Subject: Brief Note on Limits specified u/s 186 of the Companies Act, 2013
S. 186 of the Companies Act, 2013 is applicable to all the Companies. Earlier corresponding S.372A of the Companies Act, 1956 was applicable only to Public Limited Companies. We hereby give gist of the section in brief:
Total of loan made to any person or body corporate, guarantees given, securities provided and Investment in securities of Body Corporate shall not exceed
- 60% of (Paid up Capital + Free Reserves + Securities Premium Account) or
- 100% of (Free Reserves + Securities Premium Account)
Whichever is higher.
In case the above limits are exceeded, prior approval by means of special resolution is required.
Free Reserves (as defined u/s 2(43) of the Companies Act, 2013 is as under:
“free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:
(i) any amount representing unrealised gains, notional gains or revaluation of assets, 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 and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;
As per Ramaiya (18th edition) pg. 3332
Investment made in Government Securities and units of mutual fund (which generally are setup as Trust Bodies) fall outside the section as the same are not issued by the Bodies Corporate.
Mutual Funds are constituted as trusts under the Indian Trust Act, 1882 and are not Body Corporate.
Therefore while calculating the limits u/s 186 investment in mutual funds is to be excluded.
The Company shall maintain a Register in form MBP-2 and enter details of loan made, guarantees given, securities provided and investment made within 7 days.
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