Applicability
of Section:
1.
The Sub Section (1) of Section
186 is applicable on all Companies either private Companies or public
Companies.
Non-Applicability of Section:
1.
The Section 186 (Except Section
(186 (1)) of the Companies Act, 2013 does not apply in following:
(a)
Banking Company, Insurance
Company, Housing Finance Company etc.
(b)
Any company whose main business
of acquisition of shares or securities etc.
The intention of
sub section 11 is clear that if the companies are involved in banking,
insurance, funding, facilitating of loan etc., In that case, this section
cannot be applicable.
Restriction on entering into specified transactions
through layers of investment companies:
It has been
provided that unless otherwise prescribed, investment
cannot be made through more than two layers of investment companies.
However, this restriction will not be applicable if the applicable law so
permits. Further, investment can be made through more than two layers of
companies other than investment companies
(e.g. manufacturing companies). This provision is prospective in nature and
will not apply to existing investments made by companies through more than two
layers of investment companies. Giving loan, providing guarantee or security
beyond two layers of investment companies is permitted.
Types of Specified Transactions covered under this
section:
Section 186
covers 3 types of specified transactions entered by a company directly or
indirectly:
(a)
Loans to any person or other
body corporate;
(b)
Guarantee or security given in
connection with a loan to any other body corporate or person; and
(c)
Acquisition by way of
subscription, purchase or otherwise, the securities of any other body
corporate.
Ceiling on the specified transactions that Board of
Directors of a company can enter:
Board of
Directors of a company can approve transactions as specified above if the
aggregate of all such existing and proposed transactions does not exceed higher of the following two limits:
(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.
What if ceiling of the specified transactions
exceeds above limit?
Prior approval of shareholders by way of special
resolution is required in case the above limit is
exceeded. However, as per Rule 11 of Companies (Meetings of Board and its
powers) Rules 2014 this will not be applicable in case of specified
transactions entered by a holding company with its wholly owned subsidiary
company or to a loan or guarantee given or security provided by a company to a
joint venture company.
Procedure for entering into specified transactions
1.
Take prior approval of members
by special resolution in case the ceiling exceeds specified limits as above.
2.
File return with ROC in Form
MGT.14 with copy of special resolution.
3.
Take prior approval of public
financial institutions in case any term loan is subsisting and there is any
default in repayment of loans and/or payment of interest or if the total amount
of specified transactions is exceeding limit as specified above.
4.
Pass Board resolution in a
meeting with the approval of all directors’ present in the meeting.
5.
File return with ROC in Form
MGT.14 with copy of Board resolution.
6.
Disclosure to be made in the
financial statements of the full particulars of the loans given, investment
made or guarantee given or security provided and the purpose for which the loan
or guarantee or security is proposed to be utilised by the recipient of the
loan or guarantee or security.
Register (u/s 186 (9 and 10)):
The Company 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.
Penalty:
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 lakhs.
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 fine which shall not be less than Rs. 25000/-
but which may extend to Rs. 1 lakh.
