Chapter 2 Directors: Meetings of Board & Its Powers

2.45

Sec 186: Loan & Investment by the company

Why provision is made?
Loans to director and specified person is prohibited as per sec 185. But normal loans and investments to/in 3rd
parties is not prohibited. Thus this section is prepared in order to govern the loans and investment to be made by
company in ordinary course of business.

Applicability
Applicable to all companies except [sec 186(12]:
1. Banking company
2. Insurance company
3. Housing finance company
4. A company formed with objective of financing infrastructural activities
5. The NBFC (Under chapter IIIB of reserve bank of India Act, 1934) whose principal business is the acquisition
of the shares, stock, debentures or other securities. The exemption is only for investment & lending activity
& not for guarantee or security.
6. Company of whom main business is acquisition of securities.
7. Government Company engaged in defence production or company who takes approval of CG/SG as the case
may be.

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 Chapter 2 Directors: Meetings of Board & Its Powers

Bare Text Text for Understanding

186(1): Restriction on layers of investment subsidiaries / normal subsidiaries
Without prejudice to the provisions contained in this 1. The company can make maximum 2 layers of
2.46 Act, a company shall unless otherwise prescribed, investment companies as investment subsidiaries.
make investment through not more than two layers of 2. However the company can create any layer of
subsidiaries if those are not investment companies.
investment companies.
Provided that the provisions of this sub-section shall not affect: However, following are exempted from
(i) a company from acquiring any other company incorporated in a above provision:
a. A company can create any number
country outside India if such other company has investment
of layers of subsidiaries of foreign
subsidiaries beyond two layers as per the laws of such country; investment companies.
(ii) a subsidiary company from having any investment subsidiary for the b. A company can create any number
purposes of meeting the requirements under any law or under any of layers of subsidiaries of
rule or regulation framed under any law for the time being in force. investment company if it is
requirement of any specific law.
186(2): Restriction on making loans and investments
No company shall directly or indirectly — The existing (Loan + Investment +
(i) give any loan to any person or other body corporate; Guarantee + Security) + Proposed
(ii) give any guarantee or provide security in connection with a loan to any (Loan / Investment / Guarantee /
Security) together shall not exceeds
other body corporate or person; and
higher of:
(iii) acquire by way of subscription, purchase or otherwise, the securities a. 60% of (Paid-up Capital + Free
of any other body corporate, Reserve + Securities Premium),
exceeding sixty per cent. of its paid-up share capital, free reserves and or
securities premium account or one hundred per cent. of its free reserves b. 100% (Free Reserve + Securities
and securities premium account, whichever is more.
Premium).
Investment in this case means
Explanation.—For the purposes of this sub-section, the word "person"
subscription, purchase in securities of
does not include any individual who is in the employment of the company any other body corporate.
186(3): Loan, Guarantee, Security or Investment in addition to above limit.
Co Act, 2017: 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 sub-section (2), 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:
Provided that where a loan or guarantee is given or where a security has been provided by a company to its wholly owned
subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription,
purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section
shall not apply:
Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the
financial statement as provided under sub-section (4).
186(4): Disclosure to General Meeting
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.
186(5): BOD-UR for any Loan, Investment, Guarantee or security.
No investment shall be made or loan or 1. The Company shall obtain the BOD – UR for any amount of
guarantee or security given by the company loan / investment / guarantee / security. And such approval is
unless the resolution sanctioning it is passed required for every transaction. Which means all the BOD
present in the meeting shall vote in favour of resolution
at a meeting of the Board with the consent of
without any vote against it. i.e. even Rs. 1 loan, investment,

