Home Companies Act 2013 Section 186 of Companies Act 2013

Section 186 of Companies Act 2013

February 13, 2023

5933

This article is written by Ms. Sushree Surekha Choudhury from KIIT School of Law, Bhubaneswar. The article gives a detailed description of Section 186 of the Companies Act, 2013 which is famously known as “inter-corporate loans and investments.”

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Who has watched the show Shark Tank India/US? The show is well known for being a helpful platform for new companies and their founders to raise loans from investors. These investors usually personally make these investments. Imagine the same situation, but this time the investments are made from the investor company’s funds to another company that wishes to raise investment. These investments from one company to another or among companies are known as inter-corporate loans and investments. As the name suggests, this flow of funds from one company to another can either be in the form of an investment in exchange for equity in that company or in the form of debts at a fixed rate of interest for a predetermined tenure. These transactions can be tricky and pose risks. To mitigate risks and to establish a transparent framework for inter-corporate loans and investments, they are regulated under the provisions of the Companies Act, 2013. Section 186 of the Companies Act, 2013 deals with inter-corporate loans and investments and the provisions related to them. This section puts limits and restrictions on these inter-corporate loans and investments and provides a procedural framework for doing so.

In this article, we will understand everything about these provisions of Section 186 of the Companies Act, 2013 and all the related provisions, such as the disclosure requirements, limits on investments, etc.

Section 186 of the Companies Act 2013: overview

Inter-corporate loans and investments are governed under Indian investment laws. Companies often indulge in investing in other companies or giving them loans. This is known as inter-corporate loans and investments. The provisions for these inter-corporate loans and investments are provided and regulated under Section 186 of the Companies Act, 2013. A company can give loans and guarantees, acquire shares or make other forms of investments in other companies after obtaining the approval of their shareholders and fulfilling necessary requirements and regulatory compliances. Companies mandatorily need to comply with the provisions of Section 186 of the Companies Act, 2013, during making inter-corporate loans and investments.

Let us chronologically understand the arrangement of provisions of Section 186 of the Companies Act, 2013.

Section 186 (1): layers of investment

The purpose behind articulating Section 186 of the Companies Act, 2013 is to regulate the manner and limit of giving loans and making investments by one company to another. This regulation was needed to prevent excessive loans or investments and dilution of shares and to protect the stakeholders’ and owners’ interests in the market. Thus, Section 186(1) of the Companies Act, 2013 talks about “layers” of investment. The provision of Section 186(1) states that a company is not permitted to make investments beyond two layers of investment companies. “Two layers of investment companies” mean a flow of investment from a holding company to its two layers of subsidiaries.

For instance, suppose company A is the holding company of company B. Company B is a subsidiary company. Further, company C is a subsidiary company of company B. Thus, when company A makes an investment in company B, it is the first layer of investment for company A. If this investment further flows to company C, it will be considered as the second layer investment of holding company A. This covers two layers of investment for company A and so, it cannot make further layers of investments. For the purpose of understanding, layers in reference to a holding company mean a subsidiary or subsidiaries, as mentioned in Section 2(87) of the Companies Act, 2013. An “investment company” refers to a company whose primary business model is in the form of acquisition of shares, securities, debentures, etc., subject to certain sectoral caps, as has been aligned with the provisions of NBFC Company as per RBI norms by Companies (Amendment) Act, 2017.

However, there are exceptions to this general rule of two layers. Section 186, clause (1), sub-clause (i) and (ii) talk about these two exceptions. The first exception to the two layers rule is that a company in India can acquire shares and invest in more than two layers in an investment company incorporated outside India, wherein the domestic laws permit such additional layers of investment. This investment shall not be barred from the two layers restriction of Indian laws as the investment company is incorporated and functions outside India. The other exception to the two layers restriction is when having such additional investment subsidiary layers is essential for an investment company in compliance with any regulation or rule of law.

