Loan and Investment by Company (Section 186 of the Companies Act, 2013) :
Section 186 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for Loan and Investment by Company. According to this section:
This section is applicable on both public as well as private company.
(i) According to section 186(1), without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than 2 layers of investment companies:
However, the provisions of sub-section (1) shall not affect,—
(a) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
(b) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.
(ii) According to section 186 (2) of the Companies Act, 2013, no company shall directly or indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other 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.
Vide General Circular No, 04/2015, dated 10/3/2015 clarification has been issued on the applicability of provisions of section 186 of the Companies Act, 2013 relating to grant of loans and advances by Companies to their employees.
It has been clarified that loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013.
This clarification will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.
(iii) Prior approval for exceeding limit [Section 186(3)]: Prior approval by means of a special resolution passed at a general meeting shall be necessary where the giving of any loan or guarantee or providing any security or the acquisition exceeds the limits specified above.
According to the Companies (Meetings of Board and its Powers) Rules, 2014, 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.
The Companies (Meetings of Board and its Powers) Rules, 2014, also provides that:
(a) Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far 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 under section 186, 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.
Explanation.-For the purpose of this rule, it is clarified that it would sufficient compliance if such special resolution is passed within one year from the date of notification of this section.
(b) A resolution passed at a general meeting in terms of sub-section (3) of section 186 to give any loan or guarantee or investment or providing any security or the acquisition under sub section (2) of section 186 shall specify the total amount up to which the Board of Directors are authorised to give such loan or guarantee, to provide such security or make such acquisition:
Provided, that the company shall disclose to the members in the financial statement the full particulars in accordance with the provision of sub-section (4) of section 186.
(iv) Disclosure to members [Section 186(4)]: It is necessary for the company to disclose to the members in the financial statement the full particulars of :
(a) loan given,
(b) investment made or guarantee given or security provided,
(c) 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.
(v) Unanimous resolution [Section 186 (5)]: Any investment shall be made or loan or guarantee or security given by the company only after when the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting. The prior approval of the public financial institution concerned where any term loan is subsisting shall also be obtained.
However, prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in section 186(2) and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
(vi) Further, no company, which is registered under section 12 of the Securities and Exchange Board of India Act, 1992 and covered under such class or classes of companies as may be prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits. [Section 186 (6)]
According to the Companies (Meetings of Board and its Powers) Rules, 2014, 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.
(vii) Rate of interest on loan: A loan under this section shall not be given at a rate of interest lower than the prevailing yield of one year, 3 year, 5 year or 10 year Government Security closest to the tenor of the loan. [Section 186 (7)]
Vide General circular no. 06/2015 dated 9th April, 2015 ministry has clarified that in cases where effective yield( effective rate of return) on tax free bonds is greater than the prevailing yield of one year, three year, five year or ten year, Government Security closest to the tenor of the loan, there is no violation of sub-section(7) of this section of the Companies Act, 2013.
(viii) No loan till default is subsisting: No 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 give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. [Section 186 (8)]
(ix) Maintenance of register: Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed. [Section 186 (9)]
According to Rule 12 of the Companies (Meetings of Board and its Powers) Rules, 2014:
(a) Every company giving loan or giving guarantee or providing security or making an acquisition of securities shall, from the date of its incorporation, maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid.
(b) The entries in the register shall be made chronologically in respect of each such transaction within 7 days of making such loan or giving guarantee or providing security or making acquisition.
(c) The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.
(d) The entries in the register (either manual or electronic) shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose.
(e) The register can be maintained either manually or in electronic mode.
(f) The extracts from such register maintained may be furnished to any member of the company on payment of such fee as may be prescribed in the Articles of the company which shall not exceed 10 rupees for each page.
(x) Register to be kept at registered office:
(a) This register shall be kept at the registered office of the company.
(b) It shall be open to inspection at such office and extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed. [Section 186 (10)]
(xi) Nothing contained in section 186, except sub-section (1) of section 186, shall apply—
(a) to a loan made, guarantee given or security provided by a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;
According to the Companies (Meetings of Board and its Powers) Rules, 2014, the expression “business of financing of companies” shall include, with regard to a Non- Banking Financial Company registered with the Reserve Bank of India, “business of giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business”.
(b) to any acquisition—
(1) made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities:
Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;
(2) made by a company whose principal business is the acquisition of securities;
(3) of shares allotted in pursuance of section 62(1)(a) [Section 186 (11)]
(4) made by the banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business.[ Inserted by the Order no. S.O. 504(E) dated 13th February, 2015.]
(xii) Power of Central Government to make Rules: The Central Government may make rules for the purposes of this section. [Section 186 (12)]
(xiii) Penalty: If a company contravenes the provisions of section 186, the company shall be punishable with fine which shall not be less than 25,000 rupees but which may extend to 5 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 25,000 rupees but which may extend to 1,00,000 rupees. [Section 186 (13)]
(xiv) For the purposes of section 186,
(a) the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities;
(b) the expression “infrastructure facilities” means the facilities specified in Schedule VI.