Provisions for Loan & Investment by Company under Section 186

Section 186 of the Companies Act 2013 sets out the loans and investments that a company can make. It states that the company can invest through more than two layers of investment companies. This article will discuss the loan and investment by the company.

Applicable Provisions and Rules

• Section 186 of the Companies Act, 2013.
• Rule 13 of the Companies (Meeting of the Board and its Powers) Rules, 2014.

What is Section 186 of the Companies Act?

A company’s ability to lend and invest is governed by Section 186 of the Companies Act 2013. It states that a company can invest through more than two tiers of investment companies.

A company cannot directly or indirectly under Section 186 of the Companies Act 2013:

• Make a loan to anyone or anything.
• Provide any security or guarantee in connection with the loan to any other person or company;
• and acquire the securities of any other company by purchase, subscription, or other means.
• exceeding 60% of its paid-up share capital, free reserves, and securities premium account, whichever is greater, or 100% of its free reserves and securities premium account.

What is an investment and investment company?

In common parlance, “investment” refers to any asset or property in which an individual or company invests cash or income. This is an investment in equity, mutual funds, bonds, or other commodities. A company whose main activity is the sale and acquisition of shares, bonds, and other forms of securities is called an “investment company”.

The Companies Act 2013 has section 186 which deals with “loan and investment of a firm”. The rules promulgated according to section 186 of the Act also apply.

Provisions Governing Corporations

Monetary Threshold for Board Approval

With the permission of the board of directors, a company (private or public):

• Provide any loan to any natural person and possibly another legal entity.
• Offer any guarantee or even provide security in connection with a loan to any other entity or individual.
• To obtain a pledge of any other legal entity up to 60% of its compensated share capital, free reserves, and securitization, explicitly or implicitly.

Regular monitoring of these limits is the responsibility of the accounting team, the budget committee, the chief financial officer (CFO), or the company secretaries (CS).

Monetary threshold for shareholder approval: Assume that the sum of the capital so contributed, debt, guarantee, or collateral provided or provided by the Board of Directors shall exceed the prescribed limitations. The company cannot provide any other incentives for investments, loans, guarantees, or collateral unless initially authorized by a special resolution passed at the general meeting.

The board of directors should specify the total amount up to which the board is authorized to offer such mortgage or security, provide additional security or make such purchase, which should be specified in a special resolution voted at the general meeting. The company must first obtain shareholder approval and the proposal must have a monetary cap, unlike an open-ended resolution.

Exclusion from the mentioned currency limit: The term “person” shall not include a representative of the firm. Therefore, any loans, guarantees, or collateral created by the company to its employees are not subject to the above restrictions. As a result, there are no mortgages, guarantees, or collateral provided by the firm for its employees within the monetary limits.

Exemption from stockholder approval: A special shareholder resolution is not required if a line of credit or guarantee is offered when the company provides a guarantee for its wholly owned subsidiary. And perhaps the organization of a strategic partnership or when the holding company acquires the collateral of its 100% subsidiary by subscription, purchase, or otherwise. However, in the financial report, the company must disclose the specifics of such loans, guarantees, collateral, or acquisitions.

Disclosure in financial statements: The company must disclose to the representatives in the financial report full details of the loans granted, the investments made, the guarantees provided or the security offered to the representatives, and the intention with which the borrower intends to use the mortgage, guarantee, or security. Organizations can include this information in the reports of the board of directors and annexes to the financial statements.

Method of obtaining board approval: A company can make an investment, loan, guarantee, or security only after it is authorized by the board of directors with the consent of all the directors present at the meeting and not through a circular resolution. According to Section 179, paragraph 3 of the Act, the company’s board of directors is authorized to finance the company’s capital through resolutions voted at board meetings. The Board of Directors may assign such authority to any committee of directors, to the CEO or officer of the Company, or, in the case of a Subsidiary, to the most senior officer of the Subsidiary. The Board of Directors should make such delegations at a conference, not by circular resolution.

Prior approval of a public financial institution in certain cases: If there is a credit facility and there is a delay in the payment of debt installments or interest payments under the terms of the debt to the public banking institution, prior permission from the public mortgage lender is required. If there is a default on debt or interest payments, prior approval of the public financial organization is required, rather than when the organization makes payments on a regular schedule.

Loan interest rate: The organization cannot provide a loan under Section 186 of the Act at an interest rate that is lower than the current yield on one-year, three-year, five-year, or ten-year government securities in comparison to the duration of the loan.

Restrictions on the provision of loans, guarantees, or security: A corporation that is in arrears in returning any funds received or in interest payments on such deposits may not make a loan, offer a guarantee, provide collateral or make acquisitions until the authorities have resolved the arrears. This rule applies when the company defaults on a loan or interest on deposits.

Loan, guarantee, or security to board members or relatives of board members: Section 185 of the amendment deals with “lending to directors”. A company (private or public) should not make any loan (such as any loan designated as debt on the books) or provide a guarantee or collateral in connection with any loan made:

• Any director of a corporation or business that is its holding company and any associate or relative of any such director.
• Any business where any such director or relative is a shareholder. As a result, the company must verify the client and their relationship with the directors before extending any credit, providing any guarantees, or providing any security related to any credit. The company must guarantee that in such situations it will follow sections 185 and 186 of the Act.

Register maintenance: Every corporation making a loan, providing a guarantee, security or making an acquisition must keep a record that contains the required information in the prescribed manner.
Below are some key factors to keep in mind when it comes to updating your registration:

• From incorporation, the firm must keep records in the MBP 2 form and individually record details of loans and guarantees offered, securities provided and acquisitions completed.
• Within seven days after making a loan, providing a guarantee, providing security, or making an acquisition, the organization must make entries in the register gradually.
• The company secretary must hold the register or any other person approved by the board of directors.
• The record can be stored physically or electronically.
• The company secretary or any other person appointed by the board for this task must verify the updates in the record (whether manual or digital).

Viewing and extracts from the register: The registered office of the company must keep the records required by Section 186 of the Act. At such a location, such records should be available for inspection. Extracts from the record may be obtained by any person, and duplicates of the register may be furnished for a fee to any individual in the company.

Inapplicability of provisions

Section 186 of the Act is not relevant (except the requirements relating to levels of securities dealers):

• For any loan provided, any assurance offered, any collateral provided, or any money invested in the ordinary course of business of a financial institution, insurance provider, residential financial institution, or company incorporated with the purpose and involvement in the industry of financing a business operation or providing infrastructure and facilities.
• An investment in shares made available upon exercise of rights is issuable by the investment group for any capital invested by the investment company.
• In any investment made by a non-banking financial company (NBFC) licensed under the regulations of the Reserve Bank of India (RBI) and whose primary business is the procurement of shares.

Penalty for non-compliance

Companies and their fraudsters who act in contravention of the above regulations face penalties under Section 186(13). The companies will be fined not less than ₹25,000 but not more than ₹5 crores. Any officer of the company who commits the violation shall be punished with imprisonment for a term which may extend to two years and with a fine not less than ₹ 25,000 but not exceeding ₹ 1 lakh.

Final words

The provision of loans and investments is dealt with in Section 186 of the Companies Act 2013. The Companies Act 2013 brought about a shift in the idea of ​​‘loans and investments by corporations. According to the new law, intercompany acquisitions must be carried out through a maximum of two layers of investment entities. The Companies Act 1956 did not contain such a clause.