Let’s delve into an essential aspect of corporate governance: Section 186 of the Companies Act, 2013. This section regulates inter-corporate loans, advances, investments, and securities, often referred to as LAIS. It’s crucial for ensuring that a company’s financial resources are used wisely and in the best interest of its shareholders. Whether you’re a business owner, financial professional, or someone interested in corporate laws, this guide will help you understand the key elements and implications of Section 186.
What is Section 186 About?
Section 186 of the Companies Act, 2013 regulates the making of loans, guarantees, or providing securities to other companies or bodies corporate. It aims to ensure that a company’s resources are used prudently and in the best interest of its shareholders.
Key Provisions of Section 186
- Ceiling on Loans and Investments:
- A company can make loans or investments up to 60% of its paid-up share capital, free reserves, and securities premium or 100% of its free reserves and securities premium, whichever is more.
- If the amount exceeds these limits, it requires approval from the shareholders via a special resolution.
- Approval Matrix:
- Board Approval: Required if the loans or investments are within the ceiling limits.
- Shareholders’ Approval: Mandatory if the loans or investments exceed the ceiling limits.
- Public Financial Institutions’ Approval: Needed when the company has defaulted on the repayment of loans or interests.
What Companies Are Exempt?
Certain types of companies are exempt from the provisions of Section 186. These include:
- Banking companies
- Insurance companies
- Housing finance companies
- Companies engaged in financing industrial enterprises or providing infrastructure facilities
- Companies giving loans to their employees as part of the conditions of service
Disclosure Requirements
In the financial statements, companies must disclose:
- Full particulars of the loans, advances, investments, and securities (LAIS).
- The purpose of these loans or investments.
Penalties for Non-Compliance
If a company contravenes the provisions of Section 186:
- The company can be fined between Rs. 25,000 and Rs. 500,000.
- The officer in charge can face a fine between Rs. 25,000 and Rs. 100,000, and/or imprisonment for up to two years.
Additional Points to Consider
- Income Requirement: The income from the LAIS must at least match the annual yield from government securities of comparable maturity.
- Defaulting Companies: A company that has defaulted on the repayment of public deposits cannot make new LAIS until the default is resolved.
Practical Insights and FAQs
Does Section 186 Apply to Mutual Funds?
No, investments in mutual funds are not covered under Section 186 as mutual funds do not fall within the definition of a body corporate or person under the Companies Act, 2013.
Case Laws and Circulars
A notable case relevant to this section is Daman Singh and others vs. State of Punjab and others (AIR 1985 SC 973), which provides judicial insight into the interpretation of corporate governance laws. Additionally, Circular No. 8(26)/2(7)/63-PR, dated March 13, 1963, issued under the Companies Act, 1956, offers historical context and precedents.
Final Thoughts
Navigating the complexities of Section 186 can be daunting, but understanding its core principles is crucial for ensuring compliance and making informed financial decisions. Whether you are part of a large corporation or a budding enterprise, keeping these guidelines in mind will help you steer clear of legal pitfalls and ensure your company’s financial practices are both sound and transparent.
Feel free to reach out with any questions or for further clarification. For more read the pdf below.