Company Law

Loan and Investment by Co [S. 186]

1.

Layers of subsidiaries – effective 20-Sep-2017

[S. 186(1), & Cos (Restriction on number of layers) Rules]
  • A Co shall not make investment through > 2 layers of investment Cos
    • For computing the number of layers, one layer consisting of one or more WOS/s shall not be taken into account

    Exception: provisions not applicable to:

    • a Co acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond 2 layers as per the laws of such country;
    • a Sub Co from having any 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;
    • A Banking Co as defined in S. 5(c) of the Banking Regulation Act 1949;
    • NBFC as defined in S. 45-I (f) of the RBI Act 1934 registered with RBI and considered as (Systematically Important) SI-NBFC by the RBI;
    • an Insurance Co which carries on the business of insurance in accordance with the Insurance Act 1938 and IRDA Act 1999;
    • A Govt. Co referred to in S. 2(45) of the Co Act 2013
  • Every Co existing on 20-Sep-2017, having > 2 layers of investment Sub Cos as mentioned above:-
    • were required to file a return in Form No. CRL 1 disclosing the details specified therein within 150 days;
    • Shall not have any additional layer of subsidiaries over and above the layers existing on 20-Sep-2017;
    • in case one or more layers are reduced by it subsequent to 20-Sep-2017, shall not have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed as mentioned above, whichever is more.
  • Provisions of the Rules shall not be in derogation of the proviso to S. 186 (1) of Co Act 2013

2.

Ceiling on Loan /guarantee/security/investment

[S. 186(2), (3)]

A Co may directly or indirectly

give any loan to any 21person or other body corporate

give any guarantee/provide security in connection with a loan to any other body corporate or 21person

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

Up to the higher of following –

  • 60% (paid-up share capital + free reserves + securities premium)
  • 100% (free reserves + securities premium)

Loans/investment/guarantee/security to or in all other bodies corporate exceeding the above ceiling⟶with Prior Spl Reso

Exception:

  • loan/guarantee/security given/provided by a Co to its WOS/a JV Co,/
  • acquisition made by a Hold Co, by way of subscription, purchase or otherwise of, the securities of its WOS

3.

Approvals of BoD, PFIs
[S. 186(5)]
  • By a resolution sanctioning it is passed at a meeting of BoD with the consent of all the directors present at the meeting (i.e. Unanimous BR at BM)
  • prior approval of the concerned PFIs where any term loan is subsisting (i.e., default in repayment of loan installments/payment of interest thereon as per the terms and conditions), in case of loans/investment/guarantee/security requiring Prior Spl Reso as mentioned above

4.

Restrictions on
[S. 186(6), (8) & R. 11]

Type of entity

Restriction on

A SEBI intermediary Co registered with SEBI u/s 12 of SEBI Act ⟶

taking inter-corporate loan or deposits exceeding the limit specified under the relevant SEBI regulations applicable to such Co

A Co in default in the repayment of any deposits accepted before or after the commencement of the Co Act 2013/in payment of interest thereon ⟶

giving any loan/guarantee/any security or making an acquisition

  • till such default is subsisting

5.

Rate of interest
[S. 186(7)]
  • NOT lower than the prevailing yield of 1/3/5/10 year Govt. Security closest to the tenor of the loan

6.

Disclosure in FS
[S. 186(4)]
  • full particulars of the loans / investment /guarantee / security given or provided
  • purpose for which the loan / guarantee/security is proposed to be utilised by the recipient thereof

7.

Non-applicability

[S. 186(11)]

any loan made / guarantee given / security provided / investment made by ⟶
  • a Banking Co/ an Insurance Co/a HFC in the ordinary course of its business, or
  • a Co established with the object
    • of and engaged in the business of financing industrial enterprises, or
    • of providing infrastructural facilities
any investment⟶
  • made by an investment Co
  • made in shares allotted pursuant to S. 62(1)(a):- rights issue made by a Co/body corporate
  • made, in respect of investment or lending activities, by a NBFC registered under Ch. III-B of the RBI Act 1934 and whose principal business is acquisition of securities

8.

Register
[S. 186(9), (10) & R. 12]
  • in Form MBP 2
  • to be kept at the registered office of the Co
  • to be preserved permanently
  • shall be open to inspection