Yes the sub co can take loan since it lies in first layer investment according to sub sec 1
You have to checkout the prescribed limit ACC to sub sec 2 since you have not provided any details
You have to checkout the loan amount not exceeding either 60%of it's puc +free reserve +security premium account
Or
100%of security premium account
Whichever is higher
If the loan amount RS.10 cr is within the limits then normal procedure acc to your co.
If it exceeding the limits then acc to sub sec 3 prior approval has to be made by all BOD
Loans and Investments by the Companies under Companies Act, 2013
Section 186 of the Companies Act, 2013 deals with Loans & Investment by the Company.
Applicability
The above mentioned section is applicable to all companies irrespective of them being a public, private or listed or any other company like OPC (One Person Company).
Interpretation of Section 186 of the Companies Act, 2013
Section 186 (1)
Section 186 (1) starts with the sentence “Without prejudice to the provisions contained in the Act” which says that this section will be applicable without affecting the other provisions of the Companies Act, 2013.
“a company shall unless otherwise prescribed, make investment through not more than two layers of Investment Companies”
Unless it is otherwise prescribed (prescribed by the Central Government in terms of the powers given to it in the Companies Act, 2013), Company shall not (mandatorily company has to follow) make investment through not more than 2 layers of investment companies.
Section 2(87) of the Companies Act, 2013 defines the term “layer” which says layer in relation to a holding Company means its subsidiary or subsidiaries
Section 2 (87) defines one layer not the two layers which can be interpreted from the below diagram:
Holding Company (X) invests in Subsidiary Company A, B, C, etc. (This shows the One Layer)
If the Subsidiary Company A, B, C, etc. invests in their Subsidiary Companies A1, B1, C1, etc. (This shows the Second Layer) plus Holding Company investing in Subsidiary's subsidiary i.e. X investing in A1, B1, C1 etc. also come under Layer two
From the above two points and as per the definition given under Section 2(87), two layers of investment subsidiaries can easily be understood.
First proviso of Section 186 (1)
First proviso gives relaxation to certain companies as mentioned below on which sub- section (1) of Section 186 as explained above shall not be applicable:
(a) 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.
(b) a subsidiary company from having any investment subsidiary for the purpose of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force
Sub Section (2) of Section 186
This sub section restrict the companies for making the investment exceeding the certain limit as mentioned.
Language used:
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.
(c) acquire by way of subscripttion, purchase or otherwise, the securities of any other body corporate.
Exceeding 60% of its paid up share capital, free reserves and securities premium account or one hundred percent of its free reserves and securities premium account, whichever is more
Explanation:
Clause (a)
Clause (a) uses the word “person” which is not defined under the Act and hence the definition of person can be seen from General Clauses Act which says “person” shall include Company or association or body of individuals whether incorporated or not.
Clause (a) also uses the word “Body corporate” which is defined under Section 2 (11) which says Body corporate or corporation includes a company incorporated outside India but does not include:
(i) Cooperative society registered under any law relating to cooperative societies; and
(ii) any other body corporate ( not being a company defined under this act), which the Central Government may, by notification, specify in this behalf;
So, it can be seen from the above that Company shall not directly or indirectly give any loan to a person or to the body corporate as defined above
Clause (b)
Clause (b) says a company shall not provide any guarantee or security in connection with a loan to any body corporate or person
Clause (c)
Clause (c) says that a company shall not acquire by way of subscripttion, purchase or in any other way, the securities of any other body-corporate.
Subscripttion: Subscripttion refers to the process of investors signing up and committing to invest in the securities of the company.
Securities: As per Section 2(81) of the Companies Act, 2013, securities are defined under clause (h) of section 2 of the Securities Contracts (Regulations) Act, 1956.
As per clause 2 (h) securities include:
Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate
Restrictions by prescribing the limits:
(i) 60% of its paid up share capital + free reserves + securities premium account.
