Overview
In India, the Companies Act, 2013 (“the act”) governs various aspects of corporate affairs, including regulations related to loans and investments made by companies. These provisions aim to ensure transparency, accountability, and prudent financial management within companies, safeguarding the interests of all the stakeholders.
Section 186 of the Companies Act, 2013 outlines the provisions regarding loans and investments made by companies. It provides certain conditions under which companies can provide loans, give guarantees, acquire securities or make investments. Identifying the importance of this provision, it is crucial for companies to ensure compliance and avoid penalties.
A company can give loans and guarantees, acquire securities or make investments in another company or body corporate with the consent of the board or shareholders as the case may be. Such loans given by a company to other companies or body corporates are known as inter-corporate loans. When a company invests in another company, it is known as inter-corporate investment.
Explanation
A company shall not unless otherwise prescribed, make investment through not more than two layers of investment companies. Section 186(1) has further two following exceptions:
- a company may acquire any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
- a subsidiary company can have an investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.
Section 186(2) of the act states that a company can directly or indirectly:
- Give any loan to any person or other body corporate;
- Give any guarantee or provide security in connection with a loan given to any other body corporate or person;
- Acquire securities of other body corporates by way of purchase, subscription or otherwise.
However, a company can give loans, guarantee and acquire securities of up to 60% of its paid-up share capital, securities premium account and free reserves or 100% its free reserves and securities premium account, whichever is more.
And in case the limit as said above exceeds then approval via special resolution by the shareholders has to be passed first.
Few check points to be kept in mind: –
- While calculating the abovesaid limit, consider the aggregate of the amount of loan or investment already made and the amount proposed to be given.
- Disclose in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient.
- Approval of Shareholders via special resolution is not required in case of a company and its wholly owned subsidiaries, joint ventures.
- No loan shall be given at an interest rate lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.
- Pass resolution for approval at a meeting of the Board with the consent of all the Directors present at the meeting.
- Prior approval of the public financial institution concerned where any term loan is subsisting, is required to obtain.
- No company which is in default in the repayment of any deposits shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.
- A register to be maintained for loans and investment by the company.
Exemptions: –
Except the requirement of section 186(1), nothing under section 186 shall apply to the following: –
- a banking company
- an insurance company
- 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
- an investment company
- a non-banking financial company
Penalties on contravention
If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.
Conclusion:
The regulations set forth under the Companies Act, 2013 regarding loans and investments by companies aim to strike a balance between fostering business growth and preventing misuse of funds. Adherence to these provisions not only ensures legal compliance but also reinforces the credibility and financial stability of companies, fostering investor confidence and promoting responsible corporate governance.
Author: Alka Thakkar