Applicability of Section 186 of Companies Act, 2013

 1. Applicability of Section

A) The Sub Section (1) of Section 186 is applicable on all Companies either private Companies or public Companies.

B) Considering the Sub Section (11) of Section 186 of the Act, whole section except sub section (1) shall be applicable on Private Company as well as Public company also.

2. Non Applicability of Section

Sec 186(11) except  Subsection 1

(a) a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of

providing infrastructural facilities;

(b) Any company whose principal business of acquisition of shares or securities etc

Important Amendment: By Company (Removal of Difficulty) Order, 2015

Sec 186(11)(b)(iv ) Acquisition made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business.”. 

Reason of Amendment:  in clause (b) of sub-section (11) of section 186, in the absence of provisions for exemption to a banking company or an insurance company or a housing finance company making acquisition of securities in its ordinary course of business, a difficulty has arisen that such companies cannot make any acquisition of securities in their ordinary course of business; 

3. Meaning of Person used in the Section:

Word ‘Person’ has not been defined in the Act. Section 2(42) of General Clauses Act 1897 provides that ‘Person’ shall include any company, association or body of individuals, whether incorporated or not.

Whether loans to employees are also covered under the Section?

Ref: CAclubIndia
Section 186 is applicable to loans to ‘any person’ or other body corporate. ‘Any person’ will include employees also. Hence loans to employees will also be covered under the Section. This has created practical difficulty in implementation and MCA is expected to come out with some relief in such cases.

4-      Meaning of layers

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries; (Explanation (d) of Section 2 (87))

5- Investment (u/s 186 (1))

It means a company may not make investment its money more than Two Layer. The limit has been fixed. It is showing a good sign for transparency.

6-      Investment not affects (Proviso of section 186(1))

The provisions of Section 186 (1) shall not be make compulsion on following cases:- 

  

1- A company acquires any company which is incorporated outside India. Such company has Investment Subsidiary beyond Two layers as per the law of host country.

2- A subsidiary company from having any investment subsidiary for the purpose of meeting of the requirement under any law framed under any law for the time being in force.

7-      Limits for Investment and Guarantee (u/s 186(2) )

The Limit is fixed in the Section 186(2), that 60% of Paid up capital + Free Reserve + Security Premium or 100% of Free Reserve + Security Premium (whichever is More). In this Section, the company cannot give loan, guarantee or provide any security or acquisition as per fixed limit. This sub section restricts within limit.

8-      Approvals for Investment and Guarantee etc (u/s 186 (3))

The Sub section (2) of Section 186 makes restriction, but Section 186(3), gives power to the company, that it may  give loan, guarantee or provide any security or acquisition beyond the limit but before taking prior approval from Shareholder in the General Meeting.

It means once we need to take approval from Shareholder in the General Meeting, thereafter we may make investment beyond the limit.

9. Whether the Board can delegate its powers under the Section?

 Section 179(3) authorizes the Board to delegate its powers to enter into above specified transactions to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office. However, Section 186 requires consent of all directors present in the meeting for approving such transactions. There seems to be a conflict between Section 186 and Section 173 on this issue. However, applying the principle of harmonious construction it can be said that Board can delegate its powers with the consent of all directors present in the meeting.

10-     Approvals of  Board and Public Financial Institutional u/s 186 (5))

The company must take 100% consent from Board to give loan and guarantee and provided security. In case of Company has already taken loan etc from any financial institutions, banks etc. Then, it is mandatory to take prior approval also from public Financial Institution, banks etc.

The approval from Public Financial Institution shall not be required where the company has not been make default to pay interest and comply the limits and provisions of section (186 (2))

11-    Maintaining Register (u/s 186 (9 and 10))

The Company shall must maintain a Register under this section and it shall be kept at the Registered office of the Company which shall be prescribed.

This register shall be opened for inspection and in case of any member, if demand its extract, the company shall provide them as per prescribed fee.

12- What is the Penalty Prescribed in the Section?

For Company:-

If company contravenes this provision, the company shall be penalized with fine which shall not be less than Rs. 25000/- but which may extend to Rs. 5 lacs.

For Officers:-

Every officer of the Company who is default shall be punishable with imprisonment for a term which may extend to Two Years and find which shall not be less than Rs. 25000/- but which  may extend to Rs. 5 lacs.

Comment for any other Clarification:

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Thanks & Regards

RAVI GARG (CS)     

91-7838204665, 

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