Run the board and lender tests separately
Section 186(5) of the Companies Act, 2013 requires an in-scope investment, loan, guarantee or security to be sanctioned by a resolution at a board meeting with consent of all directors present. If a term loan from a public financial institution (PFI) is subsisting, obtain prior approval of the PFI concerned unless both elements of the proviso are met. The transaction must stay within the section 186(2) limit on an aggregate basis and there must be no default in the relevant instalments or interest.
Read the applicable text: Companies Act, 2013, sections 2(72) and 186.
Calculate the statutory threshold at the correct point
Under section 186(2), compare sixty per cent of paid-up share capital, free reserves and securities premium with one hundred per cent of free reserves and securities premium. Use the higher amount. Include existing covered transactions and the proposed transaction in the comparison. Keep the relevant financial bases and instrument classifications documented rather than use only the current proposal or face value of one deal.
Review member approval and exclusions independently
Section 186(3) addresses prior special resolution when the aggregate exceeds the subsection (2) limit, subject to its proviso for specified transactions involving wholly owned subsidiaries or joint ventures and other stated cases. That proviso does not by itself answer subsection (5)'s board or PFI tests. Check section 186(11), other applicable restrictions and any regulatory overlays before treating the transaction as in scope. Review the actual default status and confirm that the lender meets the definition of a public financial institution under section 2(72). A bank or regulated lender does not automatically qualify.
Do not infer unanimity from an ordinary majority
Confirm quorum and participation under the applicable meeting rules and resolve any interest or voting issue before recording the vote. Identify who was present, entitled to participate and actually consented. A tally with dissent is not unanimous; a director's abstention is not evidence of consent. Do not substitute a circulation approval or a later informal assent for the required meeting decision.
Set an evidence gate before execution
Record each potentially relevant lender separately, its term-loan status and the default evidence under its terms; do not extrapolate a single lender’s confirmation to all facilities. Keep the exposure working, lender term-loan details and written approval or documented exception, meeting notice, resolution and minutes. Cross-check any member approval and disclosure or register requirements separately. Reassess if amount, terms, lenders or default status change before execution.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Test equality at execution
The section 186(2) limit is ₹90 lakh. Existing covered exposure of ₹61 lakh and a proposed loan of ₹29 lakh total exactly ₹90 lakh. For a subsisting PFI term loan with no instalment or interest default, the aggregate does not exceed the limit. Record the nil headroom and recheck before any increase.
Illustrative example 2: Within limit and no default
Existing covered amounts of ₹58 lakh plus a proposed ₹28 lakh guarantee total ₹86 lakh against a ₹90 lakh limit. With a subsisting PFI term loan and no relevant default on the assumed facts, the ₹4 lakh headroom and no-default condition support the proviso; board consent is still required.
Illustrative example 3: Within limit but in default
Exposure is ₹72 lakh plus ₹12 lakh, or ₹84 lakh against ₹90 lakh. The company has a relevant missed interest payment on a subsisting PFI term loan. The ₹6 lakh headroom does not cure default, so the lender approval exception fails.
Illustrative example 4: Above the limit
Existing exposure ₹65 lakh plus proposed security ₹32 lakh totals ₹97 lakh. It exceeds the ₹90 lakh limit by ₹7 lakh. Check member approval and prior PFI approval where applicable; a no-default history alone cannot satisfy the exception.
Illustrative example 5: One director dissents
Five eligible directors are present and four consent. The vote is 80%, but the requirement on these facts is all five. The proposal is one consent short.
Illustrative example 6: Include two approvals in the exposure review
Existing exposure ₹52 lakh and two proposed investments of ₹16 lakh and ₹24 lakh total ₹92 lakh if both are to be made. A ₹90 lakh limit leaves a ₹2 lakh excess in the combined working; check sequence and approvals before executing either proposal.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the instrument and company scope | Proposal and legal classification |
| 2 | Check exclusions and other restrictions | Section 186 applicability analysis |
| 3 | Compute both limit limbs | Capital, reserve and premium support |
| 4 | Reconcile existing and proposed exposure | Register and commitments |
| 5 | Identify relevant subsisting term loans | Lender agreements and status |
| 6 | Verify defaults under loan terms | Lender confirmations and statements |
| 7 | Document approval or proviso | Prior written approval or exception memo |
| 8 | Verify member approval separately | Resolution or applicable exception |
| 9 | Record board-meeting consent | Attendance, minutes and vote record |
| 10 | Release transaction and update records | Execution controls and disclosure working |
Sixteen practitioner FAQs
1. Does section 186(5) apply only to loans?
No. It also addresses covered investments, guarantees and security.
2. Can a simple majority pass the required resolution?
No. Apply consent of all directors present under the provision.
3. Is abstention proof of consent?
No. Review actual participation and consent.
4. Can circulation substitute for the board meeting?
The provision specifies a meeting of the board.
5. Does any bank loan activate the PFI approval requirement?
Check whether a term loan from a PFI concerned is subsisting and the provision applies.
6. Can a within-limit transaction bypass PFI consent if there is default?
No. Both conditions of the exception must be met.
7. Does being current on repayment solve an above-limit case?
No. The aggregate limit condition must also be met.
8. Which percentage limb is chosen?
Use the higher of the two statutory calculations.
9. Should existing guarantees be ignored?
No. Include covered amounts in the aggregate.
10. Does special resolution replace board consent?
No. The approval requirements are separate.
11. Does a subsidiary exception under subsection (3) settle lender consent?
No. Test subsection (5) separately.
12. How should interested directors be handled?
Check applicable participation and voting rules before relying on the consent record.
13. Does subsection (5) itself prescribe the loan interest floor?
No. Review subsection (7) separately where applicable.
14. When should a default check be refreshed?
Before execution if the facts or timing change.
15. Can one approval cover materially changed terms automatically?
Check the scope of each resolution and lender approval.
16. What is the central proof of compliance?
A reconciled exposure calculation plus documented unanimous meeting consent and lender approval or supported exception.