Section 186 of CA 2013 : Section 186: Loan And Investment By Company

Explanation using Example

Imagine a scenario where XYZ Pvt. Ltd., a manufacturing company, is planning to expand its business operations. The board of directors considers making an investment in a new subsidiary, ABC Manufacturing Ltd., and also providing a loan to another company, LMN Traders Ltd., for mutual business interests.

According to Section 186 of the Companies Act, 2013, XYZ Pvt. Ltd. must ensure that:

• The investment in ABC Manufacturing Ltd. does not create more than two layers of investment companies.
• The loan to LMN Traders Ltd., along with any guarantee or security provided, does not exceed 60% of XYZ Pvt. Ltd.'s paid-up share capital, free reserves, and securities premium account or 100% of its free reserves and securities premium account, whichever is more.
• If the proposed loan and investment exceed these limits, XYZ Pvt. Ltd. must obtain prior authorization from its members through a special resolution in a general meeting.
• Details of the loan and investment must be fully disclosed in the financial statements of XYZ Pvt. Ltd.
• The board's resolution approving the investment or loan must be passed with the consent of all directors present at the meeting.
• If XYZ Pvt. Ltd. has any subsisting term loan from a public financial institution, prior approval from that institution is required unless the proposed transactions are within the specified limits and there is no default on existing loans.

If XYZ Pvt. Ltd. fails to comply with these provisions, it may face penalties including fines and, potentially, imprisonment for its officers in default.