Loans & Investments by Company under Sec.186 of Cos Act 2013

Investment by company:

A company shall unless otherwise prescribed, make investment through not more than two layers of investment companies except – if ;

(i) a company from acquires 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;

(ii) a subsidiary company  has 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.

Activities Covered:

- giving  any loan to any person or other body corporate;

- giving any guarantee or provide security in connection with a loan to any other body corporate or person; and

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

Limits:

The aggregate of activities, which are made directly or indirectly by the company, should not exceed the limit of –

60% of its paid-up share capital, free reserves and securities premium account or

100 % of its free reserves and securities premium account, Whichever  is more

Approval by Special Resolution:.

Where the 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, exceed the limits specified under section 186 no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting.

The company has to pass the special resolution within one year from the date of notification of this section.(i.e.,on or before 31st March,2015)

A resolution passed at a general meeting to give any loan or guarantee or investment or providing any security or the acquisition shall specify the total amount up to which the Board of Directors are authorised to give such loan or guarantee, to provide such security or make such acquisition

Exceptions:

Prior approval by means of Special Resolution passed at a general meeting is not required – if

a. a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary (WOS) company or a joint venture (JV) company, or

b. acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its WOS company         

Disclose in Financial Statement:

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 loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

Approval of PFI:

An investment shall be made or loan or guarantee or security given by the company only after the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting.

If any term loan is subsisting in a company, prior approval of the Public Financial Institution (PFI) concerned  is also required for making any investment, loan, guarantee or security.

Exceptions:

a. Where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the 60% of its paid-up share capital, free reserves and securities premium account or     100 % of its free reserves and securities premium account, Whichever  is more; and

b. There is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

Inter-Corporate loans/Deposits:

Companies which are  registered under section 12 of the SEBI Act, 1992 and covered under such class or classes of companies as may be prescribed, shall  not take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits.

Rate of Interest:

No loan shall be given under this section 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.

No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.

Register of  Loans, Investments, Guarantee or Security :

Companies/ Transactions Exempted:

This section shall not apply –

a. to a loan made, guarantee given or security provided by a banking company or an  insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;

b. to any acquisition  made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities in respect of its investment and lending activities;

c. to any acquisition made by a company whose principal business is the acquisition of securities;

d. to any acquisition  of shares allotted in pursuance of section 62(1)(a).(Further Issue of Capital)

“business of financing of companies” shall include, with regard to a Non-Banking Financial Company registered with Reserve Bank of India, “business of giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business”.

investment company” means a company whose principal business is the acquisition of shares, debentures or other securities;

“infrastructure facilities” means the facilities specified in Schedule VI.

Penalty:

Companies Act,1956 Vs Companies Act, 2013:

By: M.Kurthalanathan 

Practising Company Secretary

e-mail :mknathanacs@gmail.com

www.mknathanacs.in

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