Have you ever examined that Section -186 of Companies Act, 2013 is NOT applicable to Banking Company, or Insurance Company or Housing Finance Company in the ordinary course of its business or whose principal business is of lending of money to the general public?
This story is not Ending here only it does NOT even apply to any investment made by an investment company; made in shares allotted by way of rights issues made by a body corporate; Investment made by an NBFC company whose main business is to invest in the securities of the Company.
Proceed further to know more about Inter-corporate loans and investment made by the company as per Section 186 of Companies Act, 2013.
When a company provides loan, security or guarantee to another company or any entity is termed as inter-corporate loans. And, when a company invests in any other company in any form is referred to as an inter-corporate investment.
As per section 186(1) of the Companies Act, 2013, a company shall make an investment through not more than two layers of investment Company.
Gives Loan to any person
Invest in Body Corporate
Provides Security to any person
Provides Guarantee to any person
Board has the power to approve the same in duly convened board meeting if such loan or investment doesn’t exceed
60% of its paid-up share capital, free reserve and security premium account,
100% of its free reserve and securities premium account,
Whichever is more
For every inter-corporate loan, investment, guarantee, security the board resolution required to be passed.
# What if it exceeds the prescribed limit?
Next step would be-If the aggregate amount loan, guarantee, security, and investment the company exceeds the limit as prescribed in section 186(2) in such a case no investment or loan shall be made or guarantee shall be given or security shall be provided unless it's authorized by a special resolution passed in a general meeting.
The requirement of section 186(3) shall be applying, in case if Loan, Guarantee or security has provided by a Company- Special Resolution
to its wholly-owned subsidiary Company; or
a Joint venture Company;
or acquisition made by holding company by any mode, of securities of its wholly-owned subsidiary Company.
Few Important point to keep in mind while giving Loans, providing securities or making Investment:
The word “person” does not include any individual who is in the employment of the company
Company shall disclose the details of such loan, Guarantee, Security, acquisition in the financial statement
Company shall disclose to the member in financial statements-
the full details of the Loan, Investment, Guarantee,
Purpose of the providing and usage of the same,
The rate of interest chargeable should be more than the prevailing yield of Government Security closest to the period of the loan.
It is to be checked whether there is an existing loan from any public financial institution if so, the prior approval of that public financial institution is also required for any subsequent loan from any other source. However, prior approval of the Public Financial Institution would not be needed where the aggregate loan, investment, guarantee and security that is proposed within the limits as mentioned under section 186(2).
The company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.
Filing of form -MGT14 in case special resolution is passed by the company within 30 days of General Meeting.
Non-Applicability of Section 186 of the Companies Act, 2013
1. Loan Made, guarantee given or security provided or investment made by:
Banking Company, or
Insurance Company or
Housing Finance Company
in the ordinary course of its business or whose principal business is of lending of money to the general public.
2. To any Investment:
made by an investment company;
made in shares allotted by way of rights issues made by a body corporate;
The investment made by an NBFC company whose main business is to invest in the securities of the Company.
“Investment company” means a company whose principal business is the acquisition of shares, debentures or other securities.
3. With respect to Government Company
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 CG which is administratively in charge of the company or State Government, as the case may be.
Registers for Loan, Investment, Guarantee or Security
Every company giving a loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register in Form MBP 2 at the registered office of the company.
The register shall be kept at the registered office of the company.
The register shall be opened for inspection at the registered office of the company.
The Copies of the register may be obtained by any member on payment of prescribed fees.
Also, the extracts may be taken out from the register by any member on payment of prescribed fees
The register shall be maintained with effect from the date of its incorporation.
The register shall be preserved permanently.
The company secretary of the company or any other person authorized by the Board is required to maintain the register under its custody.
The register shall be maintained either manually or in electronic mode.