Section 186 (2): limits on loans, guarantees, investments and securities

Section 186 (2) talks about the limitations and sectoral caps put on these inter-corporate loans and investments. The purpose behind adding limits with respect to inter-corporate loans and investments in the Companies Act, 2013 is to maintain a balance and control on investments made or loans given to investment companies. Section 186 (2) puts a limit on loans, guarantees and investments to any person, company or other body corporate, directly or indirectly. These limitations are on all forms of capital expenditure, such as loans, investments, guarantees, or acquisition of shares and securities. Thus, as per the provisions of Section 186 (2) of the Companies Act, 2013, loans or investments of any form shall not be made:

In excess of 60% of its paid-up share capital, free reserves, and securities premium account combined, or
100% of its free reserves and securities premium account combined.

The investing company may choose either of the two alternative limits while making investments or giving loans. It is noteworthy that the two layers of the investment rule are applicable to investment companies. However, investments can be made to body corporates as well, by way of the acquisition of shares and securities by way of subscription or purchase. But the company through which this investment may flow to a body corporate has to be an investment company and the two layers rule is applicable to two layers of such investment companies. Therefore, suppose ABC Ltd. makes an investment in PQR Ltd., which further makes an investment in MNC LLP. This MNC LLP holds shares of another XYZ Ltd. In this case, ABC Ltd. has not violated the two layers of investment rule articulated under Section 186 (1) of the Companies Act, 2013 since the two layers have to be two layers of investment companies for the limitation to hit.

Important terms used in this clause:

For the purpose of this clause of Section 186, “person” does not include an individual who is an employee of the company.
Further, for the purpose of this section, “free reserves” mean the amount in the bank or reserves of the company which is free to be distributed as dividends as per the latest audited balance sheet of the company. This includes the balance credited or to be credited to the securities premium account. However, this amount does not include the amount due or reserved for the share application.
Further, for the purpose of Section 186 (2), the word “other body corporate” includes body corporates other than a company. A body corporate, as defined under Section 2(11) of the Act, is an inclusive definition. However, this definition of a body corporate includes a corporation incorporated outside India but does not include:

A cooperative society registered under any law relating to cooperative societies in India, or
Any other body corporate that the Central Government may have specifically barred.

In Section 186, the definition of “securities” includes bonds, debentures, warrants, derivatives, or any other kind of marketable securities. This definition is in accordance with the meaning of “securities” under the provisions of the Securities Contracts (Regulation) Act of 1956.
An “investment company” for the purpose of Section 186 refers to companies that indulge in the following activities:

Subscription or purchase of shares.
Subscription or purchase of share warrants.
Subscription or purchase of debt securities like debentures or bonds.

The activities that are not considered as “investment” under Section 186 are:

Giving loans or making advances.
Other financial transactions, such as giving leases, credit facilities, etc.

The term “infrastructure facilities” used in this section refers to facilities specified under Schedule VI of the Companies Act, 2013.

Legal requirements under Section 186

Requirement 1: board’s approval

When the approval of the board is required

When a company makes an investment in any other company or gives out loans, it is a legal requirement under the provisions of Section 186 to obtain the prior approval of the investment company’s board of directors. Obtaining the approval of the board is a mandatory requirement irrespective of the amount of loan, the form of investment, or where the number of layers is more than two layers of investment.

For any proposal to take practical form, the unanimous approval of the board of directors is necessary. It is only when a unanimous resolution is passed in a board meeting that the proposed plan of investment can be said to be approved. Such a meeting must be conducted in the presence of all the directors of the company and each one of them must have given their consent to the proposal put forth to them. This cannot be substituted by passing a resolution by circulation or a resolution by the committee of directors. Board’s approval has to be mandatorily obtained in the prescribed manner.

Power of the board of directors

The board of directors are vested with special powers in determining the company’s affairs. They enjoy and exercise their power of discretion and decision while approving inter-corporate loans and investments as well. A meeting of directors is scheduled where the board has the power to decide to:

Give loans or make investments in another company or body corporate.
Give guarantees, or provide security against any loan given to a company or body corporate.
Acquire shares and securities by subscription or purchase of shares in another company or body corporate.

