Section 186 of Companies Act - Loan and Investment by Companies

Last updated: 18 April 2022

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Quick Summary

Section 186 of the Companies Act governs loans, guarantees, and investments made by companies. There are specific limits based on paid-up capital and reserves. If these limits are exceeded, a special resolution and board approval are required. Companies engaged in financing or investment activities, or holding companies lending to wholly-owned subsidiaries for principal business, may be exempt from certain requirements. Non-compliance can result in significant fines and potential imprisonment.

To Give

Loan / Guarantee / security to any person / Body corporate OR
Guarantee / security in connection with loan taken by person / body corporate
Acquire shares of any Body corporate (Investment cannot be from more than 2 layers of investment companies)

Companies Act: Loans and Investments by Companies Explained

If the aggregate of all such exceeds

60% of paid-up capital + free reserves + Securities premium OR
100% of free reserves + Securities premium
Whichever is more.

Then any new loan / guarantee / security shall require

All directors have to approve resolution in Board meeting
Prior approval of Public financial institution in case of term loan.
Pass special resolution to give any further such loan / guarantee / security. (Explanatory statement shall mention full details of loan / guarantee / security, and purpose.
Interest rate shall be at least prevailing yield of government security (1 / 3 / 5 / 10 years)

Exemption

Co engaged in financing / investment can lend / invest in regular course of business without special resolution.
If given by Holding company to wholly owned subsidiary company for its principal business activities.

Compliance

Disclose full particulars in the financial statements
Maintain register of such Loan / Guarantee / security
MGT 14 has to be filed within 30 days of Special resolution

Fines for contravention

Co: Min 25,000. Max 5 lacs.
Every officer in default – imprisonment of up to 2 years or fine Min 25,000. Max 1 lacs.

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1 Year PLAN

1999

(Excl. of GST ₹359)

2 Years PLAN

3499

(Excl. of GST ₹629)

BEST VALUE

3 Years PLAN

4999

(Excl. of GST ₹899)

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About the Author

Rish s

Proprietor of R.Sethia Associates, Chartered accountants. CA year 2000. Experience in Banking, Corporate law, Manufacturing cos systems and audit, Income Tax etc.

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