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To simplify the functioning and processes of a company, Section 186 of the Companies Act, 2013 has introduced a few modifications in the concept of Inter Corporate Loans and Investments made by the company. This act defines laws by which a company can or cannot give loan, guarantee, and security or make an investment.
When a company provides loan, security or guarantee to another company or any entity is termed as inter-corporate loans. And, when a company invests in any other company in any form is referred as inter-corporate investment.
A firm can provide loans, investment, guarantee or security to another company after taking consent from the board of directors or shareholders. The section 186 defines the laws made regarding loans and investments by companies and specifies rules by which a company can give a loan and to whom it can provide. We are going to know about this section under the Companies Act 2013 in detail in this article.
According to the Companies Act, 2013 investments cannot be made through more than two layers of companies. According to the same, the word investment implies to:
Also, it does not include:
The non-applicability to follow the provisions of section 186(subsection 1) is for the following cases;
The non-applicability to follow these provisions except subsection 1 of the section 186 is for the following cases;
Also, a defaulter company in terms of payment of interest cannot provide loans to any other company.
A company can provide a loan or invest by passing a special resolution in the Annual General Meeting. In this meeting, if all the board members agree for the same, then only the loan/investment can be given.
The company needs to disclose to the directors, accordingly about
And the notice of the general meeting for passing the resolution should stipulate the following;
A company should not provide a loan at a rate less than the yield of the previous one, three, five or ten years whichever is the closest to the tenure of the given loan.
According to section 186, subsection 9, The Companies Act 2013, every company has to maintain a record of the loan given in a register containing all the prescribed details,subsequently. And furthermore,according to subsection 10, the registry should be kept at the registered office for inspection by the concerned department.
As the rule, if any corporation fails to comply with this act has to pay a fine of Rs 25000 to Rs 5 lakhs, and the officer at default has to pay a fine ranging from Rs. 25000 to Rs. 1 lakh consequently.
A Company can provide a loan to an individual or other corporate body under the norms contained in The Companies Act 2013. Sub-section 2, Section 186 specifies that a company can give loan to a person or a body corporate of less than sixty percent of paid up capital share, free reserves and securities premium account or less than hundred per cent of the free reserves and securities premium account, whichever is more.
A company can give loan to partnership firms following the prescribed rules given in the Companies Act 2013. According to the section 185, sub-section 1, the act defines that a company can give loan to body corporate including the LLPs.
According to Section 185 of the Companies Act, 2013, no company can provide a loan to shareholders possessing 2% or more shares of the company.
Companies Act, 2013. The section 185, sub-section 1, specifies that a director or “any other person in which the director is interested” a company cannot give lone to such people, where “any other person in which the director is interested” means;
Several changes were made through section 186, Companies Act 2013, which previously was section 372A, in the Companies Act 1956. When we compare the both, we can see that many provisions were made and simplified. Also, amendments were done according to the latest needs and requirements of companies.
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