Byte 4: Loans and Investments under S.186

Summary

In this bite-sized video, we delve into Section 186 of the Companies Act, focusing on the rules surrounding loans, guarantees, securities, and investments by companies. Key points include the need for unanimous board approval and shareholder special resolutions when amounts exceed certain limits. Disclosures in financial statements regarding loans and investments, as well as the purpose for these funds, are mandatory. The video also covers exemptions for certain businesses like banking, insurance, and investment companies, along with the limit on investment layers. A crucial overview for anyone involved in corporate governance and compliance.

Takeaways

• 😀 Section 186 requires unanimous board approval for loans, guarantees, and investments exceeding certain limits based on the company's financial condition.
• 😀 Special shareholder resolutions are required if loan guarantees or investments exceed 60% of PCFR & SP or 100% of FRSD, whichever is higher.
• 😀 Companies must provide detailed disclosures in their financial statements regarding loans, guarantees, securities, and the purpose of these transactions as per Section 186(4).
• 😀 Mutual fund investments are not covered under Section 186, as mutual funds are managed by trusts, not body corporates.
• 😀 Section 186 specifically addresses investments in securities, excluding other forms of investment like fixed deposits.
• 😀 Exemptions from the special resolution requirement under Section 186 include loans and investments made to subsidiaries, joint ventures, and certain types of companies like banks and insurance firms.
• 😀 Banking companies, insurance companies, housing finance companies, and others involved in lending or investment activities are exempt from Section 186 when operating in the ordinary course of business.
• 😀 Companies engaged in the business of financing industrial enterprises or providing infrastructural facilities are also exempt from Section 186.
• 😀 Investment companies, non-banking financial companies (NBFCs), and those subscribing to rights issues are outside the scope of Section 186.
• 😀 The two-layer investment company rule restricts companies from making investments beyond two layers of investment companies, regardless of exemptions.

Q & A

What is the primary requirement under Section 186 for providing loans, guarantees, or investments?

Section 186 requires unanimous board approval for loans, guarantees, or investments that exceed certain thresholds—60% of paid-up share capital and free reserves (PCFR) or 100% of free reserves and securities premium (FRSD). If these limits are exceeded, a special resolution from shareholders is also required.

What is the role of a special resolution under Section 186?

A special resolution is required when loans, guarantees, or investments exceed the limits set under Section 186, which are 60% of PCFR or 100% of FRSD. This resolution must be passed by the shareholders of the company.

What specific disclosures are required under Section 186(4)?

Section 186(4) mandates that companies disclose the full particulars of any loans, investments, or guarantees in their financial statements, along with the intended purpose for which the recipient will use the loan, guarantee, or security.

Are investments in mutual funds covered under Section 186?

No, investments in mutual funds are not covered under Section 186. This is because mutual funds are typically managed by trusts, which are not body corporates. Section 186 specifically applies to investments in securities.

Does Section 186 cover investments in fixed deposits?

No, investments in fixed deposits are not covered under Section 186. The section only applies to investments in securities, and fixed deposits do not fall under this category.

What are some key exemptions under Section 186?

Exemptions include loans, guarantees, or investments made to subsidiaries, joint ventures, banking companies, insurance companies, housing finance companies, companies in the business of financing industrial enterprises or infrastructure, and investment companies or NBFCs involved in lending and investment activities.

What is the exemption for companies making investments in subsidiaries or joint ventures?

A company is exempt from the requirement of a special resolution when providing loans, guarantees, or investments to its subsidiaries or joint ventures under Section 186.

Are there any exemptions for companies in the business of industrial finance or infrastructure?

Yes, companies engaged in the business of financing industrial enterprises or providing infrastructural facilities are exempt from the requirements of Section 186, including the special resolution and board approval requirements.

What is the limitation on investments by companies in other investment companies under Section 186?

Under Section 186, a company cannot make investments in more than two layers of investment companies, even if they are exempt from other provisions of the section.

Do banking, insurance, or housing finance companies have to comply with the full requirements of Section 186?

No, banking companies, insurance companies, and housing finance companies are exempt from the provisions of Section 186 when making loans, guarantees, or investments in the ordinary course of their business.