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Section 186

Loan and investment by company

(1)
Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:
Proviso

Provided that the provisions of this sub-section 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 companyfrom 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.
(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,

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.

Explanation

For the purposes of this sub-section, the word “person” does not include any individual who is in the employment of the company.

(3)
Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting:
Proviso

Provided that 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 this sub-section shall not apply:

Proviso

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section

(4)
.
(3)
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.
(4)
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.
(5)
No investment shall be made or loan or guarantee or security given by the company 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 where any term loan is subsisting, is obtained:
Proviso

Provided that prior approval of a public financial institution shall not be required where 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.

Proviso

Provided further that in case of a Specified IFSC public company, the Board can exercise powers under this sub-section by means of resolutions passed at meetings of the Board of Directors or through resolutions passed by circulation.

Proviso

Provided further that in case of a Specified IFSC private company, the Board can exercise powers under this sub-section by means of resolutions passed at meetings of the Board of Directors or through resolutions passed by circulation.

(6)
No company, which is registered under section 12 of the Securities and Exchange Board of India 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.
(7)
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.
Proviso

Provided that nothing contained in this sub-section shall apply to a company in which twenty-six per cent. or more of the paid-up share capital is held by the Central Government or one or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its memorandum of association.

(8)
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.
(9)
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 such manner as may be prescribed.
(10)
The register referred to in sub-section ( 9 ) shall be kept at the registered office of the company and —
(a)
shall be open to inspection at such office; and
(b)
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.
(11)
Nothing contained in this section, except sub-section ( 1 ), shall apply—
(a)
to a loan made, guarantee given or security provided by a banking company or an insurance company or a 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;
(b)
to any acquisition—
(i)
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:
Proviso

Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;

(ii)
made by a company whose principal business is the acquisition of securities;
(iii)
of shares allotted in pursuance of clause ( a ) of sub-section ( 1 ) of section 62.
(iv)
made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business.

Sub-section (11) has been substituted to the below provision but has not been notified yet.

(11)
Nothing contained in this section, except sub-section (1), shall apply—
(a)
to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;
(b)
to any investment—
(i)
made by an investment company;
(ii)
made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;
(iii)
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 and whose principal business is acquisition of securities.
(12)
The Central Government may make rules for the purposes of this section.
(13)
If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and 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.
Explanation

—For the purposes of this section,—

(a)
the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.;
(b)
the expression “infrastructure facilities” means the facilities specified in Schedule VI.

This section shall not apply to

(a)
a Government company engaged in defence production;
(b)
a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section. vide notification no. G.S.R. 463(E) dated 5th June, 2015.
Notes, amendments & references (26)

(The exceptions, modifications and adaptations provided above shall be applicable only to those Government Companies which has not committed a default in filing its financial statements under section 137 of the said act or annual return under section 92 of the said act with the registrar, vide notification dated 13th June, 2017)

To view the notification, Click Here

Sub-section (1) shall not apply for IFSC Private and IFSC Public company vide GSR 8(E)and GSR 9(E) dated 04.01.2017.To view the notification Click Here

Sub-section (2) shall not apply for specified IFSC Public and IFSCPrivate Companies if a company passes a resolution either at meeting of the Board of Directors or by circulation vide GSR 8(E)and GSR 9(E) dated 04.01.2017.To view the notification Click Here

(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf

Inserted vide Companies (Amendment) Act, 2017 dated 03.01.2018, Effective from 7th May,2018

To view commencement notification, Click Here

To view the notification of Companies Amendment Act,2017 Click Here

(3) Substituted vide Companies (Amendment) Act, 2017 dated 03.01.2018 Effective from 7th May,2018

Sub-section (3) shall not apply for specified IFSC Public and IFSC Private Companies if a company passes a resolution either at meeting of the Board of Directors or by circulation vide GSR 8(E)and GSR 9(E) dated 04.01.2017.To view the notification Click Here

Refer rule 13 of the Companies (Meeting of Board and its Board) Rules,2014. To view the rule, Click Here

Explanation. – For the purposes of this Act, the term ‘start-up’ or “start-up company” means a private company incorporated under the Companies Act, 2013 (18 of 2013) or the Companies Act, 1956 (1 of 1956) and recognised as start-up in accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

MCA has clarified vide clarification 04/2015 dated 10 March,2015 that loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013. This clarification will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated. To view the clarification, Click Here

Provided further that Inserted vide Exemption Notification to specified IFSC Public Companies, GSR 08 (E) dated 04.01.2017. To view the notification Click Here

Provided further that Inserted vide Exemption Notification to specified IFSC Private Companies, GSR 09 (E) dated 04.01.2017. To view the notification Click Here

Refer rule 11 of the Companies (Meeting of Board and its Board) Rules,2014. To view the rule, Click Here

It is clarified by MCA vide General Circular 06/2015 dated 09 April 2015 that in cases where the effective yield (effective rate of return) on tax free bonds is greater than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan, it will not be violation of sub-section (7) of section 186 of the Companies Act,2013.To view the clarification, Click Here

Provided that Inserted vide exemption notification to section 8 companies dated 13th June, 2017.

(The exceptions, modifications and adaptations provided shall be applicable only to those companies covered under section 8 of the said act which has not committed a default in filing its financial statements under section 137 of the said act or annual return under section 92 of the said act with the registrar, vide notification dated 13th June, 2017)

It is clarified by MCA that registers maintained by companies pursuant to sub-section (5) of Section 372A of Companies Act, 1956 may continue as per requirements under these provisions and the new format prescribed vide Form MBP2 shall be used for particulars entered in such registers on and from 1.4.2014 vide Circular 15/2014 dated 09 June 2014. To view the clarification, Click Here

Refer rule 12 and Form No. MBP 2 of the Companies (Meeting of Board and its Board) Rules,2014. To view the rule, Click Here

Refer rule 12 and Table annexed to the Companies (Registration Offices and Fees) Rules, 2014. To view the rule, Click Here

Inserted by the Companies (Removal of Difficulties) Order, 2015 vide notification no. S.O. 504 (E) dated 13th February 2015. To view the order, Click Here

(11) Substituted vide Companies (Amendment) Act, 2017 dated 03.01.2018 Effective from 7th May,2018.To view commencement notification, Click Here

Refer rule 11 and 13 and Form No. MBP 2 of the Companies (Meeting of Board and its Board) Rules,2014. To view the rule, Click Here

Inserted vide Companies (Amendment) Act, 2017 dated 03.01.2018 effective from 7th May,2018. To view commencement notification, Click Here . To view the notification, Click Here