Loan and Investment by Company In-depth Analysis of Section 186 of the Companies Act, 2013 BY CS YASH PAREEK (www.csyashpareek.in)

 

||Om Shri Ganeshay Namah||

 

Loan and Investment by Company

In-depth Analysis of Section 186 of the Companies Act, 2013

 

 

TEAM YPA

Prepared by CS Yash Pareek (ICSI Silver Medalist)

Valuable inputs by CS Neha Jain & CS Gajab Maheshwari (Practicing Company Secretaries)

  

 WWW.CSYASHPAREEK.IN

 

YASH PAREEK & ASSOCIATES

Company Secretaries

BHOPAL | INDORE | NAGPUR | AHMEDABAD

Reach us at:

Address: T-3, 3rd Floor, 207, M.P Nagar, Zone-II, Bhopal-462011, M.P

Mobile No: 9111575222

Email id: pcsyashpareek@gmail.com

Website: www.csyashpareek.in

 

 

Loan and Investment by Company

 

1.      Applicable Section and the provisions of the Statutory Law:

 

·        Section 186 of the Companies Act, 2013 [Act] (Effective 1^st April, 2014)

 

·        Companies (Amendment) Act, 2017 (Effective 07^th May, 2018)

 

·        MCA notification dated 13^th June, 2017, 05^th June, 2015

 

·        Companies (Meetings of Board and its Powers) Amendment Rules, 2019 Dated 11th October, 2019.

 

2.      Comparison with Section 372A of the Erstwhile Companies Act, 1956

 

·        The Companies Act, 2013 came into force on 12th September 2013 intending to ease business, streamline the compliance process and resolve various issues faced under Companies Act 1956.

 

·        In the new Act, many sections from the old Act were amended among which one section 372A which dealt with Inter Corporate Loan, Investment, Guarantee, and security was also amended in the concept of 'Loan and Investment by Company’.

 

·        Section 186 of Companies Act, 2013 provides that inter-corporate investments not to be made through more than two layers of investment companies which were not required Section 372A of the erstwhile Companies Act, 1956. The restriction is imposed to check misuse of multiple layers of subsidiaries for diversion of funds/siphoning off funds.

 

·        Section 186 of the Act covers both the body corporate and person whereas erstwhile Act covers only Body corporate.

 

·        Section 186 of the Act is applicable to both Public and Private companies whereas Section 372A was only applicable to Public companies and Private companies which are subsidiary of Public company i.e. Deemed Public Companies.

 

·        While computing the threshold limit under the Companies Act, 2013, the “Security Premium” is included in addition to paid up share capital and free reserve whereas under the 1956 Act “Security premium” was not included in computing the limit.

 

 

3.      Definitions:

 

3.1          Free reserves:

 

Means those reserves which, as per the latest audited balance sheet, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.

 

Provided that following shall not be treated as free reserves:

 

(i)                any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

 

(ii)              any change in carrying an amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value,

 

 

3.2         Body Corporate:

 

Section 2(11) defines 'body corporate’ or “corporation” includes a company incorporated outside India, but does not include—

(i)                a co-operative society registered under any law relating to co-operative societies; and

 

(ii)               any other body corporate (not being a company as defined in this Act), which the Central Govt. may, by notification, specify in this behalf

 

 

3.3         Company:

 

Pursuant to Section 2(20) of the Act, Company means a company incorporated under this Act or under any previous company law.

 

Comparison of Body Corporate and Company:

                              Body corporate means:

·        Company incorporate in India

·        Foreign company

·        Corporation formed under special law

·        Nationalized banks

·        Public Financial Institution

 

3.4         Securities:

Pursuant to Section 2 (81) of the Act, the word used in the section is “Securities”, it means as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

 

It is a wide definition and covers also, bond, debenture, warrants, script, or any other marketable securities and also derivatives and right and interest in the securities.

 

In this context, it can be inferred that warrant/ instrument convertible into shares also comes under the net of section 186.

              

3.5         Investment Company:

Means a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than 50% of its total assets, or if its income derived from investment business constitutes not less than 50% as a proportion of its gross income.

 

3.6         Person:

Person: The Explanation to section 185(1) w.e.f. 7-5-2018, provides that the word "person" does not include any individual who is in the employment of the company.