It is essential for a company to obtain approval from all the members of the board before indulging in any of these aforementioned activities. The presence and consent of all the directors in a meeting of directors must be obtained. However, the board can consent to proposals only up to the prescribed limit as specified under Section 186 (2) of the Companies Act 2013. Whenever the limit is proposed to be exceeded, approval of the members of the company has to be obtained in a general meeting through a special resolution. Only then the board of directors can consent to such an exceeding amount and execute the proposal.

Requirement 2: approval of members

Section 186 (3): when the approval of the members is required

Additional to obtaining the approval of the board of directors, Section 186 (3) also mandates the approval of the members of the company to be obtained by way of a special resolution in cases where the amount of loan, investment, guarantee, or the acquisition of shares and securities exceeds the limit that has been set forth under the provisions of Section 186 (2) of the Companies Act, 2013. A general meeting has to be conducted for this purpose where the details of the proposed loan or investment structure are to be discussed.

The company that wants to make investments, give loans, or acquire shares and securities by spending more than the amount which is permitted by the provisions of Section 186 (2) has to obtain the approval of the board of directors, discuss it with the members of the company and pass a special resolution in favour of the motion. It is only when the proposed plan is approved by a special majority that the company can go forward with the investment. A special resolution has to be passed in a manner specified and in accordance with the provisions of Section 114 of the Companies Act 2013. A special resolution is said to have been obtained when 75% of people present and voting have voted in favour of the motion. The special resolution approval of the members of the company is necessary only when the limit specified by Section 186 (2) is exceeded.

To facilitate this special resolution, a proposal is made to the members in a general meeting to secure their votes in favour of the proposal. This proposal must contain all necessary details such as:

The total amount till which the board is already authorised to make investments, give loans, or acquire shares and securities in another company by spending the company’s reserves. This has to be specified as a figurative value.
Further, the resolution should specify the amount exceeding this authorised amount that the company wishes to use.
Company in which the investment is proposed to be made.
The reason for exceeding the limit.
Such other details as may be required.

When these details are read out in the general meeting and after all the queries and concerns of the members have been addressed, voting is conducted. If the resolution is agreed upon and consented to by a special majority, i.e., 75% of members present and voting vote in favour of the motion, the resolution is said to have passed. Thereafter, the company can go forward in its pursuit of making investments exceeding the regulatory limit.

Passing a special resolution is not necessary in the following cases:

When the investments, loans, guarantees, or acquisition of shares and securities are within the limit specified under the provisions of Section 186 (2) of the Companies Act 2013, passing a special resolution is not essential.
When the loans given or investments made are to a wholly owned subsidiary of the investment company, the company does not need to pass a special resolution of its members.
When the loans given or investments made are to a joint venture company (JVC) of the investment company, the company does not need to pass a special resolution of its members.
When a guarantee is given or security is provided to a wholly owned subsidiary, or venture company (JVC) of the investment company, the company does not need to pass a special resolution of its members.
When a holding company acquires securities in its wholly owned subsidiary by means of purchase or subscription of shares, the investment company does not need to pass a special resolution of its members.

One exception to this requirement of obtaining special resolution of members of the company does not apply to specified IFSC public and private companies if a resolution is passed by the company in a meeting of the board or by circulation.

Requirement 3: disclosure requirements

Section 186 (4): disclosure in financial statements

Section 186 (4) talks about the mandatory disclosure requirements under the Companies Act 2013 in inter-corporate loans and investments. This provision is made in alignment with the interests of members of the company. It ensures that transparency is maintained and members are well informed about the financial activities of the company. Therefore, for maintaining clarity and transparency, the disclosure requirements as per Section 186 (4) mandates the company to disclose the following information to their members in their annual financial statement:

The particulars and full details of the loans given, investments made, guarantees granted, or securities provided through channels of inter-corporate loans and investments. The particulars will contain details of the amount of investment, the company invested in, layers of investment made, and all other relevant details.
The financial statement must also contain the purpose for which the loan was given, investment was made, security was provided or guarantee was given to that company. This is the proposed utility model of the company that raised the loan or investment.
Such other disclosures that the board may deem fit.

