INTER-CORPORATE

LOANS & INVESTMENTSUNDER COMPANIES ACT, 2013

Presented By:-

Deepak Ahuja

Image source : integritycapital.org

Section 186 read with Rules 11 to 13 of Companies (Meeting of Board and its Powers) Rules, 2014

Investment through Investment Companies Section 186(1)

Without prejudice to the provisions contained in this Act,

.

a company shall unless otherwise prescribed,

.

make investment through

.

not more than two layers of

.

investment companies

at times, Section 185 may prevail over this subsection

i.e. in a chain.

"layer" in relation to a holding company means its subsidiary

or subsidiaries

"investment company" means a company whose principal

business is the acquisition of shares, debentures or other

securities

Exemptions to section 186(1) Proviso to Section 186(1)

A company to acquire any other company

incorporated in another country

If such other company has investment subsidiaries

beyond two layers as per the laws of such country

A subsidiary company to have any

investment subsidiary to comply with the

requirements of any law or rule or

regulation framed under any other law

for time being in force

(i) (ii)

No such law

exists as of today

Restriction on making inter-corporate loans

A company shall not, directly or indirectly – exceeding the Ceiling Limit

Section 186(2)

Section 186(8) : A company in default of repayment of deposits or interest thereon, cannot make above transactions, till such default is subsisting.

Amounts Involved i.e. (Proposed Amounts + Existing Amounts) ≯ Ceiling Limit

(a) give any Loan (b) give any Guarantee

or provide Security in

connection with a loan

(c) acquire by way of

subscription, purchase or

otherwise, the Securities

Ceiling limit

Whichever is higher

60%

Paid up Share Capital

+ Free Reserves

+ Securities Premium Account

100%

Free Reserves

+ Securities Premium Accountor

“Free Reserves" means such reserves which are available for distribution as dividend..

Following shall not be treated as free reserves:

(i) Reserves representing unrealized gains, notional gains or revaluation of assets

(ii) Specific Reserves

Section 186(2)

Clarification in regards to loans & advances to employees

MCA General Circular No. 04/2015 Dated: 10/03/2015

Loans

and/or

Advances

Not governed by

requirements of

Section 186

If such loans/advances to employees are in accordance with

conditions of service applicable to employees

remuneration policy

Prior Approvals

Always

Consent of all the directors present in the meeting

Board of Directors

Amounts involved (Present + Proposed)

> Ceiling Limit

Specify amount up to which BOD is authorized

Special Resolution

Term Loan is subsisting

Not required if

• Amounts involved ≤ Ceiling Limit

• No default in repayment

Public Financial

Institutions

Section 186(5) Section 186(5)Section 186(3)

Rule 13

“Public Financial Institution" means LIC of India, Infrastructure Development Finance Co Ltd, Unit Trust of India, Others notified by CG.

Exemption from Section 186(3) Rule 11(1)

Provided to Wholly owned Subsidiary Joint Venture

In case of

• Loan given

• Guarantee given

• Security has been provided

By Company to its wholly owned Subsidiary.

• Acquisition

(by way of subscription, purchase or otherwise of, the securities)

by Holding company of its wholly owned subsidiary

• Loan given

• Guarantee given

• Security has been provided

By Company to its Joint Venture Company

Rate of Interest

1

3 3

5 5 5 5

10 10 10 10 10

1.00 2.00 3.00 4.00 5.00 6.00 7.00 7.50 8.00 9.00 10.00 11.00

Tenor of Loan (Years)

_________

Term of Government

Securities to consider

for effective Yield

Rate of Interest not to be

lower than effective Yield

MCA General Circular No. 04/2015 Dated: 10/03/2015 Effective yield of Tax Free Bonds not to be considered

Section 186(7)

Disclosure in Financial Statements

The company shall disclose to the members 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 above are proposed to be utilized by the recipient

Section 186(4)

Restriction on taking Inter-Corporate Loans/Advances

Companies registered under

Section 12 of Securities and Exchange

Board of India (SEBI) Act, 1992

Such class or classes of companies

as may be prescribed by CG in

consultation with SEBI

or

Section 186(6) Rule 11(3)

+ Make disclosure of such loans/deposit in financial statements pursuant to section 186(4)

shall take inter-corporate loan or deposits

exceeding the prescribed limit

shall take inter-corporate loan or deposits

exceeding the limits prescribed regulations applicable

Maintenance of Register Section 186(9) & 186(10)

Rule 12

Register of Loan, Guarantee, Security or Acquisition Form MBP2

• To be maintained at Registered Office

• In manual or e-Mode

• In custody of Company Secretary

• Transactions to be entered chronologically

• Within 7 days of transaction

• Authenticated by Company Secretary

To be open for inspection by Shareholders

Extraction by Shareholders

On payment of fees prescribed by AOA ≤ Rs. 10 per page

Exemption from Section 186(2) to 186(10)

Exemption

against

• Loan made,

• Guarantee given

• Security provided

• Acquisition

Exemption

to

In the ordinary course of its business

1. banking company

2. insurance company

3. housing finance company.

Companies engaged in the business of

1. financing of companies

2. providing infrastructural facilities

1. Non-Banking Financial Company

(having principle business of acquisition of securities in respect of its investments)

2. A company whose principle business is

acquisition of securities

3. Through Right Issue u/s 62(1)(a)

4. In ordinary course of business by

Banking Company, Insurance Company and Housing

Finance Company

Section 186(11)

Non-Applicability of Section 186

MCA Exemption Notification Dated: 05/06/2015

Section 186 shall not be applicable to following Government Companies

a) Engaged in Defence Production b) Unlisted Companies

if prior approval is obtained from CG/SG,

as the case may be, for

i. making any Loan or

ii. giving any Guarantee or

iii. providing any Security

iv. making any Investment

under this section

Penalty Section 186(12)

In case of

ContraventionCompany Officers of Company in default

Fine (in Rupees) 25,000 ≤ Fine ≤ 5,00,000 25,000 ≤ Fine ≤ 1,00,000

and

Imprisonment Term ≤ 2 Years

PRESENTED BY:

DEEPAK AHUJAahujadeepak@outlook.com