Section 186 Companies Act: loans and investments explained

What section 186 covers

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.

What the aggregate limit is

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.

Which approvals are needed before money moves

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.

How subsidiaries and joint ventures are treated

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 the rate, register and disclosure rules require

A company cannot make 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.

Why sections 185 and 188 are separate checks

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 to verify the legal position

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.

Common section 186 mistakes

• 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 Complied AI fits

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.