Disclosure requirements shall also be fulfilled while preparing the proposal for the general meeting. The notice for the general meeting shall disclose the following information:

The excess to which investments, loans, guarantees or securities are made by the company to the provided limit.
A further limit that is essential to determine in excess of the prescribed limit.
The particulars and details of the company or body corporate in which the proposed investments will be made, loans will be given, securities will be provided, or guarantees will be given.
The purpose for such investment, loan, guarantee, or security.
The source from which such investment, loan, guarantee, or security will be provided when it exceeds the prescribed limit.
All other details as may be required.

Requirement 4: approval of public financial institutions

Section 186 (5): PFI approval

We have already discussed the requirement of obtaining the approval of all the directors of the board before making an investment, loan, guarantee, or security. After obtaining this approval of the board, Section 186 (5) further makes provisions for obtaining the approval of the concerned public financial institution where any term loan is subsisting. When a company has taken a term loan from a Public Financial Institution, the prior approval of that Public Financial Institution and all of them, if there are more than one, before giving loans, investments, guarantees, or securities. This is a mandatory provision under Section 186 (5) as it helps to provide a deciding power on the Public Financial Institution whose money is at stake. The company which has taken loans from a Public Financial Institution has to take their prior approval before rolling this money further in making investments or giving loans to other companies or body corporates. However, this mandate applies when the investment company is proposing to go beyond the prescribed limit of investment and is in the process of obtaining the approval of members and the board of directors for the same.

Therefore, the mandatory requirement of obtaining the prior approval of the Public Financial Institution does not apply when:

The loan, investment, guarantee, or securities collectively does not breach the prescribed permissible limit as per the provisions of Section 186 (2) of the Companies Act 2013.
Obtaining the Public Financial Institution’s approval is also not required when the company has maintained good credit with the public financial institution by making no defaults in payment of installments or interests due to the Public Financial Institution. When the company has complied with all the terms and conditions of the term loan of the Public Financial Institution, obtaining their approval becomes an optional requirement.

Section 186 (6): SEBI-registered companies

While Section 186 of the Companies Act 2013 has prescribed detailed and mandatory limits on inter-corporate loans and investments, there lies an exception. The Securities and Exchange Board of India is the regulatory body in India that governs affairs of investments in the securities market and persistently aims to protect the interests of investors and other stakeholders in the securities and capital market in India. SEBI is the regulatory body that works under the guidance of the provisions enshrined in the Securities and Exchange Board of India (SEBI) Act of 1992.

The Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) Act, 1992 work in cooperation and coordination without overlapping or infringing the provisions of the respective counterparts. In this regard, the provisions for inter-corporate loans and investments enshrined under Section 186 of the Companies Act, 2013 make an exception for companies registered under the SEBI. When a company falls within the ambit of a company registered with the SEBI under Section 12 of the Securities and Exchange Board of India (SEBI) Act of 1992, it is not restricted by the regulatory limitations of Section 186 (2) of the Companies Act, 2013.

A company registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act of 1992 can make inter-corporate loans and investments beyond the limits of Section 186 (2) of the Companies Act, 2013 by disclosing them in their annual financial statements. The benefit of these provisions extends to all the companies registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act of 1992, as well as to those companies or classes of companies as may be prescribed by the SEBI from time to time.

Requirement 5: rate of interest determination

When a company gives loans to another, it fixes a particular percentage of interest that the company taking the debt must pay on the principal amount. This percentage is usually fixed for different tenures. For instance, the tenure or period for which the debt is given is also predetermined and is usually in a multiple of two, five, or otherwise.

As per the provisions of Section 186 (7) of the Companies Act 2013, this rate of interest on loans or debt is fixed as per the prevailing market rate of interest of 1 year, 3 years, 5 years, or 10 years equivalent of government securities. Thus, when an inter-corporate loan is given for a period of 5 years, the rate of interest at which it will be given will be the same as the 5 years government security rate of interest. Even if the inter-corporate loan is given for a period of 4.5 years, the rate of interest will be similar to the 5 years government security rate of interest since that is the closest equivalence.