Explanation
A company shall not give loan, guarantee, security in connection with the loan or acquire by way of subscripttion, purchase or otherwise the securities of any other body corporate, not exceeding 60% of paid up share capital (as per the latest audited balance sheet), free reserves (as discussed below) and securities premium account (as per the latest audited balance sheet)
Free Reserves: Free reserves are defined under Section 2 (43) of the Companies Act, 2013 which says, such reserves which, as per the latest audited balance sheet of a company are available for distribution as pidend:
Provided that-
(i) any amount representing unrealised gains, notional gains or revaluation of asset, whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit & loss account on measurement of the asset or the liability at fair value, Shall not be treated as free reserve
(iii) 100% of its free reserves and securities premium account
Explanation:
Here, paid up share capital is excluded and limit has been increased from 60% to 100%, and at the end of Sub-section (2) a sentence is used “whichever is higher” so, the higher of the two is considered while calculating the limits beyond which company shall not give loan, provide guarantee or security or do acquisition.
Sub Section (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.
Explanation:
Rule 13 (1) of the Companies (Meeting of Boards and its Powers) Rules, 2014 says:
· 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 investment, loan, guarantee or security proposed to be made or given by the Board
Exceeds the limits as specified by Section 186, 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 of a company.
Here, the word acquisition has not been used but in the section as we have seen already, acquisition of securities is used.
Rule 13 (2) of the Companies (Meeting of Boards and its powers) Rules, 2014 says:
A resolution passed in a general meeting in terms of sub-section (3) of Section 186 of the Companies Act, 2013 to give any loan or guarantee or investment or providing any security or the acquisition under sub-section (2) of Section 186, shall specify the total amount upto which the Board of Directors are authorised to give such loan or guarantee, to provide such security or make such acquisition.
Here also, the word acquisition is used under the sub-rule (2) and hence it created the ambiguity in understanding the Rule and the Section.
From the Rule 13 as a whole it can be concluded that Company needs to pass the Special Resolution in a general meeting, if the limit exceeds, as prescribed and in that Special Resolution, Company needs to mention the amount upto which the Board of Directors can give loan or guarantee, to provide such security or make such acquisition.
Sub-Section (4)
As per Sub-section (4), certain disclosures required to be made by the Company in its financial statements
· full particulars of the loans given, investment made, guarantee given and security provided (acquisition not included)
· purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the same.
Sub-Section (5)
This sub-section talks about the approval from the Board of Directors before giving of any loan, making any investment, giving of guarantee and providing of security in connection with the loan.
Approval resolution shall only be passed when consent from all the Board of Directors has been obtained.
This sub-section also talks about the approval from the public financial institution concerned, if, the term loan, if any, is subsisting, is obtained before giving of any loan, investment, guarantee & security.
First proviso to Sub-section (5) says that approval from the public financial institution shall not be required where:
· 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 investment, loan, guarantee or security proposed to be made or given by the Board
Does not exceed the limit as specified under sub-section (2) of the Companies Act, 2013 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.
Note: Here in this sub-section also there is no use of the word acquisition and hence this sub-section is not applicable to the acquisition of securities.
Sub-section (6)& Rule 11(3) of the Companies (Meeting of Boards & its powers) Regulations, 2014
This sub-section talks about the limits for taking Inter-Corporate Loans and deposits w.r.t. Companies registered under SEBI Act and covered under the companies as may be notified by the Central Government in consultation with the SEBI,
Companies include:
(1) Companies registered under Section 12 of the Securities and Exchange Board of India Act, 1992; and
(2) Companies covered under such class or classes of Companies as may be prescribed.
[Companies covered under Section 12 of the SEBI Act, 1992 include:
Stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market.]
Rule 11 (3) of the Companies (Meetings of Board and its powers) Rules, 2014 defines Companies covered under such class or classes, says
Companies which are covered under Section 12 of the SEBI Act, 1992 and also covered under class or classes of Companies as may be notified by the Central Government in consultation with the SEBI, shall not take Inter-corporate loans or deposits exceeding the limits specified under the regulations applicable to such Company, pursuant to which it has obtained a certificate of registration from the SEBI]
Sub-section (7)
This Sub-section says that a Company shall not give any loan at a Rate of Interest lower than the prevailing yield of one year, three year, five year or ten year of a Government Security closest to the tenor of the loan.
