Compliances

Inter Corporate Loans and Investments According to Section 186 of the Companies Act 2013

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.

What is Inter Corporate Loans and 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.

What is the Applicability for Inter Corporate Loans?

According to the Companies Act, 2013^[1] investments cannot be made through more than two layers of companies. According to the same, the word investment implies to:

• Subscribing or purchasing of shares
• Subscribing or obtaining of share warrants                                
• Subscribing or purchasing of debt securities 

Also, it does not include:

• The making of loans or advances
• Financial transactions like lease purchase of receivables, or any credit facilities.

What is the Non-Applicability for Inter-Corporate Loans?

The non-applicability to follow the provisions of section 186(subsection 1) is for the following cases;

• Companies integrated outside India
• Companies having investment subsidiaries past two layers
• Private and public companies authorized by IFSC
• And a subsidiary company which has its investment subsidiary

The non-applicability to follow these provisions except subsection 1 of the section 186 is for the following cases;

• A company who has any loan, guarantee, security or investment taken from, any banking firm, Insurance firm, Any housing finance company, any company engaged in financing companies

Also, a defaulter company in terms of payment of interest cannot provide loans to any other company.

All about Approval from Members

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.

What are the Requirements for the Disclosure of Particulars of Loan?

The company needs to disclose to the directors, accordingly about

• The full details of the loan, investment
• Security or guarantee given
• And, the purpose of the demand for the loan by the recipient

And the notice of the general meeting for passing the resolution should stipulate the following;

• The purpose of the loan/security/guarantee/investment
• The details of the recipient
• Source of funding
• The limit of the loan amount which can be given
• Other specified details

What is the Rate of Interest for Inter-Corporate Loans?

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.

What is the Process of Keeping a Record of Inter-Corporate Loans?

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.

Fine for the Violation of Section 186

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.

Can a Company give a Loan to an Individual?

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.

Can a Company give Loan to LLPs?

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.

Can a Private Limited Company give Loan to Shareholders?

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.

Can a Company give Loan to another Private Limited 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;

• A firm in which the director or any of his relative is a partner
• Any private company where the director is a director or member
• A body corporate where the director has not less than 25% of the voting rights at a general meeting
• A director of a lending company, any holding company or any other partner

Disclaimer

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.

Read our article: Legal Compliance for E-Commerce Business in India