Section 186: Loan and Investment by a Company

Section 186 loans and investments is the ceiling the Companies Act, 2013 puts on how much of its own balance sheet a company can lend, guarantee or invest into other bodies corporate. Above the ceiling the Board cannot act alone, and the whole exposure has to be disclosed to members in the financial statement. For anyone reading a set of accounts, section 186 is the reason inter-corporate exposure is visible at all.

The section 186 limit, and how it is measured

Section 186(2) prohibits a company, directly or indirectly, from doing three things beyond a limit:

• (a) giving any loan to any person or other body corporate
• (b) giving any guarantee or providing security in connection with a loan to any other body corporate or person
• (c) acquiring, by way of subscription, purchase or otherwise, the securities of any other body corporate

The limit is the higher of two numbers: sixty per cent of the company's paid-up share capital, free reserves and securities premium account, or one hundred per cent of its free reserves and securities premium account. Because it is whichever is more, a company with large reserves relative to its capital is governed by the second measure.

An Explanation inserted by Act 1 of 2018 with effect from 7 May 2018 narrows the reach of clause (a): for the purposes of sub-section (2), the word "person" does not include any individual who is in the employment of the company.

The special resolution trigger

Section 186(3), as substituted by Act 1 of 2018 with effect from 7 May 2018, is the gate above the ceiling. Where the aggregate of the loans and investment so far made, and the amount for which guarantee or security has so far been provided, taken together with what the Board now proposes, exceeds the limits specified under sub-section (2), no investment or loan shall be made and no guarantee or security shall be given unless previously authorised by a special resolution passed in a general meeting.

Two provisos qualify it.

The first exempts three intra-group cases from the special resolution requirement: a loan or guarantee given, or security provided, by a company to its wholly owned subsidiary company or a joint venture company, and an acquisition made by a holding company of the securities of its wholly owned subsidiary company.

The second closes the transparency gap that would otherwise open: even where the exemption applies, the company shall disclose the details of such loans, guarantee, security or acquisition in the financial statement as provided under sub-section (4).

What has to be disclosed, and where

Section 186(4) is the disclosure obligation, and it is addressed to members rather than to the Registrar. The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made, guarantee given or security provided, and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient.

The purpose limb is the part that carries the most information. A bare number tells a reader the size of the exposure. The stated purpose tells them what it is for.

Section 186(9) adds a register: every company giving a loan, giving a guarantee, providing security or making an acquisition under the section shall keep a register containing the prescribed particulars, in the prescribed manner. Under section 186(10) that register is kept at the registered office, is open to inspection there, and extracts may be taken by any member, with copies furnished on payment of the prescribed fee.

Section 186(6) sits alongside these for one class of company: a company registered under section 12 of the Securities and Exchange Board of India Act, 1992 and covered under such class of companies as may be prescribed shall not take inter-corporate loans or deposits exceeding the prescribed limit, and shall furnish the details of the loan or deposits in its financial statement.

The conditions that apply below the limit too

Three requirements in section 186 are not about size at all. They apply to the transaction whatever its amount.

Unanimous Board consent, and lender approval. Under section 186(5), no investment, loan, guarantee or security may be given unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting, and the prior approval of the public financial institution concerned is obtained where any term loan is subsisting. The proviso removes the public financial institution approval where the aggregate stays within the sub-section (2) limit and there is no default in repayment of instalments or interest on that loan.

A floor on the interest rate. Section 186(7) provides that no loan shall be given under the 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. The comparison is tenor matched, not a single benchmark.

A bar while a deposit default subsists. Under section 186(8), a company in default in the repayment of any deposits accepted before or after the commencement of the Act, or in payment of interest on them, shall not give any loan, guarantee or security or make any acquisition till such default is subsisting.

The layer rule, and who is outside the section

Section 186(1) is a separate restriction that sits at the top of the section: a company shall, unless otherwise prescribed, make investment through not more than two layers of investment companies. A proviso preserves two situations, the acquisition of a foreign company that itself has investment subsidiaries beyond two layers under the law of its country, and a subsidiary having an investment subsidiary to meet a requirement of any law, rule or regulation in force.

Section 186(11), as substituted by Act 1 of 2018 with effect from 7 May 2018, exempts a set of financial businesses from the rest of the section except sub-section (1), so the two-layer rule still binds them:

• Loans, guarantees, security or investment in the ordinary course of business by a banking company, an insurance company or a housing finance company, or by a company established with the object of and engaged in financing industrial enterprises or providing infrastructural facilities
• Investment made by an investment company
• Investment made in shares allotted under section 62(1)(a), or in shares allotted in a rights issue by a body corporate
• Investment made in respect of investment or lending activities by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 whose principal business is acquisition of securities

The Explanation to the section defines "investment company" and, as amended by Act 1 of 2018 with effect from 7 May 2018, deems a company principally engaged in acquisition of securities if its investments in shares, debentures or other securities are not less than fifty per cent of its total assets, or its income from investment business is not less than fifty per cent of gross income. "Infrastructure facilities" means the facilities specified in Schedule VI.

The penalty

Section 186(13) applies where a company contravenes the section. The company shall be punishable with fine of not less than twenty-five thousand rupees, extending to five lakh rupees. 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 of not less than twenty-five thousand rupees, extending to one lakh rupees.

Note the conjunction on the officer's side. It is imprisonment and fine, not one or the other, which makes section 186 heavier on individuals than the flat fine on the company suggests.

Section 186 against section 185

The two sections are adjacent and are routinely mixed up. They ask different questions.

Section 185 loans to directors covers the other half of that pairing in full.

Where this sits in the disclosure picture

Section 186 exposure is disclosed in the financial statement, which for a listed company reaches the market through its results and annual report rather than through a standalone filing. The register under section 186(9) is a registered-office record, inspectable by members.

• Section 185 loans to directors is the related party prohibition that sits immediately before this section.
• What is a related party transaction covers the section 188 regime that often applies to the same counterparty.
• What is a form AOC-4 is the filing that carries the financial statement where section 186(4) particulars appear.
• What is a postal ballot is one of the routes by which the special resolution under section 186(3) can be put to members.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.