Loan and Investment by Company

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

  1. Investment through Layers [Section 186(1)]

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

  1. Limits on Loans, Guarantees, Securities & Investments [Section 186(2)]

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:

    • 60% of paid-up share capital,free reserves, securities premium account, OR
    • 100% of free reserves and securities premium account

Whichever is more

Note: “Person” excludes employees of the company [Explanation to Section 186(2)]

  1. Special Resolution Requirement [Section 186(3)]

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:

    • Loans/guarantees/securities to wholly owned subsidiary or joint venture company
    • Acquisition of securities of wholly owned subsidiary by holding company

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:

    • Where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of sub-section (3) of section 186 shall not apply:
    • Provided that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4) of section 186
  1. Disclosure Requirements [Section 186(4)]

The company must disclose in financial statements:

    • Full particulars of loans, investments, guarantees, and securities
    • Purpose for which the loan/guarantee/security will be utilized by the recipient
  1. Board Resolution Requirements [Section 186(5)]

Mandatory Conditions:

    • Board resolution with consent of all Directors present
    • Prior approval of public financial institution (if term loan subsisting)

Proviso – Exemption from PFI Approval: When aggregate does not exceed Section 186(2) limits AND no default in loan repayment/interest exists

  1. Inter-Corporate Deposits [Section 186(6) & Rule 11(3)]

Companies registered under SEBI Act Section 12 and covered under prescribed classes:

    • Cannot take inter-corporate loans/deposits exceeding prescribed limits
    • Must furnish details in financial statements

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.

  1. Interest Rate Requirement [Section 186(7)]

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.

  1. Default Restrictions [Section 186(8)]

Companies in default of deposit repayment or interest payment cannot:

    • Give any loan
    • Give guarantee or provide security
    • Make any acquisition

till such default is subsisting.

  1. Register Maintenance [Section 186(9) & (10); Rule 12]

Every company must maintain a register containing prescribed particulars.

Rule 12 Specifications:

Form: MBP-2

Maintenance Requirements [Rule 12(1)-(5)]:

    • Separate entries for loans, guarantees, securities, acquisitions
    • Chronological entries within 7 days of transaction
    • Kept at registered office
    • Permanent preservation
    • Custody: Company Secretary or Board-authorized person
    • Authentication by Company Secretary or authorized person
    • Can be maintained manually or electronically

Inspection Rights [Section 186(10); Rule 12(6)]:

    • Open to inspection at registered office
    • Members can obtain extracts/copies
    • Fees: As per Articles (maximum ₹10 per page)
  1. Exemptions from Section 186 [Section 186(11)]

Sub-section (1) only applies to all companies.

Sub-sections (2)-(10) do NOT apply to:

(a) Loans/Guarantees/Securities by:

    • Banking companies
    • Insurance companies
    • Housing finance companies
    • Companies financing other companies
    • Companies providing infrastructural facilities
    • Rule 11(2): NBFCs registered with RBI and Finance Companies registered with IFSCA engaged in financing business

(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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