What is the section 186 loan and investment limit?

What does section 186 cover?

Section 186 is the company's capacity check for a proposed loan, guarantee, security or investment. It applies to the aggregate, so a company cannot assess a new transaction in isolation. The file needs to show what has already been lent, guaranteed, secured or invested before the new amount is added.

The section also restricts investment through more than two layers of investment companies, subject to the exceptions written into the Act. It is therefore relevant to group restructurings as well as a straightforward inter-company loan.

How is the section 186 limit calculated?

Under sub-section (2), the company may give loans, guarantees or securities, and acquire securities, up to the higher of the two amounts below without the member approval required for an excess.

This is an aggregate ceiling. Include the proposed amount with the company's existing loans, guarantees, securities and acquisitions of securities. If the aggregate crosses the higher amount, obtain the prior special resolution unless a stated exception applies.

How does the two-layer investment restriction work?

Section 186(1) of the Companies Act, 2013 stops a company investing through more than two layers of investment companies. Two exceptions are written in: acquiring a foreign company that itself has investment subsidiaries beyond two layers under the law of that country, and a subsidiary holding an investment subsidiary where another law requires it. Group restructurings cross this line more often than single inter-company loans do.

Which approvals does section 186 need?

Section 186 has two approval levels. The first is always a Board-level decision for a covered transaction. The second applies when the aggregate will go above the statutory ceiling.

1. Put the proposal before a Board meeting. The Board resolution requires the consent of all directors present.
2. Calculate the aggregate against the statutory limit using the latest reliable financial figures and existing exposure.
3. If the limit is exceeded, obtain members' prior approval by special resolution before the transaction, unless the Act's subsidiary or joint venture exception applies.
4. Check whether an existing term loan from a public financial institution triggers a separate prior-approval condition under sub-section (5).

A general permission should still identify the statutory basis, the counterparty, the amount and the nature of the support. Records matter because the Board must later account for the transaction in the register and financial statements.

Are wholly owned subsidiaries exempt?

The proviso to sub-section (3) removes the special-resolution requirement in certain group-company cases. It covers a loan, guarantee or security given to a wholly owned subsidiary or a joint venture company. It also covers acquisition of securities of a wholly owned subsidiary.

That exception is narrow. It does not turn section 186 off. Board approval, the register, financial-statement disclosure, the interest rule where a loan is involved, and the distinct tests under sections 185 and 188 may still apply. Confirm whether the company is actually a wholly owned subsidiary or a joint venture for the purpose of the transaction.

What interest rate and register apply?

Section 186(7) of the Companies Act, 2013 bars a loan at an interest rate lower than the prevailing yield of the one-year, three-year, five-year or ten-year Government security closest to the loan's tenor. The rate decision belongs in the approval record, not in an unexplained spreadsheet after the event.

The company must keep the register required by section 186 in the prescribed form and make the prescribed disclosures in its financial statements. The register is a running record of the company's loans, guarantees, securities and investments. It gives the Board the evidence needed to calculate aggregate headroom for the next proposal.

Which form is the section 186 register kept in?

Form MBP-2, under section 186(9) read with rule 12 of the Companies (Meetings of Board and its Powers) Rules, 2014. The register is kept at the registered office, entries are made chronologically within seven days of the transaction, and members may inspect it and take extracts on payment of the prescribed fee.

What penalty follows a section 186 breach?

Section 186(13) of the Companies Act, 2013 fines the company not less than ₹25,000 and up to ₹5 lakh. Every officer in default faces imprisonment up to two years together with a fine of not less than ₹25,000 and up to ₹1 lakh. That exposure runs alongside, not instead of, the ₹5 lakh to ₹25 lakh fine in section 185(4) where the same transaction touches a director.

How does 186 differ from 185 and 188?

A transaction that fits inside the section 186 limit may still be blocked by section 185. A permitted loan can also have a related-party approval issue. Read section 185, section 186 and section 188 as a set when a director or group entity is involved.

How do I confirm section 186 today?

1. Read section 186 in full, including every proviso and explanation.
2. Check the applicable rules for the register and related procedure.
3. Read MCA notifications for any exemption or amendment being relied on.
4. Compare the current group structure and exposure ledger with the statutory test.
5. Take company-secretarial or legal advice before documenting a complex group transaction.

Why do section 186 breaches happen?

• Calculating the limit from the proposed loan alone.
• Using a Board resolution by circulation for a transaction that needs a meeting resolution.
• Treating a wholly owned subsidiary exception as an exemption from every other requirement.
• Using an interest rate without checking the Government-security yield test.
• Clearing section 186 without separately testing sections 185 and 188.
• Updating the statutory register only at year end.

Where do section 186 changes appear?

A section 186 decision can depend on an Act amendment, a rule and an MCA notification. Complied AI keeps MCA updatesbeside the source documents, so a company can review the amendment trail before using a summary in a board paper.