Requirement 6: no continuing defaults

Section 186 (8): subsisting defaults restriction

Section 186 (8) of the Companies Act 2013 puts a restriction on companies that have made any defaults in the past and those defaults are subsisting. This provision applies to a company that has previously accepted any deposits as investments or loans in the past and holds these deposits currently or held them in the past. The legal requirement of this provision of Section 186 arises when a company eventually made defaults in the repayment of these debts, their installments or interests and these defaults subsist. As per the provisions of Section 186 (8) of the Companies Act 2013, when a default in deposits subsists, the company cannot make further investments or give loans to other companies or body corporates. Thus, to be eligible to indulge in inter-corporate loans and investments, a company must not have any subsisting defaults in deposits towards another. Therefore, if a company has subsisting defaults, it is essential to first clear these defaults before being able and eligible to make investments, give loans, or acquire shares and securities in another.

Section 186 of the Companies Act 2013: non-applicability

The provisions of Section 186 of the Companies Act 2013 are general provisions applicable to companies operating in India. However, there are a few exceptions to their applicability which are discussed in sub-section (11) Section 186. Section 186 of the Companies Act 2013 is not applicable in the following cases:

The restrictions of Section 186 are not applicable to government companies that are engaged in defence-related activities and productions.
The restrictions of Section 186 (except sub-section 1) are not applicable to a banking company giving loans, making investments, giving guarantees, or acquiring shares and securities in their ordinary course of business.
The restrictions of Section 186 (except sub-section 1) are not applicable to an insurance company giving loans, making investments, giving guarantees, or providing security in their ordinary course of business.
The restrictions of Section 186 (except sub-section 1) are not applicable to a housing finance company giving loans, making investments, giving guarantees, or providing security in their ordinary course of business.
The restrictions of Section 186 (except sub-section 1) are not applicable to a company giving loans, making investments, giving guarantees, or acquiring shares and securities in their ordinary course of business of financing other companies or engaging in providing infrastructural facilities.
The restrictions of Section 186 (except sub-section 1) are not applicable to the acquisition of shares by a Non-Banking Financial Company (NBFC) registered under Chapter IIIB of the Reserve Bank of India Act, 1934 whose primary business is the acquisition of shares and securities. The exemption is available for the investment and lending activities of these NBFCs.
The restrictions of Section 186 (except sub-section 1) are not applicable to companies whose primary business activity is the acquisition of shares and securities.
The restrictions of Section 186 (except sub-section 1) are not applicable to the shares of any company allotted as per the provisions of Section 62 (1) (a) of the Companies Act 2013.

Maintaining register for loans, investments, guarantees, or securities: Section 186 (9) and (10)

Every company indulging in inter-corporate loans and investments must prepare and maintain a register with entries of such loans, investments, guarantees and securities. This register shall be updated by the company at regular intervals and all the recent loans, investments, guarantees, or securities provided by the company shall be entered into this register with the latest details. These entries shall be accompanied by relevant particulars in the manner specified under Section 186 (9) and (10) of the Companies Act 2013 as well as the constitutional documents of the company.

As per the provisions of Section 186 (9) and (10) of the Companies Act 2013, this register shall be kept available at all times in the registered office of the company and be open for inspection. Members of the company can obtain a copy of the register in a prescribed manner by paying the prescribed fees. The members can also take out extracts of the register by paying prescribed fees.

This register shall be maintained in Form – MBP 2. It shall be made and maintained with immediate effect right from the day of incorporation of the company. Since the day of its creation, it shall be maintained permanently and updated regularly. The register is maintained under the custody and supervision of the Company Secretary of the company, who shall ensure that all regulatory and sectoral standards and adhered to. The Company Secretary or any other authorised individual shall ensure that the entries of the register are true and accurate information. For ease of doing business, the register may either be maintained manually or in electronic mode.

