NBFC is basically a financial institution carrying out finance activities/business as per the g...
In this article, we will be talking about the various provisions of the Companies Act, 2013 related to NBFC and Housing Finance Company, its filing procedure and exemptions, along with the amendments.
Section 186 of the Companies Act, 2013 talks about the loan and investment provisions by a company.
To understand the scope of Section 186 of the Companies Act, 2013, let us first understand the meaning of investment.
According to Section 186(1) of the Act, the following will be considered as an investment with a few exceptions:
To resolve the rise in concerns after the 2013 Act, an amendment in the year 2017 was made to incorporate the missing provisions. The MCA (Ministry of Corporate affairs) constituted a CLC (Companies Law Committee) to bring in the changes in the Companies Act, 2013. Therefore, the Companies (Amendment) Act, 2017 was enacted after taking into consideration the suggestions made by the CLC.
Amongst all the changes made in the Act, one of the significant changes was brought in Sections 186 of the 2013 Act.
Certain relaxations have been introduced in Section 186 of the 2013 Act.
Section 186 (2)
It states that no company can (directly or indirectly) give any:
Exceeding 60% of its paid-up share capital along with free reserves & securities premium account, or 100% of its free reserve and securities premium account, whichever is more.
The Board can only give a loan, guarantee or provide security & make an investment under section 186(2) by passing a board resolution at the company’s meeting.
What are the requirements under Section 186?
The rate of interest should be more than the prevailing revenue of Government Security closest to the loan period.
When a company fails to repay the deposits or interest on the due date, then the company can make a loan, investments, security or guarantee, only after the default is paid.
The company must disclose all the particulars of investments made; a loan is given, a guarantee or security is given, and the purpose to be utilized by the recipient; in its financial statement.
Section 186(11): Non Applicability of Section 186
The provisions of Section 186 of the Companies Act, 2013 is not applicable, as stated in section 186(11), where:
In the ordinary course of business of the companies instituted to engage in the financial-industrial enterprises or infrastructural facilities.
“The investment company” means a company that deals or deems to deal in the business of acquiring shares, debentures or other securities. If the company’s assets are in the form of shares, debentures or other securities for not less than 50% of its total assets or if its income is from the investment business constitutes not less than 50% of its gross income.
In the next segment, we will discuss the NBFC, and the Housing Finance Company is exempted from the Chapter IIIB of the Reserve Bank of India Act, 1934.
RBI has rescinded certain exemptions approved for HFCs (Housing Finance Companies) and bringing them to the same level as the NBFCs (Non-Banking Financial Companies). This has happened due to the new development in Finance Act, 2019, that allows RBI to regulate HFCs (Housing Finance Companies).
RBI has cleared that NBFC and Housing Finance Company are exempted from the Chapter IIIB of the Reserve Bank of India Act, 1934. As of 13th August 2019, RBI has announced that the housing finance companies will be treated as a category of non-banks.
The 2017 Amendment Act is by far the most significant change by the MCA in consultation with CLC. The changes in Section 186 of the 2013 Act were needed regarding NBFC and Housing Finance Company. Along with these amendments, RBI also announced the withdrawal of certain exemptions from the Housing Finance Companies and declared that it would be treated as a category of non – banks.
Read our article:Special Liquidity Scheme for NBFCs and HFCs through SPV