The Companies Act 2013 is a comprehensive legislation that governs the functioning of companies in India. Section 186 of the Act is one of the important provisions that deal with loans, investments, guarantees, and security given by a company. In this article, we will discuss in detail the provisions of Section 186 of the Companies Act 2013, its applicability, and the important aspects that companies should keep in mind while complying with the provisions of this section.
What is Section 186 of the Companies Act 2013?
Section 186 of the Companies Act 2013 deals with the borrowing powers of a company, restrictions on investments, loans, and guarantees given by a company, and the security provided by the company for such loans, investments, or guarantees. The section aims to prevent the misuse of funds by companies and to protect the interests of the shareholders and creditors of the company.
Applicability of Section 186:
Section 186 of the Companies Act 2013 applies to all companies, including private companies, public companies, and government companies. However, certain provisions of the section do not apply to certain classes of companies, such as banking companies, non-banking finance companies, and housing finance companies.
Important Provisions of Section 186:
- Restrictions on Investments: As per Section 186(1), a company cannot make an investment in any other company or provide a loan or guarantee for any other company unless it meets certain conditions. The investment, loan, or guarantee should be within the borrowing limit of the company, and the company should have the approval of the Board of Directors for such investment, loan, or guarantee.
- Prior Approval of Shareholders: As per Section 186(2), any investment, loan, or guarantee that exceeds the prescribed limits or amounts requires prior approval of the shareholders of the company by way of a special resolution.
- Limits on Investments: As per Section 186(3), the total investment made by a company, including its subsidiaries, in any other company or body corporate should not exceed 60% of the company’s paid-up share capital, free reserves, and securities premium account. However, the limit can be increased up to 100% with the prior approval of the shareholders.
- Limits on Loans and Guarantees: As per Section 186(4), the total amount of loans and guarantees provided by a company to any other company or body corporate should not exceed 100% of the company’s paid-up share capital, free reserves, and securities premium account. However, the limit can be increased up to 200% with the prior approval of the shareholders.
- Security for Loans and Guarantees: As per Section 186(5), if a company provides a loan or guarantee to any other company or body corporate, it should take adequate security or provide adequate security for such loans or guarantees.
- Disclosure Requirements: As per Section 186(6), any investment, loan, or guarantee made by a company to any other company or body corporate should be disclosed in the financial statements of the company.
Penalties for Non-Compliance:
Non-compliance with the provisions of Section 186 of the Companies Act 2013 can attract penalties, including fines and imprisonment for the officers of the company. Any investment, loan, or guarantee made by the company in violation of the provisions of Section 186 can be declared void by the company law tribunal.
Conclusion:
Section 186 of the Companies Act 2013 is an important provision that aims to prevent the misuse of funds by companies and to protect the interests of the shareholders and creditors of the company.
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Frequently Asked Questions:
Q: What is Section 186 of the Companies Act 2013?
A: Section 186 of the Companies Act 2013 deals with investments made by a company in other companies or entities.
Q: What is the objective of Section 186 of the Companies Act 2013?
A: The objective of Section 186 is to regulate the investments made by a company in other companies or entities to protect the interest of shareholders.
Q: What are the restrictions imposed by Section 186 on investments made by a company?
A: Section 186 imposes restrictions on the amount of investment that a company can make in another company or entity, the types of investments that can be made, and the conditions under which investments can be made.
Q: What is the maximum limit of investment allowed by Section 186 of the Companies Act 2013?
A: As per Section 186, the total amount of investment made by a company in other companies or entities cannot exceed 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.
Q: What are the types of investments that can be made by a company as per Section 186?
A: Section 186 allows a company to make investments in shares, debentures, mutual funds, and other securities issued by other companies or entities.
Q: Is it mandatory for a company to take approval from the board of directors for making investments?
A: Yes, as per Section 186, a company needs to take approval from its board of directors before making any investment in other companies or entities.
Q: Is it necessary for a company to disclose details of investments made as per Section 186?
A: Yes, a company needs to disclose the details of investments made in its financial statements as per the disclosure requirements of the Companies Act.
Q: What are the penalties for non-compliance with Section 186?
A: Non-compliance with Section 186 can lead to penalties for the company and its directors, which may include fines and imprisonment. Additionally, the investments made in violation of Section 186 may be declared void.