Explanation:
If the Company gives a loan having tenure of five years at a Rate of Interest of 10% & at the same time the Rate of Interest for the same tenure on the Government Security as issued by the Government from time to time is 12% .
In the above case, Company shall not give loan at a rate of Interest lower than the Rate of interest as given by the Government Securities i.e. 12%. So, the Company if gives above loan, is at default.
Section 186 (8)
RESTRICTION WHEN COMPANY IS IN DEFAULT
This sub-section says, whenever the Company is in default of repayment of any deposits* accepted before or after the commencement of this Act or in payment of interest thereon, then that Company shall not give any loan or guarantee or provide any security or make an acquisition, till such default is subsisting.
* Deposits: Section 2(31) of the Companies Act, 2013 defines Deposit and includes any receipt of money by way of deposit or loan or in any other form by a Company, but does not include such categories of amount as may be prescribed** in consultation with the Reserve Bank of India.
** Please refer Rule 2 (1)(c) of the Companies (Acceptance of Deposits) Rules, 2014.
Section 186 (9)& (10)
REGISTER TO BE MAINTAINED BY THE COMPANY
As per this sub-section, every Company which is giving loan or guarantee or providing security or making an acquisition of securities, shall keep a Register* in the manner as prescribed in Rule 12 of Companies (Meetings of Board and its Powers) Rules, 2014
*Register:
· Every Company which fall under this section shall maintain the register in Form: MBP-2
· Entries in the register shall be made chronologically in respect of each transaction within 7 days of giving of loan or guarantee or providing of security or making acquisition of securities.
· Register shall be maintained at the Registered Office of the Company and shall be preserved permanently and shall be kept in the safe custody of the Company Secretary of the Company or any person authorized by the Board.
· Entries in the Register shall be authenticated by the Company Secretary of the Company or by any person authorized by the Board.
· Register can be maintained either physically or electronically
· Extracts of the Register maintained may be furnished to any member of the Company on payment of such fees as may be specified in the Articles of the Company but which shall not exceed Rs. 10/- for each page.
Section 186 (11)
NON-APPLICABILITY OF SECTION, EXCEPT SUB-SECTION (1)
The provisions of Section 186 except sub-section (1) are not applicable to:
· A loan made, guarantee given or security provided by a:
1) Banking Company; or
2) Insurance Company; or
3) Housing Finance Company in the ordinary course of business
4) Company engaged in the business of financing of Companies*; or
5) Providing Infrastructural facilities**
*Company engaged in the business of Financing of Companies:
Defined under Rule 11 (3) of Companies (Meetings of Board and its Powers) Rules, 2014, which says business of financing of companies shall include with regard to a Non-Banking Financial Company registered with Reserve Bank of India, “business of giving of any loan to a person or providing of any guarantee or security for due payment of any loan availed by any person in the ordinary course of its business.
**Infrastructure Facilities:
Defined under Schedule VI of the Companies Act, 2013.
· To any acquisition:
1) made by a Non-Banking Financial Company (NBFC) registered under Chapter III of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities. ( Exemption to NBFC shall be for its investment and lending activities)
2) made by a Company whose principal business is the acquisition of securities.
3) Of shares allotted in pursuance of Clause (a) of Sub-section (1) of Section 62.
4) Made by a banking Company or an Insurance Company or a Housing Finance Company, making acquisition of securities in the ordinary course of business.
Section 186 (12):
Power to Central Government
Under this sub-section, Central Government has the power to make rules for the purposes of this section.
Section 186 (13)
PENALTY FOR NON-COMPLIANCE
Penalty for Company who is in default:
· Fine which may extend from Rs. 25000/- to Rs. 5,00,000/-
Penalty for officer of the Company who is in default:
· Imprisonment which may extend to 2 years & fine which may extend from Rs. 25000/- to Rs. 1,00,000/-
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