CL: Inter-Corporate Loans and Investment (section 186)

Section 186: Inter-Corporate Loans and Investment

According to section 186, Company shall not directly or indirectly:

-> make any loan to any person or other body corporate;

-> give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate;

-> acquire, by way of subscription, purchase or otherwise the securities of any other body corporate.

Exceeding 60% of its paid-up share capital, free reserves and security premium account or 100% of its free reserves and security premium account, whichever is more.

·         *  If aggregate of inter-corporate loan, investment, guarantee and securities in connection with loan already made and proposed to be made together is not above limit (higher of 60% of paid up capital, free reserve and security premium or 100% free reserve and security premium account), inter corporate loan and investment is possible by passing board resolution with approval of all directors present at meeting.

·        * However, if it is beyond the above limit then prior SR and prior approval of financial institute is required if term loan is subsisting.

·         * No loan shall be given under at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year government security closed to the period of the loan.

·         * The company shall disclose to the members in the financial statement, the amount of the loans given, investment made or guarantee given or security provided and the purpose for which it is given.

·        * Company can’t make inter-corporate loan, guarantee and security if it has defaulted in payment of deposit or interest thereon till default is continuing.

·         * Company is not allowed to make investment through not more than two layers of investment companies. However, this provision is not applicable to company while acquiring any other company incorporated outside India which has investment subsidiaries beyond two layers as per law of such country.

Procedure for Inter-corporate loan beyond limit

·         * Unanimous consent of BOD is required to provide any loan, give guarantee or provide security.

·         * When the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to in all other bodies corporate, along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceeds the aforesaid limit, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a SR passed in a GM.  SR must be passed by postal ballot.

   

Non applicability of section 186

Section 186 shall not apply when any loan made, any guarantee given or any security provided or any investment made by:

-          A banking company, an insurance company or a housing finance company in the ordinary course of its business.

-          A company established with the object of financing industrial enterprises, or of providing infrastructure facilities.

-          Registered NBFC (Non-Banking Finance Company) and whose principal business is acquisition of securities.

-          A company whose principal business is the acquisition of securities.

-          Purchase of right issues.

-          To any loan made, guarantee given or any security provided by a holding company to its wholly owned subsidiary or joint venture company.

-          To acquisition by a holding company, by way of subscription, purchase or otherwise, the securities of its wholly owned subsidiary or joint venture company.