This article is written by Pratyush Pandey, a student of NLU Delhi.

Companies Act, 2013 has introduced major changes in the governance of companies. The concept of loan and investment by companies has also gone a change in the process. The provisions for investment by companies are contained in Section 186 of the Act under Chapter XII (Meetings of the Board and its Powers) read with the Companies (Meetings of the Board and its Powers) Rules, 2014.

Investment made through layers

A company shall make investment through not more than two layers of investment companies. There was no such provision in Section 372A of Companies Act, 1956. In relation to a holding company, ‘layer’ means its subsidiary or subsidiaries.

Non-Applicability

However, the above provisions shall not affect:

(i)  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;

(ii) 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.

Restrictions on Inter-Corporate Loans

No company shall directly or indirectly give any loan to any person or other body Corporate; give any guarantee or provide security in connection with a loan to any other body corporate or person; and acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.

When loan can be given?

Notwithstanding the restrictions under 186(2) where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.

Section 186(4) makes it mandatory for the company shall disclose to the members in the financial statement 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.

According to the provisions under Section 186(5), unless it is resolved so at a Board meeting with all directors present, a company shall not make an investment or give out a loan/guarantee/security. A prior approval of the public financial institution from where the loan has been taken is mandatory.

Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans, investments, guarantee, security proposed to be made or given does not exceed the limit as specified in 186(2), and there is no default in repayment of loan/interest/payment of interest thereon to the public financial institution.

This Act shall not apply to a loan/guarantee/security provided by a banking/insurance/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.

This Act shall also not apply to any acquisition 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 (exemption only in respect of its investment and lending activities); made by a company whose principal business is the acquisition of securities; f shares allotted in pursuance of clause (a) of sub-section (1) of section 62.

WHEN LOAN CANNOT BE GIVEN

Under section 186(6), a company registered under section 12 of  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 such company shall furnish in its financial statement the details of the loan or deposits.

According to section 186(7), no loan shall be given 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.

Section 186(8) prohibits any 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, from giving any loan/guarantee/security or make an acquisition till such default is subsisting.

Maintenance of Registers

It is mandatory for every company giving loan/guarantee/security or making an acquisition to maintain a register, which shall contain particulars and maintained in the manner prescribed. The register shall be kept at the registered office of the company and shall be open to inspection at such office. 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.

Punishment for non-compliance

Section 186(13) prescribes punishments for companies and its defaulters who act in contravention of the above stated provisions. The companies shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend 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 which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.