Procedure for making inter-corporate loans and investments

Inter-corporate loans and investments are regulated and monitored by the provisions of the Companies Act, 2013 as well as different authorised bodies and individuals. For this purpose of inter-corporate loans and investments, a definite procedure must be followed. Every company that wishes to make inter-corporate loans and investments need to go through the route of this well-defined systematic procedure. Let us understand this procedure step by step:

Step 1

The very first thing that a company that wishes to indulge in making inter-corporate loans and investments needs to do is ensure that the loans given, investments made, or securities provided by them are within the prescribed threshold limit of Section 186 (2) of the Companies Act, 2013. In case the company aims to breach this threshold limit, it first has to undergo all the necessary requirements under the provisions of Section 186 by obtaining a special resolution of the members of the company along with the consent of all the directors of the company. The company also needs to obtain approval from any Public Financial Institution from whom they have secured loans, if any.

Step 2

For completing step 1, a meeting of all the directors of the company must be arranged. A notice is to be sent to all the directors, calling for the meeting. A board resolution must be passed with the presence and consent of all the directors of the board in favour of the proposed loan or investment. Obtaining the board’s approval is required whether or not the company is breaching the threshold of Section 186 (2) of the Act.

Step 3

After obtaining the approval of the board of directors and passing the board resolution in the prescribed manner, a special requirement in case the loan or investment breaches the threshold is to be met. A meeting of members of the company will be arranged to obtain their approval of exceeding the threshold. A notice is sent to all the members of the company with essential particulars and with the date, time and venue of holding the general meeting. In this meeting, the quorum must be met and the proposal must be approved by passing a special resolution (approval of 75% of people present and voting).

Step 4

After passing the board resolution and the special resolution of members of the company (if applicable), approval of any involved Public Financial Institution is to be obtained. This provision is conditional and applies when the company holds an ongoing debt from any PFI. Further, obtaining this approval is not mandatory if the company has made no defaults in payment of instalments or interests to the PFI or when the proposed investment is well within the threshold of Section 186 (2) of the Act.

Step 5

After obtaining all the necessary approvals, a copy of the special resolution of the company will be filed in Form No. MGT -14 with the prescribed fees as per the Companies (Registration of offices and fees) Rules, 2014 to the Registrar of Companies. This copy must be submitted in the prescribed form and with the prescribed fees within 30 days from the day of passing the special resolution. All the additional documents that are required to be submitted shall be attached to this copy while submitting. All these procedural requirements are to be met before a company can go forward with giving loans, investments, guarantees, or securities to another. While doing so, the two layers mandate must be adhered to without any exceptions unless it is expressly allowed by the domestic laws of the country where the company or body corporate where investment will be made resides. For the companies incorporated and operating within India, complying with the two layers restriction as per Section 186 (1) of the Act is a mandatory provision.

Step 6

The aforementioned requirements must be met before a company makes an investment, gives a loan, provides security, or acquire shares of another company. After meeting these requirements, the company executes their proposed investment plan. When the investment is made, a loan is given, security is provided, or shares of another company are acquired, certain procedural requirements follow. These requirements are met in the post-investment stage. These steps ensure that the data of the companies are appropriately preserved and transparency is maintained. These provisions protect the interests of the investors and other stakeholders of the company. Thus, the post-investment requirement consists of disclosure requirements and mandates.

Step 7

After the inter-corporate loans and investments have been facilitated, the company needs to create and maintain a register with entries containing all the updated details with important information and particulars related to any or all of the inter-corporate loans and investments made by the company. Entries will be made in a chronological manner with the updated details of each entry. This register will be maintained in Form MBP – 2. The register will be made available at the registered office of the company for inspection or taking copies or extracts whenever required, in a prescribed manner after the payment of prescribed fees.

Step 8

The details of all the transactions made by a company, loans given, investments made, securities provided and shares acquired by them shall be disclosed in the financial statement of the company for that financial year. It shall entail details like the rate of interest at which the loan is given or the term for which the security is provided. The financial statement shall disclose all such inter-corporate loans and investments made by the company, the entities in which they are made and the reasons or purpose for which it is made. It is also the duty of the directors and members to ensure that the rate of interest is equivalent to a similar tenure of government securities.

Step 9

When a company has made an investment, given a loan, or used up the company’s reserves in providing securities and acquiring shares of a company in excess of the threshold mentioned in Section 186 (2), the financial statement should also contain the details of these transactions, such as the amount used in excess, the purpose for which the threshold is exceeded and the utilisation model of the company to which this amount is transacted.