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 Chapter 2 Directors: Meetings of Board & Its Powers

all the directors present at the meeting and the

guarantee, security will require BOD-UR.
prior approval of the public financial 2. In addition to this if the company has took the loan from any
institution concerned where any term loan is Public Financial Institution then the approval of such PFI is
required for any loan, investment, guarantee, security.
subsisting, is obtained.
Provided that prior approval of a public financial The approval of PFI will be required only if any of the
2.47
institution shall not be required where the aggregate following conditions are fulfilled.
of the loans and investments so far made, the amount a. The default is made in repayment of loan of such PFI;
&
for which guarantee or security so far provided to or
b. The existing (Loan + Investment + Guarantee +
in all other bodies corporate, along with the Security) + Proposed (Loan / Investment / Guarantee
investments, loans, guarantee or security proposed / Security) together exceeds higher of:
to be made or given does not exceed the limit as i. 60% of (Paid-up Capital + Free Reserve +
specified in sub-section (2), and there is no default in Securities Premium), or
repayment of loan instalments or payment of interest
ii. 100% (Free Reserve + Securities Premium).
Compliance of any one of the above condition will require
thereon as per the terms and conditions of such loan
PFI’s approval.
to the public financial institution.
186(6): Restriction on Stock Broking Companies, etc as Per SEBI
No company, which is registered under section 12 of the 1. The companies registered u/s 12 of SEBI Act such
Securities and Exchange Board of India Act, 1992 Stock Brokers, Sub Brokers, Share Transfer Agent,
and covered under such class or classes of companies as etc shall not take inter corporate loan or deposit
exceeding the limit prescribed by SEBI / CG in this
may be prescribed, shall take inter-corporate loan or
behalf.
deposits exceeding the prescribed limit and such 2. In addition to this companies mentioned above shall
company shall furnish in its financial statement the details furnish details of the same in the financial
of the loan or deposits. statement.
186(7): Restriction on Rate of interest on loan.
No loan shall be given under this section at a The interest rate on such loan made in sec 186 shall be more than
rate of interest lower than the prevailing yield or equal to prevailing yield rate of 1 year, 3 year, 5 year or 10 year
of one year, three year, five year or ten year Government security, whichever is closest to tenure of loan.
The intention behind the provision is that such loan availed from
Government Security closest to the tenor of
company shall not be used to invest in Government Security to
the loan. earn excess income without any efforts.
186(8): Restriction in case of Default in Repayment of Deposit.
No company which is in default in the repayment of If the company is under default for repayment of the
any deposits accepted before or after the deposit u/s 76 then such company cannot give loan /
commencement of this Act or in payment of interest investment / guarantee / security in any case.
But if the default is cured and the deposits are paid then
thereon, shall give any loan or give any guarantee or
company can make the Loan / Investment / Guarantee /
provide any security or make an acquisition till such Security.
default is subsisting.
186(9): Register of Loans and investment.
Every company giving loan or giving a guarantee or providing security or The company shall maintain the
making an acquisition under this section shall keep a register which shall register of loan / investment /
contain such particulars and shall be maintained in such manner as may be guarantee / security in the manner
stated u/s 187 [discussed
prescribed.
afterwards].
Module Updating
According to Rule 12 of the Companies (Meetings of Board and its Powers) Rules, 2014:
(a) Every company giving loan or giving guarantee or providing security or making an acquisition of securities
shall, from the date of its incorporation, maintain a register in Form MBP 2 and enter therein separately,
the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid.
(b) The entries in the register shall be made chronologically in respect of each such transaction within 7 days
of making such loan or giving guarantee or providing security or making acquisition.

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 Chapter 2 Directors: Meetings of Board & Its Powers

