Section 186 (Applicable to both Public & Private Company)

INVESTMENT IN SUBSIDIARY

[Section 186(1)]

A Company can make investment through not more than two layers of investment companies, Without prejudice to the provisions contained in the Act, unless otherwise prescribed, below mention two exceptions of this:

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.

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.

 As per Section 2(87) (d) “Layers” in relation to a holding company means its subsidiary or subsidiaries.

APPROVAL: [Section 186(2)]

No Company Shall Directly or Indirectly without Board Resolution

• Give any LOAN to
• Give any GURANTEE & provide SECURITY to
• Acquire by way of Subscription, Purchase & otherwise, the Securities to
• Any Person or Body Corporate.

Section 2(81) provides that ‘securities’ means the securities as defined in Section 2(h) of Securities Contracts (Regulation) Act, 1956.

♠ Body Corporate

Section 2(11) provides that ‘Body Corporate’ and ‘Corporation’ includes Company incorporated outside India.

But not include,

• A Co-operative Society
• A Body Corporate-notify by Central Government

Examples of Body Corporate:

Indian Company, Foreign Company, Corporation, PFI, NBFC, LLPs.

Not Bodies Corporate:

Proprietorship, Partnership firm (Other than LLPs), HUFs, Societies, Mutual Funds managed by trustee (UTI is a body Corporate it is governed by UTI Act)

♠ Person:

The Word Person has not been defined in the Act.

Section 2(42) of General Clauses Act, 1987 provides that “Person” shall include any Company, association or body of individuals, whether incorporated or not.

Any person includes employees of company (Loan to employee covered u/s 186)

♠ Board Approval: [Section 186(2)&(5)]

Company can give loan or guarantee or providing any security or the acquisition by Passing of Unanimous Board Resolution at the meeting of Board of Directors, when limit does not exceed:

60% of Paid up share capital + Free Reserve + Security Premium Account

OR

100% of Free Reserve + Security Premium Account

(Whichever is more)

♠  General Meeting Approval: [Section 186(3)]

Where any Loan & Guarantee or providing any security or the acquisition exceeds the limit mention above then:-

• prior approval of Shareholder
• By passing of Special Resolution in General Meeting

Section 2(47) defines “free reserves” as such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that-

1. any amount representing unrealised gains, notional gains or revaluation of assets, whether Shown as a reserve or otherwise, or
2. any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;
   

♠ PUBLIC FINANCIAL INSTITUTION Approval: [Section 186(5)]

Prior Approval of Concerned Public Financial Institution is require, if term loans subsisting is (Aggregate of Loan, Investment, Guarantee & Security already made along with Loan, Investment, Guarantee & Security proposed to be made) exceed the limit mention above.

Provided that, No approval of PFI is required if there is no default made by company on repayment of loan installment or payment of interest there on as per T&C of such loan to the Public Financial Institution.

Prior approval of shareholders by way of special resolution is required in case the above limit is exceeded. However, as per Rule 11 of Companies (Meetings of Board and its powers) Rules 2014, this will not be applicable in case of specified transactions entered into by a holding company with its wholly owned subsidiary company or to a loan or guarantee given or security provided by a company to a joint venture company.

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.

♠ conditions: No Company

• Which is Registered under section 12 of the SEBI 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 furnish in financial statement the details of the loan and deposits. [Section 186(6)]

• 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, Guarantee, Security & Investment till such default is subsisting. [Section 186(8)]
  

• No loan shall be given under this section at a rate of interest lower than the prevailing yield of 1 year, 3 year, 5 year or 10 year Government Security closest to the tenor of the loan. [Section 186(7)]

Note: [Section 186(4)]

The Company shall disclose to the member

• in the financial statement
• the full particular of Loan, Guarantee, and Security & Investment made and
• Purpose for which the same is proposed to be utilized by the recipient of it.

