Home Company Law - Editorial Loan and Investment by Company – Section 186

Loan and Investment by Company – Section 186

by CS Divesh Goyal
Loan and Investment by Company – Section 186
Everything about Section 186 (Process of granting of Loan)

There is always a doubt in our mind regarding process of grant loan or investment by Company. Process of grant of Loan and investment can be complete only after complying with following Sections:

  1. Section 179 – Power of Board to decide about investment and Loan
  2. Section 185- To check whether Company is eligible to give loan or invest in the other party.
  3. Section 186- if successfully pass from Section 185 or section 185 allowed to grant loan or investment then fall under 186 to check process for the same

Therefore, in general word one can opine that, combined reading/ compliance of Section 185 and 186 are required to successfully grant loan or made investment. Because, Section 185 states about “TO WHOM CAN GIVE” and section 186 states “HOW CAN GIVE”

Let’s start detail study on Section 186

Sub-Section 1 shall be discussed in detail in next editorial of this series.

  1. As per Section 186(2)

“ 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,.” 

LIMIT:

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. Without approval of Board of Director in their meeting with approval of all the Directors.

As per sub section 2 company can give

(1) give a loan to a person;

(2) give a loan to a body corporate;

(3) give a guarantee in connection with a loan to a body corporate;

(4) give a guarantee in connection with a loan to a person;

(5) provide security in connection with a loan to a body corporate;

(6) provide security in connection with a loan to a person;

(7) invest in the securities of a body corporate.

Upto 60% of paid up share capital, FR and SPA or 100% of FR and SPA with approval of Board of Director in their meeting.

1.       Whether investment in Mutual fund covered under word Securities?
  Units issued by any mutual fund (which is operated through a Trust) do fall within the purview of this definition and hence are “securities”. However, the units issued by any mutual fund which is a ‘body corporate’ only will constitute “securities of a body corporate”
2.       If Company acquire shares of new Company as Subscriber to MOA. Whether Section 186 will be applicable?
  It is requires compliance with this section by the subscribing company

PERSON: The word ‘person’ is not defined in the Companies Act but it is defined in the General Clauses Act and Indian Penal Code. Section 3(42) of General Clauses Act, 1897 defines it including ‘any company or association or body of individuals, whether incorporated or not.

Loan and advance given to ‘Employees” doesn’t cover under word person. (Clarified by Ministry on 10.03.2015)

LIMITS OF LOAN/ GUARANTEE/ SECURITY:

  • Joint Limit: Below mentioned limit of 60% or 100% is aggregate of loans, guarantees, securities and investments together On the date of investment.
  • Share Capital: The paid-up share capital is to be calculated by taking into account both equity and preference share capital
  • Calculation of Limit:
  • Free reserve/ Security Premium as per latest audit Balance sheet of the Company.
  • Paid up share capital as on the date of investment by Company.

APPROVALS:

 

Board meeting Approvals:

  • Delegation of Power: the board may give one-time or general approval for making investments or giving loans/guarantees/securities and delegate the power to a committee or a director or any other officer of the company.
  • Board Meeting: Resolution should pass at the proper meeting of Board director and should be pass with unanimous approval of all the director present in the meeting. 
  • Prior approval: a board resolution approving a proposal of loan, guarantee, security or investment need not be a previous approval and the board may ratify it after the event.

General meeting Approvals:

  • Maximum Limit: There is no limit on the amount up to which a company can give loans, guarantees or securities and make investments with the approval of the company by special resolution.
  • General Authority to Board: a company may obtain a general authority with up to a limit specified in the resolution within which the board is authorised to give loans, guarantees and securities and make investments.
  • Prior approval: a Special resolution approving a proposal of loan, guarantee, security or investment need to be a previous approval by the Shareholder in General Meeting.
  • Exemption from the approval of Shareholder: 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 shareholder approval shall not apply:

  • Disclosure in Financial Statement:
  • The company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement.
  • 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.
1.       Whether Board Resolution can be pass by Circular Resolution?
  This resolution required to be pass only at the Meeting of Board of Director. This can’t be pass through circular resolution.
2.       Whether Board meeting for this purpose can be held through Video Conferencing?
  It is required to held meeting of Board of Director by any ways. Therefor, even video conferencing meeting can also be held.
3.       How much percent of consent of Directors required to pass this Board Resolution?
  Unanimous approval of Directors present in meeting required to pass this resolution. Unanimous approval means approval of 100% directors present in meeting.
4.       Whether Company can take approval of Board of Director after enter into transaction?
  Sub Section 5 doesn’t states about “previous or prior” therefore, one can opine that resolution can be pass after enter into transactin.

Approval of Public Financial Institution:

  • Prior approval of the public financial institution concerned where any term loan is subsisting, must be obtained for every loan, guarantee, security and investment,
  • Except:- when 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 sub-section (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.
Important compliances of 186:
  • INTEREST RATE:

No loan shall be given under this 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.

  • Restriction on Investment:

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

  • Maintain 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  Form MBP-2.

  • The register referred to in sub-section (9) shall be kept at the registered office of the company and
  • 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.
  • The entries in the register shall be made chronologically in respect of each such transaction within seven days of making such loan or giving guarantee or providing security or making acquisition.
  • 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
Exemption from This Section

Sub-section (11) exempts loans, guarantees, securities and investments which do not fall within this section and no compliance with any provision of this section except subsection (1)] is necessary in these cases.

Exempted cases.—The following cases of loans, guarantees, securities and investments are exempted:

(1) a loan made, guarantee given or security provided by—

  • a banking company in the ordinary course of its business,
  • an insurance company in the ordinary course of its business and
  • a housing finance company in the ordinary course of its business.

(2) a loan made, guarantee given or security provided by a company engaged in the business of—

  • financing of companies; or
  • providing infrastructural facilities.

(3) acquisition of securities of bodies corporate 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 in respect of its investment and lending activities.

(4) Acquisition of securities of bodies corporate by any company whose principal business is the acquisition of securities.

(5) Investment in shares allotted in pursuance of clause (a) of sub-section (1) of section 62, i.e. rights shares up to the entitlement in a rights issue.

(6) Acquisition of securities of bodies corporate by a banking company or an insurance company or a housing finance company in the ordinary course of business.

Process of Investment in Brief:

  1. Holding of Board Meeting {u/s 179 and 186}
  2. Passing of Board Resolution, if with in limit
  3. Calling of General Meeting, if exceed limits
  4. File – MGT-14 of Board Resolution (Public Companies)
  5. Passing of Special Resolution in General Meeting
  6. Filing of MGT-14 for Special Resolution.
  7. Entry into Statutory Register

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION

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