Section 186 Of The Companies Act 2013
Updated: Oct 7, 2022
What is Section 186 of the Companies Act 2013?
Section 186 of the Companies Act, 2013 deals with the Loans and Investments by a Company. Section 186(1) of the Act states that a Company shall invest in not more than two layers of investment companies.
'layer' concerning a holding company means its subsidiary or subsidiaries [explanation (d) of Section 2(87) of the Act]
‘Investment Company’ means a Company whose principal business is
Acquisition or purchase of shares
Acquisition or purchase of debentures
Acquisition or purchase of other securities
Investment Company ‘A’ cannot invest beyond stepping down subsidiary ‘C.’
The provisions of Section 186 (1) shall not affect the following cases:
If a Company acquires any Company incorporated outside India and such Company has Investment Subsidiary beyond two layers as per the law of such country.
A subsidiary Company from having any investment subsidiary to meet the requirement under any law or under any rule or regulation framed under any law for the time being in force.
Non-Applicability of Section 186
Section 186 (except Sub Section 1) of the Companies Act, 2013 does not apply to the following:
Banking companies, Insurance companies, Housing Finance companies, etc.,
Any Company whose main business of acquisition of shares or securities etc.,
A Company acquiring Shares on a Right Issue basis under section 62(1)(a)
Where a loan or guarantee is given or where a company has provided security 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 sub-section (3) of section 186 shall not apply.
Old Act (1956 Act) to the New Act (2013 Act)
The Companies Act 2013 came into force on 12th September 2013 to ease business, streamline the compliance process and resolve various issues faced under the Companies Act 1956.
In the new Act, many sections from the old Act were amended, among which one section 372A, which dealt with Inter Corporate Loan, Investment, Guarantee, and security, was also amended in the concept of 'Loan and Investment by Company. Section 186 of the Companies Act, 2013 provides that inter-corporate investments not to be made through more than two layers of investment companies were not required Section 372A of the erstwhile Companies Act, 1956. The restriction is imposed to check misuse of multiple layers of subsidiaries for diversion of funds/siphoning off funds.
Modifications to Companies Act, 2013 vide Companies (Amendment) Act, 2017
To address the concerns raised in the 2013 Act, the Government of India enacted the Companies (Amendment) Act, 2017 (the 2017 Act), which received the President’s assent on 1st January 2018 and was notified in the Official Gazette on 7th May 2018. The key amendments that were brought about under the 2017 Act were the changes to Sections 185 and 186 of the 2013 Act, which deal with loans to directors
loans to directors and loans and investments by companies and their corresponding rules.
The new act with modification made it easy for the investors/businessman to ease the business process; now, any Company can give a loan to another Company where its Directors, Shareholders/promoters are related subjects to limitations specified therein.
Loan/Guarantee/Security/Investments under Sec-186(2)
Section 186(2) of the Act states that no Company shall directly or indirectly:
give any loan to any person or other body corporate,
give any guarantee or provide security in connection with a loan to any other body corporate or person
and acquire by way of subscription, purchase, or otherwise, the securities of any other body corporate,
exceeding 60% of its paid-up share capital plus free reserves plus securities premium account
or
100% of its free reserves plus securities premium account, whichever is more.
Free reserves mean such reserves which, as per the la