 

 

4.      Restriction on Loan, Guarantee, Security, Investment:

 

Section 186 (2) of the Companies Act, 2013 states that a company cannot directly or indirectly:

 

·        Give any loan to any Person or Body Corporate

 

·        Provide any Security or give any guarantee in connection with a loan to any other person or body corporate and

 

·        Acquire by way of purchase, subscription or otherwise, the securities of any other body corporate

 

Exceeding 60% of its Paid-up Share CAPITAL, Free Reserves and Securities Premium Account

 

OR

 

One hundred Percent of its free Reserves and Securities Premium Account,

 

WHICHEVER IS MORE (HIGHER)

 

 

 

 

5.      Stages of Approval:

 

There are three stages of approval that determine on circumstances of crossing the threshold mentioned above and subsisting of any Term Loan as mentioned under Section 186 of the Act.

 

5.1   Approval of Board:

 

The approval of the Board is required in all cases irrespective of the amount of loan, investment, guarantee or security pursuant to Section 179 (3) (e) and Section 179 (3) (f) of the Companies Act, 2013.

 

Pursuant to Section 186 (5) of the Act, the approval of the Board shall be obtained by means of a unanimous resolution passed at a Board meeting with the consent of all the directors present at the meeting.

 

Resolution by circulation or resolution of the committee of directors is not sufficient.

 

The Board of Directors of a company can approve the above said proposals only upto 60% of the paid up capital and free reserves or 100% of the free reserves of the company, whichever is more.

 

The said limit applies to aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board.

 

 

5.2   Approval of Members:

 

When the aggregate of the loan, investment, guarantee or security already made together with the loan, investment, guarantee or security proposed to be made exceeds the limit specified u/s 186(2) i.e. {60% or 100%}, prior approval by means of a special resolution is necessary.

 

E-form MGT-14 is required to be filed with the concerned Registrar of Companies within 30 days of the passing of special resolution under Section 117 (3) of the Companies Act, 2013.

 

The contents of the Special resolution shall contain the total amount up to which the Board is authorized to make loans, guarantee, investment or security.

 

The notice of the general meeting for passing Special Resolution shall indicate clearly the following:

 

(i)                The Limits that will be required in excess of the prescribed limits involved in the proposal;

 

(ii)              The particulars of the body corporate in which the investment is proposed to be made or to which the loan or guarantee or security proposed to be given;

 

(iii)             The purpose of the investment, loan, guarantee or security;

 

(iv)             The sources of funding for meeting the proposal; and

 

(v)              Other details as may be specified.

 

 

 

5.3   Approval of Public Financial Institution [PFI]

 

Pursuant to Section 186 (5) of the Act, the company shall obtain the prior approval of PFI from which it has taken a term loan and the said loan is subsisting.

 

However, Approval of PFI is not required if,

 

·        The aggregate of loans, guarantee, investments or security already made together with the loan, investment, guarantee or security proposed to be made does not exceed the limit specified under Section 186 (2) of the Act i.e. {60% or 100%}.

 

AND

 

·        There is no default in repayment of loan installments or interest to PFI as per the terms and conditions of such term loan.

 

 

6.      Exemptions:

 

Pursuant to Section 186 (11) of the Act and Rule 11 of the Companies (Meetings of Board and its Powers) Amendment Rules, 2019:

 

6.1   Exemption in Granting Loan:

 

No approval by way of SR is required, where –

 

·        The loan is given by a company to its Wholly Owned Subsidiary [WOS] or joint venture company [JVC], or

 

·        A banking company in the ordinary course of its business;

 

·        An insurance company in the ordinary course of its business

 

·        A housing finance company in the ordinary course of its business;

 

·        A company engaged in the business of financing of industrial enterprises or of providing infrastructural facilities.

 

 

6.2    Exemption in Providing Guarantee

 

·        The guarantee is given or security is provided by a company to its WOS or JVC

 

·        A banking company in the ordinary course of its business;

 

·        An insurance company in the ordinary course of its business;

 

·        A housing finance company in the ordinary course of its business;

 

·        A company engaged in the business of financing of companies or of providing infrastructural facilities.

 

 

 

6.3   Exemption in Acquisition of Securities:

 

·        Where the acquisition of securities of its wholly owned subsidiary is made by a holding company, by way of subscription or otherwise.

 

·        Any acquisition of shares allotted in pursuance of right shares.

 

·        Any acquisition made by a company whose principal business is the acquisition of securities (i.e. investment company).