Step 10

It is also a procedural requirement for the company making inter-corporate loans and investments to check and ensure that they have repaid all their subsisting debts and that there is no subsisting defaults on their part. A company with subsisting defaults arising due to failure in timely payment of installments or interests cannot further make inter-corporate loans and investments. The investment company must scrutinise their own records.

Step 11

When the company has fulfilled and complied with all the mandatory requirements for making inter-corporate loans and investments as per the provisions of Section 186 of the Companies Act, 2013, the company must finally keep track and record in the register the status of subsisting loans and investments made by them. This again ensures that the interests of the company’s stakeholders are not hampered due to any default on the part of the companies that have raised loans or investments from the investing company.

Contravention of Section 186 of the Companies Act 2013: Penalty

Just like any other contravention, contravention of Section 186 of the Companies Act 2013 also attracts penalties. Provisions for penalties are mentioned in sub-section (13) of Section 186. This section provides punishment (penalty) in two forms: penalty for contravention by companies and penalty for officers responsible for such contravention.

When a company contravenes any provision of Section 186 of the Companies Act 2013, the company can be penalised with a minimum fine of Rs. 25,000/- which may go up to Rs. 5,00,000/- and the officer or every officer in default will be individually sentenced to imprisonment of two years (maximum) as well as fine of Rs. 25,000/- which may extend to a maximum of Rs. 1,00,000/- depending upon the grievousness of the contravention.

Conclusion

India is a hub for innovation and entrepreneurship is at a boom. The sway of newly formed companies is seen every day. These innovations and startup companies require funds for their running and administration. There are also many pre-existing companies whose functioning requires huge CapEx (capital expenditure). To fulfill these needs and gain profits from them, companies frequently indulge in giving and taking inter-corporate loans and investments. One company gives loans or makes an investment in another, or acquires shares and securities in them, which in turn helps them make profits from the business and revenue of the company they invested in. this ecosystem helps both companies and creates a win-win situation for both which in turn booms the capital market. Since this method of inter-corporate loans and investments is so frequent in India, it is essential to be regulated. For this purpose, the Companies Act, 2013 makes provisions under Section 186. Section 186 of the Companies Act, 2013 makes provisions for inter-corporate loans and investments, the mandatory requirements that a company must follow and the procedural requirements. It also mentions the conditions under which a company can or can not make inter-corporate loans and investments. Section 186 focuses on disclosure requirements to be complied with by the company in order to uphold the stakeholders’ and investors’ interests in the market. Corporate fraud of high scale is a subsisting risks in the market and they swipe away huge capital and give rise to other risks and losses. Therefore, it is essential to regulate the sector and areas which are prone to such risks. This is why Section 186 of the Companies Act, 2013 was framed. It helps mitigates risks by maintaining transparency.

Frequently Asked Questions (FAQs)

Can an inter-corporate loan be interest-free?

No, a loan given to a person, company or body corporate cannot be lower than the prevailing yield rate of interest of government securities of similar tenure.

What is the type of transactions that are covered within the ambit of inter-corporate loans and investments?

Inter-corporate loans and investments under Section 186 of the Companies Act, 2013 consist of the following types of transactions:

Loans given by a company to any person, company or body corporate.
Investments made by a company to any person, company or body corporate.
Acquisition of shares by a company in any company or body corporate.
Securities or guarantees provided by a company to any person, company or body corporate.

Will a loan given to any individual also be regulated by Section 186?

The ambit of Section 186 extends to any ‘person,’ company or body corporate. Therefore, if an investment company gives a loan to any individual at a prescribed rate of interest, it will be considered as a form of an inter-corporate loan.

Will an investment in mutual funds be considered an investment under Section 186?

SEBI regulations suggest that a mutual fund cannot be categorised as a person, company, or body corporate since they are managed by trusts. Therefore, mutual fund investments cannot be treated as an investment under Section 186. An exception to this general provision is for ‘Unit Trust of India’, which is constituted, registered and functions under the UTI Act as a body corporate.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity