LOANS AND INVESTMENTS BY COMPANIES [SECTION. 186]

1. NOT MORE THAN 2 LAYERS OF INVESTMENT COMPANIES
2. 1. No company shall make any investments through more than two layers of investment companies. However, the said provision shall not apply in the following cases:
      1. A company which makes investments in a company incorporated outside India and it has investment subsidiaries beyond two layers as per the laws of that country.
      2. It shall not be applicable in case of a subsidiary company for having any investment subsidiary for the purpose of meeting the requirements under any law.
3. NO COMPANY SHALL DIRECTLY OR INDIRECTLY
   1. give any loan to any other person or body corporate or
4. 2. give any guarantee or provide any security in connection with the loan made to any person or body corporate or
5. 3. make any investments by acquisition or subscription of securities of any other body corporate exceeding 60% of its paid up share capital, free reserves & securities premium account OR 100% of free reserves & securities premium, whichever is higher.

The word "person" does not include any individual who is in the employment of the company.

Any investment beyond the above limit shall require previous approval of shareholders in the general meeting by way of a special resolution. However, no such provision of loan, guarantee, security or investments shall apply to any transaction made by a holding company in its wholly owned subsidiary or Joint Venture Company.

3.  CONSENT OF ALL THE DIRECTORS:

Before making any loan or investments prior approval of “ALL THE DIRECTORS” present at the board meeting shall be obtained.

4. DISCLOSURE IN FINANCIAL STATEMENTS:

Details of such loans & investments or guarantees or securities provided by the company shall be disclosed to the members in its financial statements.

5. NO OBJECTION CERTIFICATE FROM BANKS / FINANCIAL INSTITUTIONS:

If there is any loan subsisting from a bank or a financial institution and if the company has exceeded the limits as stated above and if there is any default in repayment of such loan or its interest payment, a prior approval from such bank or financial institution shall be obtained.

6. SECTION 186 APPLICABLE TO FINANCIAL INTERMEDIARIES AS WELL:

Any company registered under section 12 of SEBI Act, 1992 shall have the applicability of the provisions related to loans & investments by companies i.e. no such company shall make any loan or investment transaction outside the limits as stated above without prior sanction of the shareholders.

7. RATE OF INTEREST:

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.

Provided that nothing contained in this sub-section shall apply to a company in which 26 % OR MORE OF THE PAID-UP SHARE CAPITAL is held by the Central Government or one or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its memorandum of association.

8. DEFAULT IN REPAYMENT OF DEPOSITS:

No company, which is in default in repayment of any deposits accepted before or after the commencement of the Companies Act, 2013 or in payment of interest thereon, shall give any loan or give any guarantee, or provide any security or make an acquisition till such default is subsisting.

EXEMPTIONS

1. A banking company, insurance company, housing finance company in their ordinary course of business or a company engaged in the business of financing company’s or companies providing infra facilities.
2. Non-Banking Finance Companies (NBFCs)
3. A company whose business is acquisition of securities (Investment companies)
4. Shares allotted u/s. 62(1) (a) [Rights issue].

Note:

Section 186 is also applicable to section 8 Companies. In case if the company does not have share capital, calculations shall be done based upon free reserves.

SECTION 186 SHALL NOT FURTHER APPLY TO:

1. a Government company engaged in defence production;
2. a Government company, other than a listed company, in case such company obtains   approval of the Ministry or Department of the Central Government which is administratively 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.

REGISTER OF LOANS AND INVESTMENTS

1. 1. Every company which has given any loan or given any guarantee or provided any security or made any investments u/s. 186 shall maintain a register in the format prescribed.
   2. Such Register shall be maintained in form MBP– 2 and shall contain all the transactions chronologically and the entries shall be entered within 7 days from the date of the transaction.
   3. It shall be kept at the registered office of the company and shall be under the custody of the company secretary or any other person authorized by the Board.
2. 4. It shall be maintained either manually or electronically and shall be authenticated by the company secretary or any other person authorized by the Board.
3. 5. Such Register shall be open for inspection & copies thereof maybe provided to any member by payment of such fee as may be provided in the Articles but not exceeding Rs. 10.