COMPANY LAW:
Section 186- Loan & Investment by Companies
SECTION 186 + Rule 11, 12 and 13 of Companies (Meeting of Boards and its Powers) Rules, 2014
LOAN AND INVESTMENT BY COMPANY
- Objective: –
> To protect the interest of shareholders
> To prevent company from unnecessary exploitation of funds of shareholders
> To maintain feasible debt equity ratio
> To ensure sufficient liquidity
| Section 186(2) | Section 186(3) (4) (5) (6) (7) and (8) |
| A Company shall not (Directly/Indirectly) do any of the following activities in excess to 60% of (Paid up Share Capital + Free Reserves + Securities Premium) or 100% of (Free Reserves + Securities Premium), whichever is less. | A Company may (Directly/Indirectly) do any of the activities as mentioned in sub section 2 of Section 186, in excess to 60% of (Paid up Share Capital + Free Reserves + Securities Premium) or 100% of (Free Reserves + Securities Premium), whichever is less, on following conditions. |
| > Give any Loan to any person or other Body Corporate
> Give any Guarantee or provide Security in connection with a Loan to any other Body Corporate or person > Acquire (Investment) by way of subscription, purchase or otherwise, the securities of any other Body Corporate. Note 1:- Other person shall not include a person full time in employment of the Company Note 2:- Aggregate of Existing + Proposed (Loan, Guarantee, Security and Investment) shall be taken into consideration while calculating the limit of 60% or 100%as the case may be.
|
> Unanimous consent of all Directors who are present in Board Meeting
> Special Resolution by members in General Meeting Exemption (No need to pass Special Resolution):- 1. Holding Company gives Loan, Guarantee, Security to, or makes acquisition of shares of Wholly Owned Subsidiary Company 2. Holding Company gives Loan, Guarantee, Security to Joint Venture Company > Disclosure of such Loan , Guarantee, Security or Acquisition in Financial Statement > Approval from Public Financial Institution if > Companies (Stock Brokers, Sub Stock Brokers, STA, etc.) registered under Section 12 of SEBI Act, 1992 shall not take inter-corporate loan or deposits in excess to prescribed limit (60% or 100%) and shall furnish the particulars of loan or deposits in Financial Statement. > Rate of interest on loan shall not be less than prevailing yield of one year, three years, five years or ten years on government securities, closest to the tenure of the loan. > Company shall have not defaulted or have any default in repayment of any deposits accepted or in payment of interest thereon. |
–
| Exemptions to Section 186 |
| > Sub Section 2 and 3 shall be exempted for IFSC Public and Private Companies , if such company passes resolution either at Board Meeting or Resolution by circulation |
| > Government Company engaged in the production of defence equipments |
| > An Unlisted Government Company shall have to obtain approval of concerned Ministry |
| > Except sub section 1, rest all sub section shall not be applicable on:-
1. Loan, Guarantee, Security or Investment made by Banking Company, Housing Finance Company or Insurance Company , in ordinary course of business 2. Investment made by Investment Company 3. Investment by way of exercising Right Issue under Section 62(1)(a) 4. Lending or Investment by NBFCs registered with RBI |
Procedure for Inter-corporate loan/ guarantee/ investment
| Procedure for Inter-corporate loan/ guarantee/ investment | ||
| Step 1 | Board Meeting
> Unanimous Board Resolution to make inter-corporate loan/ guarantee/ investment > Board Resolution to call General Meeting + approval of Notice, Venue, Date and Time for the General Meeting > Board Resolution to authorise CS or Director to do necessary acts or signing |
|
| Step 2 | General Meeting
> Special Resolution by members (if limit exceeds beyond 60% or 100% as the case may be) |
|
| Step 3 | Approval of Public Financial Institution (if limit exceeds beyond 60% or 100% as the case may be + outstanding ) | |
| Step 4 | File E-Form MGT-14 with following attachments (within 30 days of passing SR):-
> CTC of SR + Explanatory Statement > Consent of shorter notice(if applicable) |
|
| Other Provisions | ||
| Register of inter-corporate loans, investments, guarantee or security | > Form MBP-2 | |
| Penalty | > Company:- Fine of Rs. 25,000 up to Rs. 5 lacs
> Officer in default:- Imprisonment up to 2 years + Fine of Rs. 25000 and up to Rs. 1 lac. |
|