Register of Loans, Investments, Guarantee or Security [Section 186(9)&(10)]

Form	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 (w.e.f 1st April, 2014) and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid.
Entries in Register	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
Place of Keeping	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.
Authentication	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
Maintenance	The register can be maintained either manually or in electronic mode.
Inspection	The register shall be open to inspection at registered office of the company
Extract from Register	The extracts from the register 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 Rs.10/- for each page

♠  EXEMPTION [Section 186(11)]:- The Provision of this Section Not Apply:

- Loan, Guarantee & Security provide by

• Banking Company (in ordinary course of business)
• Insurance Company (in ordinary course of business)
• Housing Finance Company (in ordinary course of business)
• Company Engage in Business of Financing of Companies “NBFC”
• Company engage in Business of Providing Infrastructure Facility
• Providing By Holding Company to Its WOS
• Providing By Holding Company to Joint Venture Company

- To Any Acquisition

• Made by NBFC Whose Principle Business is Acquisition of Security
• Made by Company Whose Principle Business is Acquisition of Security
• Shares Allotted in Pursuance of Section 62(1) (a)
• By Holding Company in WOS.

• “Business of financing of companies” shall include, with regard to a Non-Banking Financial Company registered with 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”.
• Investment Company” means a company whose principal business is the acquisition of shares, debentures or other securities;
• “Infrastructure facilities” means the facilities specified in Schedule VI.
• Ordinary Course of Business: It is not defined under the Companies Act, 2013 or rules made there under. It seems that the ordinary course of business will cover the usual; transaction, customs and practices of a business and of a company.

♠  Penalty [Section 186(13)]:-

Company – Fine of Rs.25,000/- to Rs.5,00,000

Officer- Imprisonment up to 2 years and Fine of Rs.25,000/- to Rs.1,00,000/-

Whether offence under the Section can be compounded?

Ans.: Section 441 of the Act provides for compounding of offences punishable with:

1. a) Fine only
2. b) Fine or imprisonment
3. c) Fine or imprisonment or both.

Offences punishable with imprisonment only or imprisonment and fine both are not Compoundable.

However, Section 441 has not yet come into force and hence presently offences under the Act are not compoundable.

♠ Procedure for entering into specified transactions?

- In case the ceiling exceeds specified limits.

1. Take prior approval of members by special resolution
2. File return with ROC in Form MGT-14 with copy of special resolution.
3. Take prior approval of public financial institutions in case any term loan is subsisting and there is any default in repayment of loans and/or payment of interest or if the total amount of specified transactions is exceeding limit as specified above.
   

• In case the ceiling does not exceeds specified limits.

4. Pass Board resolution in a meeting with the approval of all directors present in the meeting.
5. File return with ROC in Form MGT-14 with copy of Board resolution.
6. Disclosure to be made in the financial statements of the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.
7. Particulars of loans/guarantees/security/investments to be entered into register maintained for this purpose at the registered office, which shall be open for inspection and extracts may be taken by members on payment of prescribed fee.

1. Up to what limit shareholders can give approval for such transactions?

Ans: The Act does not prescribe any limit up to which the shareholders can give approval for such   transactions. However, on a query under corresponding Section 372A of Companies Act 1956, the Department of Company Affairs vide circular No. 8 dated 4.6.1999 had clarified as under:

I. The companies are expected to obtain the approval for making investments into securities or grant of loan to other companies of amounts which are linked with company’s available financial resources and the resolution, for investment much beyond the net worth should not be passed by the companies.

II. The companies should specifically indicate in the explanatory statement to the resolution, the specific securities in which it is proposed to invest the amount. En bloc approval should normally be avoided (except in the case of guarantee where the resolution can indicate an amount on annual basis).

If the above broad parameters are not complied with, the Government will be constrained to take suitable action against those who contravene these.”

Hence above clarification may be kept in mind while passing special resolutions under Section 186 of Companies Act, 2013 also.

2. Whether various advances and deposits will also be covered under the Section?

Ans: There is a difference between advance and loan. Loan is lending of money with absolute promise to repay whereas advances is to be adjusted against supply of goods and services. Genuine trade advances given to suppliers against orders for supply of goods will not be considered as loans and hence will be out of purview of Section 186. Similarly, advances given to employees against current month’s salary will also not be in the nature of loans.

Sale on credit is also not a loan. [Bombay High Court in Fredie Ardeshir Mehta v. Union of India (1991)]

3. Whether book debts will also be considered as loans?

Ans: Courts have held in various judgements that credit extended beyond normal credit period may be considered in the nature of loans and hence provisions of the Section may get attracted to such book debts also.

4. Whether investments in mutual funds are also covered under the Section?

Ans.: As per SEBI regulations, most of the mutual funds are managed by trusts which are not body corporates. Hence investments in mutual funds are not covered under the Section. However, Unit Trust of India is an exception since it has been constituted under UTI Act and is a body corporate.