Loans and Investments by Company under Section 186 of the Companies Act, 2013

Loans and Investments by Company under Section 186 of the Companies Act, 2013

Section 186 governs how much a company can lend to, invest in, or guarantee on behalf of other bodies corporate — essentially regulating inter-corporate financial exposure. It is a critical provision for group companies, holding-subsidiary structures, and any business that regularly extends credit or guarantees to related entities.

Without obtaining prior approval by special resolution, a company cannot, directly or indirectly, give any loan, guarantee, security, or make an investment exceeding the higher of: 60% of its paid-up share capital, free reserves and securities premium account; or 100% of its free reserves and securities premium account. Beyond this limit, prior approval by special resolution of shareholders is mandatory.

Every loan, guarantee, security or investment (even within the general limit) requires the unanimous approval of all directors present at the board meeting, and prior approval from any public financial institution if the company has a term loan outstanding with it (unless the aggregate of the proposed transaction and existing loans does not exceed the sanctioned limit and there is no default in repayment).

A company cannot make investment through more than two layers of investment companies, subject to exceptions such as acquiring a foreign company with more than two layers as per the laws of that host country, or where the company is required to comply with the layer restriction under any other statute (like a banking or insurance company).

No company can give a loan under this section at a rate of interest lower than the prevailing yield of 1-year, 3-year, 5-year or 10-year government security closest to the tenure of the loan.

•      Loans, guarantees or securities given by a banking company, insurance company, housing finance company, or a company established for financing industrial enterprises/infrastructure, in the ordinary course of business.

•      Investment made by a holding company in its wholly-owned subsidiary, or a subsidiary investing in its holding company's securities in specified circumstances.

•      Loans/guarantees given by a company engaged in the business of financing companies, or of providing infrastructural facilities, subject to conditions.

•      Tracking only current-year transactions and forgetting to include the cumulative outstanding balance from prior years when assessing the threshold.

•      Assuming board approval alone is sufficient even when the cumulative limit has been crossed, without seeking shareholder approval.

•      Structuring investments through more than two layers of investment companies without checking for a valid exemption.

•      Charging an interest rate below the prescribed government security yield without realising this breaches Section 186.

Q1. Does Section 186 apply to loans given by a company to its own employees?

No, Section 186 governs loans, guarantees, securities and investments concerning bodies corporate, not loans to individual employees, which are governed by other provisions like Section 185 (for director-related loans) or general company policy.

Q2. Is board approval required even within the general threshold?

Yes, unanimous board approval is always required for any transaction under Section 186, regardless of whether the amount is within or beyond the general threshold; shareholder approval by special resolution is additionally required only when the threshold is exceeded.

Q3. Can a private company be exempted from certain Section 186 requirements?

Certain private companies enjoy specific exemptions notified by the MCA, such as relaxation from the interest rate floor in specified circumstances, but the core restrictions and approval requirements largely continue to apply.

Q4. What is a 'layer' in the two-layer investment restriction?

A layer refers to a subsidiary company; the restriction prevents a company from investing through a chain of more than two subsidiary investment companies, aimed at preventing round-tripping and opaque corporate structures.

Q5. Does Section 186 apply to investments in mutual funds or listed securities for treasury management?

Broadly, investments in securities of 'bodies corporate' are covered; companies should assess whether specific instruments (like mutual fund units, which are not always classified the same way as direct equity/debt of a body corporate) fall within scope, and seek professional advice for treasury investment structuring.

Q6. Is prior approval of a public financial institution always required for a Section 186 transaction?

No, it is required only if the company has an outstanding term loan from that institution and the proposed transaction, combined with existing loans, exceeds the sanctioned limit, or if there is an existing default in repayment.

Q7. Can a company give an interest-free loan to another body corporate?

Generally no, since Section 186(7) mandates a minimum interest rate benchmarked to government securities, except for specific exempted categories like loans to wholly-owned subsidiaries in permitted circumstances.

Section 186 is central to how corporate groups in India structure intercompany funding and investment. Finance teams should track cumulative outstanding loans, guarantees and investments against the free reserves-based threshold in real time, since crossing it without the required special resolution is a common and easily avoidable compliance lapse.