Section 186 Loan and Investment by Company: A Comprehensive Guide to Compliances

 

Section 186 Loan and Investment by Company: A Comprehensive Guide to Compliances

Companies frequently engage in loan transactions and investments to finance their operations and grow their business. However, these transactions need to comply with legal requirements to prevent fraud and protect stakeholders' interests. The Companies Act, 2013, provides regulations for loans and investments made by companies, including the maximum limit, conditions for exemptions, and compliances to be followed. In this article, we will discuss Section 186 of the Companies Act, 2013, and the checklist for its compliances.

Section 186 of the Companies Act, 2013, restricts companies from directly or indirectly giving loans, guarantees, or securities to any person or body corporate 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. The word "person" above does not include any individual who is in the employment of the company.

Where the aggregate of the loans and investments made, the amount for which guarantee or security has been 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 above, 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 a company wants to exceed these limits, it must obtain prior approval through a special resolution passed in a general meeting. However, this requirement does not apply to loans or guarantees given or securities provided to a wholly owned subsidiary company or a joint venture company or securities acquired by a holding company from its wholly owned subsidiary.

 Additionally, a company shall not make an investment through more than two layers of investment companies, except under specific conditions. However, the provisions do not affect a company from acquiring another company incorporated in a country outside India or a subsidiary company having an investment subsidiary for meeting regulatory requirements.

To ensure compliance with Section 186 of the Companies Act, 2013, companies need to follow the below mentioned checklist:

  1. Convene a board meeting by giving seven days notice to every director to pass the resolution in the board meeting, and prior approval from a public financial institution is required if there is a subsisting term loan.                                                                                                                          However, if the total loans and investments made so far, along with the proposed investments, loans, guarantees or securities do not exceed the limit mentioned above and there is no default in loan repayments or interest payments, prior approval from the public financial institution is not necessary.
  2. Ensure that a resolution is passed by the Board with the consent of all the directors present in the board meeting and the prior approval of the public financial institution concerned where any term loan is subsisting.
  3. Convene a general meeting by giving not less than clear twenty-one days notice to all the shareholders of the Company. Notice of the general meeting is to be given with the proposed special resolution and explanatory statement if the proposal under consideration would result in exceeding the limits as mentioned above which are prescribed under sub-section (2) of section 186 of the 2013 Act. 
  4. Ensure that the company that proposes to grant loans etc. has not defaulted in repayment of deposits accepted before or after commencement of the 2013 Act.
  5. Ensure that 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.
  6. Maintain a register in form MBP 2 required to be maintained under section 186(9) read with Rule 12 of the Companies (Meetings of the Board and its Powers) Rules, 2014, and keep it at the registered office of the company.
  7. Ensure that the register aforesaid is available for inspection by any member at the registered office of the company.
  8. 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 utilized by the recipient of the loan or guarantee or security.

In conclusion, complying with the provisions of Section 186 of the Companies Act, 2013 is essential for companies to ensure that they operate within the bounds of the law. Companies need to follow the checklist mentioned above to ensure that they comply with the provisions of this section. Failure to comply with the provisions of Section 186 can lead to legal complications and penalties, which can have adverse effects on the company's operations and reputation.

 

 

 

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