Loans and Investments by Company
Section 186 of the 2013 Act is substantially similar to the provisions of section 372 A of the 1956 Act. One of the significant additions to the section is sub-section (1) of section 186 of the 2013 Act. Under sub-section (1) of section 186 of the 2013 Act, a company has been restrained from making loans and investment through not more than two layers of investment companies. This restraint is subject to exception contained in the provision to sub-section (1) of section 186 of the 2013 Act. Section 186(1) of the 2013 Act shall not be applicable for a company acquiring any other ‘company’ incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per laws of such country or there are requirements under any law or rule which require existence of such subsidiaries. Section 186 of the 2013 Act restrains investments with more than two layers of downstream investment companies and does not prohibit investment being made through any number of layers of companies if there are not more than two investment companies in the corporate layer. The term “investment company” has been defined to mean a company which has principal business of acquiring shares, debentures and other securities. The term “principal business” has not been defined. The issue therefore arises whether ‘principal businesses’ would be determined based on composition of investment business in the company or based on main objects in the memorandum of association of the company. The Reserve Bank of India has introduced the concept of Core Investment Company. It has also defined the criteria for determining whether a company is an NBFC and is principally engaged in the business of investment by specifying that any company whose more than 50% of income is from financial assets and whose financial assets are more than 50% of the total assets, then it has been held that the company is principally engaged in finance activities and hence it is an NBFC. The circulars issued by RBI may be usefully referred for the purpose of defining investment companies. Section 186 of the 2013 Act refers to “investment companies” and not to bodies corporate.
Sub-section (1) of section 186 of the 2013 Act attacks the very basic concept of company being a separate legal entity managed by the Board of Directors of the company. The section seeks to control further investment by a second layer investment company or the Ultimate Holding Company which has made investment in respect of business of second layer Investment Company. Each company has its Board of directors and each company is entitled to carry on the business in the interest of the company. Whether section 186 of the 2013 Act refers to actual flow of investment money made by Investment Company into the third layer of company or whether it speaks about the investment structure between the ultimate holding company and downstream companies is a subject matter of interpretation. Further the corporate structure between the various companies in the group may not be holding-subsidiary relationship permitting any control or monitoring as contemplated by section 186 of the 2013 Act. Section 186 (1) of the 2013 Act hinders carrying on of business by the companies as separate entities. The word ‘company’ has been loosely used in sub-section (1) of section 186 of the 2013 Act and in the provision wherein bodies corporate incorporated outside India has been referred to as company. The example given below will explain the same- A Ltd invests in B Ltd whose principal business is to acquire shares. B Ltd is subsidiary of A Ltd. B Ltd may invest in C Ltd. C Ltd is investment company which is 30:60:10 Joint venture between B Ltd:D Ltd: public. Any further investment by a subsidiary of C Ltd although may be made to further the joint interest of the shareholders would be in violation of provisions of section 186(1) of the 2013 Act.
Prescribed limit for investment
The company shall not make loans to any person or body corporate, give guarantee or provide security in connection with the loan to any person or body corporate or acquire by way of subscription, purchase or otherwise the securities of other body corporate in excess of 60% of paid-up capital and free reserves and securities premium account or 100% of free reserves and securities premium account, whichever is greater, except with previous approval of members of the company by special resolution.
Companies shall make full disclosure of details of loans given, investment made or guarantee given or security provided and the purpose for which such loans or guarantee or security is proposed to be utilized by the recipient.
Board resolution sanctioning the investment
No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning the same is unanimously passed at the meeting of Board. In case the company has obtained term loan, prior approval of such public financial institution shall be obtained. Prior financial institution shall not be noted required where the investments or loans or guarantee or security does not exceed the threshold limit stated in section 186(2) of the 2013 Act and there has not been any default in repayment of loan installments or payment of interest to the public financial institution. A company which is in default of repayment of deposits accepted before or after the commencement of the 2013 act or in payment of interest to the public financial institution. A company which is in default of repayment of deposits accepted before or after the commencement of the 2013 Act or in payment of interest thereof shall not give any loan, guarantee or security or make any investment till such default is subsisting.
Restrictions on certain class of companies and rate of interest on the loans
Companies which are registered under section 12 of SEBI Act and covered by the class or classes of companies as may be prescribed shall not take inter-corporate loans and deposits exceeding the prescribed limit. Section 186(7) of the 2013 Act provides that no loan shall be given at a rate of interest lower than prevailing yield of one year, three year or ten year Government security closest to the tenor of the loan. The rate of interest specified is not the bank rate specified in section 185 of the 2013 Act. Concessional employee loans granted by companies will be hit by this requirement.
Register to be maintained
Every company giving guarantee or providing security or making investment shall maintain a register providing for the particulars as prescribed in Rule 12 of the Companies (meetings of board and its powers) Rules, 2014. The register shall be open for inspection at the registered office of the company and the member shall be entitled to take extras from the register.
The exemptions provided under sub-section (8) of section 372 A of the 1956 Act have been done away substantially. The benefits available in case of investment or guarantee or security between holding subsidiary companies, private company have been removed. NBFCs have been specifically granted exemption in the 2013 Act for their lending and investment activities which was not stated in express terms in the 1956 Act.
Punishment for contravention
In case of contravention of provisions of section 186 of the 2013 Act every officer of the company who is in default shall be punishable with imprisonment for a term which may extent to 2 years and with fine which shall not be less than Rs.25000/- but may extend to Rs.1,00,000/-. Under the 1956 Act, where the amount has been repaid in full, no imprisonment shall be imposed for contravention of previous of the section. In case of part repayment, the imprisonment shall be reduced proportionately. The 1956 Act also provided for punishment for not only the officers of the company but also all persons who were knowingly parties to contravention by way of fine. These provisions have been removed from the 2013 Act.
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