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Section 186 | Inter-Corporate Loans, Investments, Guarantees, and Security


Company Law CS Executive Programme

Investments, guarantees and protection,inter-corporate loans, related party transactions An overview

 In the field of inter-corporate loans, acquisitions, guarantees and security under Section 186 and related party transactions under Section 188, the Companies Act, 2013 has incorporated abundant amendments. We will have to refer to the regulations and old provisions when and where to distinguish the purpose and extended scope in order to understand its applicability and substantial coverage allowed by the new legislation. 

What are Inter-Corporate Loans, Investments, Guarantees, and Security – Section 186

Section 372A, under the Companies Act, 1956, deals with Inter-Corporate Loans and Investments. In the growth of industries, Inter Corporate Loans and Investment plays a critical role as it identifies and formulates the flow of funds for the company or associates or other companies in need of those funds. In order to invest in a way that should turn out to be profitable and within the legal structure, every organization must make a plan.

The present law is no longer a provision covering only inter-corporate loans, investments and guarantees; it has now expanded its scope to every other entity to include all loans and investments made by a corporation. The most notable reform to be noted is that the new Act specifies that no more than two layers of investment firms will make inter-corporate investments. As per the regulations:

 A Company shall make investments through not more than two layers of investment companies. However, this shall affect:

 a. A business acquires any other company incorporated in a country outside India if that other company has investment subsidiaries above two layers, as per the law of that country.

 

b. A subsidiary corporation shall have some investment subsidiary for the purpose of meeting, for the time being in force, the specifications of any law or rule or regulation framed under any law.

 Limits & Approvals

 Restrictions

i. A business shall not issue a loan in compliance with this section at an interest rate lower than the prevailing yield of one year, three years, five years or ten years, which is nearest to the tenor of the loan to government protection.

 ii. ii. A company that is in default in repaying or adding any deposits shall not lend, guarantee or provide any protection or make an acquisition until such default subsists.

 Reporting

i. In the financial statement, the corporation shall report to the members the full details of the loans issued, of the investment made or guaranteed or of the security given, and of the reason for which the loan or guarantee or security is intended to be used by the recipient of the loan or guarantee or security.

Recording

Recording of the particulars are dealt with in detail under Rule 12 of the Companies (Meeting of Board and its Powers Rule, 2014)

 i. Every company giving a loan or giving a guarantee or providing security or making an acquisition under this section shall maintain a register in Form MBP 2 and enter the particulars of the loans and guarantees given security provided and acquisition made

 ii. The entries to the register shall be made chronologically in respect of each such transaction within seven days

iii. The register can be maintained electronically or manually

 iv. Entries in the Register shall be authenticated for this reason by the Secretary of the Organization or any other individual approved by the Board.

 V. The register shall be kept at the company's registered office, held indefinitely, and kept in the custody of the secretary of the company or of any other individual approved for that purpose by the Board.

 vi. Any member of the company may be provided with an extract of the register upon payment of the fee as prescribed in the articles of the company. It must not, however, exceed ten rupees per page.

 Penal Provision on Contravention

 If a corporation breaches the provisions of section 186-

 a. The corporation shall be fined, not less than twenty-five thousand, which may be extended to five lakhs and five lakhs.

 b. Any defaulting officer shall be punishable by imprisonment for a period of up to two years and by a fine of not less than twenty-five thousand, which may be extended to one lakh rupee.

 Read More About Section 186 and Section 188, Section 2(76) at our CS Executive Blog Page.

  •  Related Party Transactions – Section 188
  •  Definition of Related Party – Section 2(76)

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