Overview of intercorporate loans

SECTION 186

Section 186 of the Companies Act, 2013 deals with the loans and investments by the companies:

1. No company shall invest more than two layers in investment company. For Eg. X Ltd is holding 51% in Y Ltd and Y Ltd is holding in Z Ltd then X ltd cannot hold in another company through Z Ltd as X Ltd becomes the ultimate holding company of Z Ltd
2. No company shall make invest more than two layers through Investment Company. Though, this provision is not applicable in following case:
3. If a company is making investment in a company which is incorporated outside India and that has subsidiary more than two layers according to the law of that country.
4. If the company is making the investment in its subsidiary company for the requirement of any law.
5. No company is allowed directly or indirectly,
6. Gives any loan to any person or to any person or any corporate;
7. Give any guarantee or any security related to the loan made to any person or corporate;
8. make any investments in any other company that exceeds

• 60% of paid up share capital, free reserves and securities premium account OR
• 100% of free reserves and securities premium account

Whichever is higher.

9. Consent of all directors shall be obtained before making any loan or investment.
10. All the details of such loans and investment shall be made in the financial statement and disclose it to the member of the company.
11. If there is loan taken by the company from any bank or financial institution then No Objection Certificate shall be taken if there is any default made by the company in repayment of the loan.
12. Company which is incorporated under Section 12 of the Securities Board Exchange of Indian Act, 1992 will be not eligible to make any loan or investment above the prescribed limit without taking prior permission of the shareholders.
13. Loan given under this section shall not carry the rate of interest lower than the prevailing yield of 1 year, 3 years, 5 years or 10 years government security closest to the tenure of the loan.
14. If any company has accepted the deposit and made any default in repaying the deposit or interest of that before or after commencement of Companies Act, 2013 shall not give any loan or guarantee or give any security to any company till such default is made correct.

This section also applies to the Section 8 Company. In case if the company has no share capital then calculation will be done with the help of free reserve.

EXEMPTIONS

Section 186 is exempted to the following companies:

• A banking company, insurance company, housing finance company in their ordinary course of business or a company that is into the business of financing company's or companies providing infra facilities.
• Non-Banking Finance Companies (NBFCs)
• Investment companies
• Rights issue [Section 62(1) (a)].
• a Government company engaged in defence production;
• a Government company, other than a listed company (in case such company needs approval of the Ministry or Department of the Central Government which is in charge of the company, or, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section).

PENALTY

If a company contravenes the provision of this section then the company will be liable for the penalty of maximum of Rs. 5 lakhs and every officer who is in default will be liable to penalty of maximum Rs. 1,00,000 with imprisonment of 2 - 3 years.