(c) The register shall be kept at the registered office of the company and the register shall be preserved
permanently and shall be kept in the custody of the company secretary of the company or any other person
authorised by the Board for the purpose.
(d) The entries in the register (either manual or electronic) shall be authenticated by the company secretary
2.48 of the company or by any other person authorised by the Board for the purpose.
(e) The register can be maintained either manually or in electronic mode.
(f) The extracts from such register maintained may be furnished to any member of the company on payment
of such fee as may be prescribed in the Articles of the company which shall not exceed 10 rupees for each
page.
187(10): Inspection of Register of loans and investment.
The register referred to in sub-section (9) shall be kept at the registered office of the company and —
(a) shall be open to inspection at such office; and
(b) extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the
company on payment of such fees as may be prescribed.
186(11): Non applicability of section.
Co Act 2017: Nothing contained in this section, except sub-section (1), shall apply—
(a) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or
an insurance company, or a housing finance company in the ordinary course of its business, or a company established
with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural
facilities;
(b) to any investment—
(i) made by an investment company;
(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in
pursuance of rights issues made by a body corporate;
(iii) made, in respect of investment or lending activities, by a non-banking financial company registered under
Chapter
III-B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.";
(iv) in the Explanation, in clause (a), after the words "other securities" the following shall be inserted, namely:
"and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other
securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty
per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as
a proportion of its gross income.".
186(12): Power of CG to make rules.
The Central Government may make rules for the purposes of this section.
186(13): Contravention & Consequences
If a company contravenes the provisions of this section, the company In case of contravention of sec 186 by
shall be punishable with fine which shall not be less than twenty-five company the consequences are as follows:
thousand rupees but which may extend to five lakh rupees and every a. Company shall be punishable with fine
of Rs. 25000 to Rs. 5 lacs &
officer of the company who is in default shall be punishable with
b. Every officer in default shall be
imprisonment for a term which may extend to two years and with fine punishable:
which shall not be less than twenty-five thousand rupees but which i. Imprisonment upto 2 yrs; &
may extend to one lakh rupees. ii. Fine of Rs. 25000 – Rs. 1 lac.
Explanation to section
Explanation: For the purposes of this section:
(a) the expression “investment company” means a company whose principal business is the acquisition of shares,
debentures or other securities;
(b) the expression “infrastructure facilities” means the facilities specified in Schedule VI.

Chart for Understanding

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 Chapter 2 Directors: Meetings of Board & Its Powers

2.49

Approval from financial institution Required only if:

1. there is default in repayment of load or
2. such loan or investment to be granted exceeds higher of:
a. 60% of (paid up capital + free reserves + securities premium)
b. 100% of (free reserve + securities premium)
A company having made default in repayment of any deposits accepted before or after the
commencement of this act or in payment of interest thereon shall not give any loan or give any
guarantee or provide any security or make any acquisition till such default is subsisting.

-= BOMBERS =-
1. What do you mean by “Infrastructure facilities”?
Ans: Schedule VI defines the Infrastructure Facilities as follows:
(1) Transportation (including inter modal transportation)
(2) Agriculture
(3) Water management
(4) Telecommunication
(5) Industrial, commercial and social development and maintenance
(6) Power
(7) Petroleum and natural gas
(8) Housing
(9) Other miscellaneous facilities/services

2. What is procedure for entering into loan and investment?

Ans:
1. Take prior approval of members by special resolution if the specified limit is exceeded,
2. File return with ROC in form MGT 14 with copy of special resolution,

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 Chapter 2 Directors: Meetings of Board & Its Powers

3. Take prior approval of Public financial institutions in case any term loan is subsisting and there is any default
in repayment of loans and/or payment of interest or if the total amount of specified transactions is exceeding
limit as specified above, [sec 186(5)],
4. Pass board resolution in a meeting with a approval of all directors (i.e. unanimous resolution) present in a
2.50 meeting, [sec186(5)],
5. File return with ROC in form MGT 14 with copy of board resolution,
6. Disclosure to be made in the financial statements of the full particulars of the loan 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,
7. Particulars of loans/guarantees/securities/investments to be entered into the register maintained for this
purpose at the registered office, which shall be open for inspection and extracts may be taken by members
on payment of prescribed fee. [Sec 186(9) & (10)]

3. What do you mean by free reserves?

Ans: Free reserve means:
Examples of Free Reserves:
1. Name of the Account to be included or not Securities Premium: Yes
2. Share application money: No
3. Capital Redemption Reserve: No
4. Sinking Fund: No
5. Fixed Asset Revaluation Reserve: No
6. Dividend Equalisation Reserve: Yes

