Background
The provisions relating to loans and investments by companies under the Companies Act, 2013 were introduced to ensure transparency, financial discipline, and protection of shareholders’ funds. In the past, companies had greater freedom in giving loans or making investments, which sometimes led to misuse or diversion of resources. To regulate this, the Act provides a structured framework mainly under Section 186, prescribing limits, approvals, and disclosure requirements. These rules help companies make responsible financial decisions while maintaining accountability. The objective is to safeguard the interests of shareholders and creditors and promote good corporate governance.
Applicability
All types of companies except a Government company engaged in defence production; a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section.
Compliance Requirements under Companies Act, 2013 in Accordance with Rule 11 and Rule 12 of the Companies (Meetings of Board and its Powers) Rules, 2014
A company shall make investments through not more than two layers of investment companies.
Exceptions:
(i) Foreign subsidiaries having investment subsidiaries beyond two layers as per foreign laws
(ii) Subsidiaries having investment subsidiaries to meet statutory/regulatory requirements
A company shall not exceed the following limits for:
(a) Giving loans to any person or body corporate
(b) Giving guarantees or providing security for loans
(c) Acquiring securities of any body corporate
Prescribed Limit: Higher of:
Whichever is more
Note: “Person” excludes employees of the company [Explanation to Section 186(2)]
Where the aggregate of existing loans, investments, guarantees, and securities and proposed transaction exceeds the limits under Section 186(2), a special resolution in general meeting is mandatory.
First Proviso – Exemptions from Special Resolution:
Second Proviso: Details must be disclosed in financial statements per Section 186(4)
Corresponding Rule: Rule 11(1) reiterates these exemptions with disclosure requirement as:
The company must disclose in financial statements:
Mandatory Conditions:
Proviso – Exemption from PFI Approval: When aggregate does not exceed Section 186(2) limits AND no default in loan repayment/interest exists
Companies registered under SEBI Act Section 12 and covered under prescribed classes:
Rule 11(3): Limits as per applicable SEBI regulations for such registered companies as:
No company registered under section 12 of the Securities and Exchange Board of India Act, 1992 and also covered under such class or classes of companies which may be notified by the Central Government in consultation with the Securities and Exchange Board, shall take any inter-corporate loan or deposits, in excess of the limits specified under the regulations applicable to such company, pursuant to which it has obtained certificate of registration from the Securities and Exchange Board of India.
Loans must not be given at interest rates lower than prevailing yield of Government Securities (1-year, 3-year, 5-year, or 10-year) closest to loan tenure.
Companies in default of deposit repayment or interest payment cannot:
till such default is subsisting.
Every company must maintain a register containing prescribed particulars.
Rule 12 Specifications:
Form: MBP-2
Maintenance Requirements [Rule 12(1)-(5)]:
Inspection Rights [Section 186(10); Rule 12(6)]:
Sub-section (1) only applies to all companies.
Sub-sections (2)-(10) do NOT apply to:
(a) Loans/Guarantees/Securities by:
(b) Investments:
(i) By investment companies
(ii) In shares allotted under Section 62(1)(a) or rights issues
(iii) By NBFCs registered under RBI Act Chapter III-B whose principal business is acquisition of securities
Rule-Making Power [Section 186(12)]
Central Government may make rules for implementing this section.
Penalties & Punishments
If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.
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