 

·        Any acquisition made by a non-banking financial company whose principal business is the acquisition of securities.

The exemption to NBFC shall be with respect to investment and lending activities.

 

 

 

6.4   Government Companies:   

·        A Government company engaged in defense production.

 

·        A Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of CG which is administratively in charge of the company or State Government, as the case may be.

 

 

7.      Rate of Interest

 

Pursuant to Section 186 (7) of the Act, the rate of interest chargeable should be more than the prevailing yield of one year, three year, five year or ten year Government Security closest to the period of the loan.

 

No company can give loans at a rate of interest lower than the prevailing yield of one year, three-year, five year or ten-year Government Security closest to the tenor of the loan.

 

Nothing contained section 186(7) shall apply to a Section 8 company in which 26% or more of the paid-up share capital is held by the Central Govt. or one or more State Govt. or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance of its objects as stated in its MOA.

 

 

8.      Prohibition:

 

Pursuant to Section 186 (8) of the Act, A company which has defaulted in repayment of any deposits accepted by it or in payment of interest on deposits, shall not make any loan, guarantee, investments or security till such default is subsisting.

 

In other words, where a company fails to repay the deposits or interest thereon on the due date, it may make loan, guarantee, investments or security only after the default has been made good.

 

 

9.      Disclosures in Financial Statements

 

Pursuant to Section 186 (4) of the Act, the company shall disclose to the members in the financial statement –

 

·        The full particulars of any loans given, investments made, guarantee or security provided, and

 

·        The purpose for which the loan or guarantee or security is proposed to be utilized by the recipient.

 

Such disclosure has to be in the Board's Report also.

 

10.   Register of Loans, Investments, Guarantee or Security

 

Pursuant to Section 186 (9) and Section 186 (10) of the Act,

 

·        Every company which makes a loan, investment, guarantee or security shall maintain a register.

 

·        The register shall contain the prescribed particulars and in the prescribed manner.

 

·        The register shall be kept at the registered office of the company.

 

·        The register shall be opened for inspection at the registered office of the company.

 

·        The Copies of the register may be obtained by any member on payment of prescribed fees.

 

·        Also, the extracts may be taken out from the register by any member on payment of prescribed fees

 

·        The register shall be maintained in Form MBP – 2.

 

·        The register shall be maintained with effect from the date of its incorporation.

 

·        The register shall be preserved permanently.

 

·        Company secretary of the company or any other person authorized by the Board is required to maintain the register under its custody.

 

·        The register shall be maintained either manually or in electronic mode.

 

 

 

11.   Penalty For Contravention of Section 186

 

If a company contravenes any of the provisions of this section, the punishment would be as follows

 

11.1 For Company

 

Fine – Minimum Rs. 25000 and, Maximum Rs. 5,00,000

 

11.2 For an official in default

 

Maximum Imprisonment – 2 years; and Fine – Minimum Rs. 25,000 and, Maximum Rs. 1,00,000.

 

 

Conclusion:

 

Section 186 has to be complied by corporate in true letter and spirit. Also Auditors needs to check the compliance of Section 186 while issuing CARO 2020 report to enable the stakeholders to ascertain the intention of management in utilization the funds of the company in such a manner which is not prejudicial to the interest of the company and its stakeholders.

 

Happy reading.

 

Regards,

CS Yash Pareek   [ICSI Silver Medalist]

Company Secretary  I     Yash Pareek & Associates {www.csyashpareek.in/Professional}

Entrepreneur             I     Manomay Innovations Private Limited {www.manomay.co.in}

Social Worker            I     Rukmani Devi Pareek Charitable Foundation {www.csyashpareek.in/socialwork}

Contact No.:  9111575222       Website: www.csyashpareek.in

Office at T-3/207, Zone-II, M.P Nagar, Bhopal-462011, M.P

 Google         https://goo.gl/maps/iXKVRo6A5FUQzcj5A               

Just Dial    https://www.jdmart.com/GOJ-JUP1652612757?skip

You tube       https://www.youtube.com/channel/UCg5VPXertW0YWoM-sJcQKXA                

 Linked In https://www.linkedin.com/in/cs-yash-pareek-822978114/

Twitter       https://twitter.com/CSYashPareek1                 

Facebook    https://www.facebook.com/csyashpareek

Read and review our blogs on konnectwithyash.blogspot.com

 

 

Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I, CS Yash Pareek assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.