Penalty for Contravention ofSection 186
If a company contravenes any of the provisions of this section, the punishment would be as follows:
Fine on Company
Officer in default
Min- 25,000 Rupees
Max- 5,00,000 Rupees
Imprisonment: 3 Years
Min- 25,000 Rupees
DRAFT BOARD RESOLUTION TO BE PASSED UNDER SECTION: 186
CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF (COMPANY NAME) HELD AT THE REGISTERED OFFICE OF THE COMPANY AT (ADDRESS) ON (DATE) AT (TIME).
“RESOLVED THAT” the consent of the Company be and is hereby accorded to the Board of Directors in terms of the provisions of Section 186 of the Companies Act, 2013 and the Board including any Committee of Directors be and is hereby authorized, subject to the approval of the Reserve Bank of India, if any, and other applicable Rules, Regulations, Guidelines (including any statutory modifications or re-enactment thereof for the time being in force) and such conditions as may be prescribed by any of the concerned authorities, notwithstanding that the aggregate loans and guarantees to any bodies corporate and persons and investment in securities of any bodies corporate exceeds the limits specified under Section 186 of the Companies Act, 2013, read with the applicable rules, circulars or clarifications thereunder:
(a) to invest/acquire from time to time by way of subscription, purchase, conversion or otherwise Equity Shares, Preference Shares, Debentures (whether convertible or non-convertible) or any other financial instruments of one or more bodies corporate, whether in India or outside, which may or may not be subsidiary(ies) of the Company as the Board may think fit, in pursuance of Section 186 of the Companies Act, 2013 (including any ordinance or statutory modification or re-enactment thereof, for the time being in force), to the extent of the following limits:
Investments into Subsidiaries and other Bodies Corporate:Rs.___(Rupees ________________only).
(b) to make/give from time to time any loan or loans to anybody or bodies corporate, whether in India or outside, which may or may not be subsidiary(ies) of the Company or to any persons as the Board may think fit, in pursuance of Section 186 of the Companies Act, 2013 (including any ordinance or statutory modification or re-enactment thereof, for the time being in force) to the extent of the following limits:
Loans to Subsidiaries, other Bodies Corporate or Persons: Rs.___(Rupees ______only).
(c) give from time to time any guarantee(s) and/or provide any security to any person(s), any Body Corporate, Bank, Financial Institutions or any other institution in India or outside in respect of or against any loans to or to secure any financial arrangement of any nature by, any other person(s), any Body(ies) Corporate, whether in India or outside, which may or may not be subsidiary(ies) of the Company, as the Board may think fit, in pursuance of Section 186 of the Companies Act, 2013 (including any ordinance or statutory modification or re-enactment thereof, for the time being in force) to the extent of the following limits:
Guarantees against Loans/Financial arrangements in favour of Subsidiaries, other Bodies Corporate and Persons: Rs.___(Rupees ______only).
“RESOLVED FURTHER THAT” the consent of the Company, be and is hereby accorded to the Board including any Committee of Directors, pursuant to Rule No.ll of the Companies (Meetings of Board and its Powers) Rules, 2014 and Section 186 and other applicable provisions of the Companies Act, 2013, to give any loan to or guarantee or provide any security on behalf of, or acquire securities of, the Wholly Owned Subsidiaries of the Company, for such sums as may be decided by Board/Committee of Directors as permitted or subject to the provisions specified therein.
“RESOLVED FURTHER THAT” for the purpose of giving effect to the above resolution, the Board/Committee be and is hereby authorized to agree, make, accept and finalize all such terms, condition(s), modification(s) and alteration(s) as it may deem fit including the terms and conditions within the above limits up to which such investments in securities/loans/ guarantees, that may be given or made, as may be determined by the Board or the Committee thereof, including with the power to transfer/dispose of the investments so made, from time to time, and the Board/Committee is also hereby authorized to resolve and settle all questions, difficulties or doubts that may arise in regard to such investments, loans, guarantees and security and to finalize and execute all agreements, documents and writings and to do all acts, deeds and things in this connection and incidental as the Board/Committee in its absolute discretion may deem fit without being required to seek any further consent or approval of the members or otherwise to the end and intent that they shall be deemed to have been given approval thereto expressly by the authority of this resolution.
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