4. Whether approval of only PFI is required? or approval of all FI is required from whom the loan is obtained.
What do mean by PFI in such case?
Ans: In the given section the approval of only PFI is required in case of default to repay the loan as the section
specifies the same. The section does not specify the approval of normal financial institution in case of default
to repay the loan. Not it will not be logical to say that the approval of the normal financial institution is at all
not required in any case. Because author have only said that section does not specify the same. Thus it will be
depending on the agreement between the normal FI and the company that whether the approval will be
required in case of default in repayment of the loan.
For the purpose of the section PFI are defined in sec 2(72) as follows:
“public financial institution” means—
(i) the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act,
1956;
(ii) the Infrastructure Development Finance Company Limited, referred to in clause (vi) of sub-section (1) of
section 4A of the Companies Act, 1956 so repealed under section 465 of this Act;
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(iv) institutions notified by the Central Government under sub-section (2) of section 4A of the Companies
Act, 1956 so repealed under section 465 of this Act;
(v) such other institution as may be notified by the Central Government in consultation with the Reserve
Bank of India:
Provided that no institution shall be so notified unless—
(A) it has been established or constituted by or under any Central or State Act; or
(B) not less than fifty-one per cent. of the paid-up share capital is held or controlled by the Central
Government or by any State Government or Governments or partly by the Central Government and
partly by one or more State Governments;
Resolution
POWER TO INVEST FUNDS OF THE COMPANY
“RESOLVED THAT pursuant to section 179 (3) (e) of the Companies Act, 2013, Sri …………….. Director of the
Company be and is hereby authorised to invest the Funds of the Company in shares and securities of joint stock
Companies, shares and securities of banks, financial institutions and public sector undertaking, units of mutual
funds bonds including bonds issued by Government, RBI Bonds, deposits with Bank and Companies and such
other investments subject to such terms and conditions and for such period with or without interest as he may
deem fit and proper with a power to sell, very and dispose of such investments at his discretion, provided

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 Chapter 2 Directors: Meetings of Board & Its Powers

however that total amount of outstanding investments shall not exceed a sum of Rupees --------------- at any
point of time.

POWER TO MAKE LOANS

“RESOLVED THAT pursuant to section 179(3)(f) of the Companies Act, 2013 Sri …………. Director of the Company
be and is hereby authorised to make loans and or to give guarantees or provide securities in respect of any loan 2.51
or otherwise subject to such terms and conditions and rate of interest and for such period to such companies,
firms, individuals or other persons as he may deem fit and proper from time to time, provided however that
total amount of outstanding loans, guarantees given and securities provided shall not exceed a sum of rupees
---------------- at any point of time.

Contravention & Cosequences

For Company For Officer in Default

Penalty of Penalty of: Rs. 25,000 - Rs. 1,00,000

Rs. 25,000 - Rs. 5,00,000 & Imprisonment Up to 2 yr.

Sec 187: Investment of the company is to be held in its own Name

Why provision is made?
The intention of creation of section is that the company shall hold all its investment in its own name and no other
person including the director of the company shall take the advantage of the same. If the company holds the
investment in the name of other person the same can be misused and sold without any benefit passed on to the
company. And still if the company wants to hold the investment in the name of the other person then how it shall
be held shall be decided with the condition and the restrictions. This section provides for such conditions and
restriction also.
Applicability
Applicable to all companies
Bare Text Vs Text for Understanding & Writing in Exam
187(1): Investments to be held in own name.
All investments made or held by a company in any According to section 187(1) A company should hold all the
property, security or other asset shall be made and investments in:
held by it in its own name: a. Property,
b. Security, and
Provided that the company may hold any shares in its
c. Other assets,
subsidiary company in the name of any nominee or In its own name,
nominees of the company, if it is necessary to do so, But it can hold shares in its subsidiary by name of its
to ensure that the number of members of the nominee / nominees if it is necessary to maintain the
subsidiary company is not reduced below the statutory limit of the holdings in the subsidiary.
statutory limit.
187(2): Non applicability of section
Nothing in this section shall be deemed to prevent a The section is not applicable if:
company— a. if company deposits the shares or debentures or
(a) from depositing with a bank, being the bankers securities with the banker of the company for
collection of dividend or any income then section is not
of the company, any shares or securities for the
applicable.
collection of any dividend or interest payable
thereon; or
(b) from depositing with, or transferring to, or holding in the name of, the b. The company can hold the shares
State Bank of India or a scheduled bank, being the bankers of the and the securities in the name of
SBI or any scheduled commercial

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