar, together with the fee specified in the Companies Rules, 2014.

• Step 8: Attach all essential documents in accordance with the form’s specifications.

• Step 9: Every business that makes a loan, gives a guarantee, grants security, or makes an acquisition must keep a register in Form MBP-2 starting from the date of its registration, and the documentation for the loan, guarantee, securities, and purchase must be put therein.

• Step 10: Entries would be made in the register for each such transaction of obtaining such a loan, offering a guarantee, providing security, or completing a purchase.

• Step 11: It must be assured that no loan is granted at a rate of interest lower than the current yield of the Government securities closest to the loan’s duration for one year, three years, five years, or ten years.

• Step 12: The company must disclose in its financial statements the full details of the loans made to members, the investment made or guarantee provided or security provided, and the purpose for which the loan, guarantee, or security is proposed to be used by the recipient of the loan, guarantee, or security.

• Step 13: Examine the company’s repayment history in terms of payback of any deposits or interest thereon.

Penalty for Non-Compliance of Section 186 under the Companies Act, 2013

For violating the terms of Section 186 of the Act, the company must pay a penalty of not less than Rs.25,000 and up to Rs.5 lakhs. Every director in default is punished by imprisonment for a term of up to two years and a fine of not less than Rs.25,000, which may be increased to Rs.1 lakh for violating Section 186 of the Act.

Takeaway

Money is one of the most important commodities needed to start a business. Businesses can get share capital, loans, and other sources of finance. Loans are the principal source of funding for the majority of enterprises. An inter-corporate loan is now one of the most successful ways for companies to borrow capital. The inter-corporate loan meets a company’s whole capital needs and criteria. Only with the authority and agreement of the board of directors and shareholders may a company make an inter-corporate loan to another company or body corporate.

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