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There has been much confusion about applicability of section 185 and regarding Lending, giving of guarantee, making investment by companies in the light of section 185 and 186 of the Companies Act, 2013

Sub-section (1) of section 185 starts with “Save as otherwise provided in this Act”

The implication is obvious – if there is any other provision of the Act permitting lending as covered by this section, then such specific permission shall prevail over this section.Now let us examine section 186 , which deals with “Loans and investment by company”

While analyzing Section 186, one must analyse it part by part.

Section 186(1) is an over-riding provision as it starts with the words “Without prejudice to the provisions contained in this Act ” . Section 186(1) prohibits only making of investment through more than two layers of investment companies, subject to exceptions as provided in the Proviso to sub-section (1) of section 186. 

It is pertinent to note that exemption as given by sub section (11) of section 186 is exclusive of sub-section (1) of section 186.

In none of the other sub-sections of section 186, the word “Without prejudice to the provisions contained in the Act” have come.

Hence Lending (giving of loan), granting of guarantee and investment (either by subscription, purchase or otherwise) is governed by sub-section (2) to sub-section (13) of section 186.

Sub-section (1) of section 186 has no applicability regarding Loans, Guarantee and investment(except that it prohibits  making of investment through more than two layers of investment companies).

Hence in my view, if Loans, Guarantee and investment {other than expressly prohibited by section 186(1)} are carried out in compliance with sub-section (2) to sub-section (13) of section 186, section 185 do not come with play.

Now the question arises as to why there are two penal clauses separately as stated in sub-section (13) of section 186 and  sub-section (2) of section 185.

The most important aspect of section 185(1) is that it applies to Loans given to or guarantees given for  either the directors or any other person in whom the director is interested. It nowhere mentions about related parties or entities controlled by the promoters.

Related party transactions are separately covered by section 188. But section 188 do not talk about Lending (giving of loan), granting of guarantee and investment (either by subscription, purchase or otherwise). Hence it is permitted even in related parties.

It clearly implies that if there is violation of the provisions of sub-section (2) to sub-section (12) of section 186 , the penal provisions of sub-section (13) of section 186 will apply.

And if the violation is with regard to Loans to directors and/or persons in whom directors are interested, section 185 will come into play and penal provisions as stated in section 185(2) will be attracted in addition to the penal provisions of section 186(13).

Hence it can be deduced from the discussion hereinabove, that:

A company, whether it is NBFC or not, not having any term loan from any public financial institutions, can give loans to, guarantee for  and/or make investment in any person, whether related or otherwise subject to:

1. Limits upto 60% of CRP (Share Capital + Free Reserves + securities premium account ) or 100% of RP, whichever is higher ;

2. At a rate not lower than the prevailing yield on government  securities for such period;

3. Disclose in the financial statements full particulars oof loan alongwith the purpose for which the loan is/was proposed to be utilized ;

4. Maintain register as prescribed and keep it open for inspection and taking extracts by member.

If the lender is having any term loan, unanimous consent of all directors present should be taken.

Further if there is default in repayment of instalments of loan or payment of interest on a term loan, prior approval from such PFI is required.

By: CA Manoj Sethia

FCA, ACS, ACMA

Email: msethiaco@gmail.com


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Category Corporate Law, Other Articles by - manoj sethia 



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