SHORT SUMMARY
In the following article, the author will explore a very significant subject concerning the applicability of Section 186 to non-bank financial companies (NBFC).
Brief about Section 186
Section 186 of the Companies Act, 2013 deals with loans and investments made by a company. It specifies the conditions under which a company can provide loans to other entities, make investments, or provide guarantees or securities. The section imposes restrictions on the amount of loans, investments, or guarantees that a company can provide, and it mandates compliance with certain procedural requirements, such as obtaining prior approval from the board of directors and shareholders.
The primary objective of Section 186 is to ensure transparency, accountability, and prudent financial management within companies.
Legal Provision
Section 186 (11) Nothing contained in this section, except sub-section (1), shall apply.
(a) to any loan made, any guarantee given, or any security provided, or any investment made by a banking company, an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises or providing infrastructural facilities;
(b) to any investment:
(i) made by an investment company;
(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;
(iii) made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal business is the acquisition of securities.
(12) The Central Government may make rules for the
Meaning of "business of financing companies" [Section 186(11)(2) Rule 11(2)] "business of financing industrial enterprises" shall include, with regard to a NBFC registered with RBI, "business of giving of any loan to a person or providing any guarantee or security for due repayment of any loan availed by any person in the ordinary course of its business.
Key Takeaways From Section
This section covers the following transactions:
- give any loan to any person or other corporate body;
- give any guarantee or provide security in connection with a loan to any other body corporate or person; and
- Acquire, by way of subscription, purchase, or otherwise, the securities of any other body corporate,
Full exemption from Section 186
Section 186 shall not be applicable in the case of providing a loan or guarantee of security by:
- Banking Company
- Insurance Company
- Housing Finance Company
- A company in Infrastructure Facilities
Understanding from the NBFC point of view
As per Section 186(11), it seems that there is a partial exemption for NBFC from the provisions of Section 186.
Exemption in Investment
If the principal business of an NBFC is the acquisition of securities, then Section 186 shall not be applicable to such an NBFC for any investment made by an NBFC.
When a non-bank financial company (NBFC) has a primary activity that is not the acquisition of securities, then it is possible to hold the opinion that this exemption is not applicable to such an NBFC.
Exemption in Business of Financing
As per Rule 11(2), if the business of NBFC (which is registered with the RBI) gives any loan to a person or provides any guarantee or security for the due repayment of any loan availed by any person in the ordinary course of its business,.
As per this, NBFC is exempt from giving a loan, guarantee, or security only if the other person uses such a loan, guarantee, or security for the due repayment of its loan, which it has taken in the ordinary course of business.
Because of this, one could argue that NBFC companies are not completely free from the provisions of Section 186. In the scenario described above, it is entitled to a partial exemption from the NBFC. Any time an NBFC provides a loan, guarantee, or security, with the exception of the situations described above, the NBFC is required to comply with the provisions of Section 186 regarding the limit, interest, and other related matters.
CONCLUSION
Section 186 of the Companies Act, 2013 does not specifically exempt non-banking financial companies (NBFCs) from its provisions. However, NBFCs are subject to regulation by the Reserve Bank of India (RBI) and must adhere to the guidelines and regulations issued by the RBI regarding loans, investments, and other financial transactions. These regulations often cover similar aspects as Section 186 but may have specific provisions tailored to the functioning and operations of NBFCs.
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