Understanding Section 186 of the Companies Act, 2013: Loans, Investments, Guarantees, and Securities The Companies Act, 2013

Understanding Section 186 of the Companies Act, 2013: Loans, Investments, Guarantees, and Securities The Companies Act, 2013 governs corporate affairs in India and has a dedicated provision—Section 186—that regulates how companies deal with loans, investments, guarantees, and securities. This section is a key control mechanism, ensuring companies do not misuse their financial resources or indulge in risky financial behavior without proper transparency and shareholder knowledge.
Let’s break down Section 186 in a simplified and practical manner.

1. Objective of Section 186

Section 186 aims to regulate:
Loans made by a company.
Investment in other bodies corporate.
Giving guarantees or providing security in connection with a loan.
Ensuring transparency, accountability, and checks on inter-corporate financial transactions.

2. Applicability
Section 186 is applicable to all companies, including private companies and foreign companies operating in India, except:
Banking companies,
Insurance companies,
Housing finance companies, and
Companies whose principal business is the acquisition of securities.
These exceptions apply only if the transactions are in the ordinary course of their business.

3. Key Provisions of Section 186
A. Ceiling on Loans and Investments (Sub-section 2)
A company cannot:
Give loans,
Provide guarantees or securities, or
Make investments in other companies,
exceeding 60% of its paid-up share capital, free reserves and securities premium account, or
100% of its free reserves and securities premium account,
whichever is higher, unless it passes a special resolution in a general meeting.

✅ Note: Prior approval via board resolution is always required, and in certain cases, approval from shareholders too.

B. Approval Requirements
Board Resolution with consent of all directors present is mandatory. If the limit specified under Section 186(2) is crossed, special resolution is required in a general meeting. Disclosure in financial statements of the full particulars of such transactions is compulsory. Prior approval of public financial institutions is required if term loans are subsisting.

C. Interest Rate (Sub-section 7)
If a company gives any loan, it should not charge less than the prevailing yield of one year, three year, five year or ten year government security, closest to the tenure of the loan.

D. Restrictions (Sub-section 1)
A company shall not make investments through more than two layers of investment companies (to prevent money laundering or diversion). However, there are exemptions, such as: If the investment is in a wholly-owned subsidiary, Or a wholly-owned investment subsidiary.

4. Exemptions from Section 186
Section 186 does not apply to: Loan or guarantee or security given by banking/insurance/ a housing finance companies in ordinary course of business. where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section (3) shall not apply
5. Penal Provisions
Non-compliance with Section 186 can lead to penalties: the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

6. Practical Implications
Section 186 brings a balance between operational freedom and financial discipline. It: Ensures shareholders are aware of large financial transactions. Prevents misuse of company funds for unrelated ventures. Encourages good governance and strategic financial planning.