Inter-Corporate Loans & Investments — Section 186

Section 186 of the Companies Act, 2013 governs a company's power to give loans, provide guarantees or security, and make investments in securities of other bodies corporate. Under Section 186(2), a company cannot, without a prior special resolution passed in a general meeting, give any loan, guarantee or security, or acquire securities, exceeding the higher of (a) 60% of its paid-up share capital, free reserves and securities premium account, or (b) 100% of its free reserves and securities premium account — the aggregate of all such loans, guarantees, securities and investments already made being counted against this limit.

Where the aggregate remains within the above limit, the transaction still requires unanimous consent of all directors present at the Board meeting under Section 186(5), along with prior approval of any public financial institution from which the company has an outstanding term loan (unless the aggregate proposed transaction and existing exposure together stay within the limit and there is no default in repayment). Section 186(7) requires that inter-corporate loans not be given at an interest rate lower than the prevailing yield of government securities of comparable maturity. Section 186(9) requires the company to maintain a register of loans, guarantees, security and investments in Form MBP-2, and Section 186(4) requires disclosure of the full particulars, including the purpose for which the loan/guarantee/security is proposed to be utilised, in the financial statements.

Inter-corporate loans and investments are the loans, the guarantees and the security a company extends to other bodies corporate, and they are regulated by Section 186 of the Companies Act 2013. Under Section 186, a company cannot make a loan or give a guarantee or provide security in excess of the prescribed limits — VERIFY: 60% of its paid-up share capital, free reserves and securities premium, or 100% of its free reserves — without the prior approval of the members by special resolution, and the board's resolution with the details of the transaction is required in every case. The section also prescribes the rate of interest for the loans.

The inter-corporate loan is how group companies move money — the holding company funding a subsidiary, the group treasury lending between entities — and it is one of the most audit-visible transactions in the Act. The compliance is the board resolution, the special resolution where the limit is crossed, the rate of interest, and the disclosure in the financial statements. Each is a box the auditor checks.

The cost of an uncompliant inter-corporate loan is the transaction being questioned in its entirety: the loan made without the resolution, the limit crossed without the special resolution, the interest below the prescribed rate — each a default under Section 186 that can be called out in the audit and the enforcement, with the loan itself at risk of being treated as a violation of the Act.

This service is for companies making or receiving inter-corporate loans, guarantees and security. We structure the transaction within Section 186 — the limits, the board and the special resolutions, the rate of interest — prepare the documentation, manage the disclosures in the financial statements, and review the group's inter-corporate positions so the audit is clean.