Choose the security tenor before comparing rates
Companies Act section 186(7) says a loan under the section cannot carry a rate below the prevailing yield of the one-, three-, five- or ten-year Government security closest to its tenor. It does not prescribe a permanent percentage or permit choosing the cheapest yield among those maturities. This guide, checked on 28 October 2026, develops the loan-rate working rather than repeating the section's aggregate investment limits. Companies Act section 186(3), (5), (7)–(11).
Establish whether the loan is within the provision
Review section 186(11) and applicable notified exemptions or modifications on the lender's actual status and activity. Do not infer exemption merely because the borrower is a group company. The wholly-owned-subsidiary or joint-venture exception in subsection (3) addresses the special-resolution requirement there; it is not a blanket repeal of subsection (7). The illustrations assume an ordinary loan subject to the interest floor and no exemption. Companies Act section 186(3), (5), (7)–(11).
Document the contractual tenor
Obtain the executed agreement, disbursement terms and maturity. Compare that tenor with the four specified security maturities, recording why the selected one is closest. Avoid inventing an interpolation formula or a tie-break rule not supplied by the provision. If maturity is uncertain, renewable, on demand or exactly equidistant, obtain a supported legal and treasury conclusion before selecting the benchmark; the simple examples deliberately avoid those cases. Companies Act section 186(3), (5), (7)–(11).
Preserve prevailing yield, not just a coupon
Record the contemporaneous reliable Government-security yield evidence used for the loan decision and the security maturity. A security's printed coupon, the company's borrowing cost and a bank deposit rate are different quantities. Do not substitute any of them without basis. The yields below are wholly fictional for calculation; they are not current market quotations. Retain the observation date, source and approval-date linkage in the sanction file. Companies Act section 186(3), (5), (7)–(11).
Compare rates on a consistent basis
State the contractual rate and its basis clearly and compare it with the established applicable floor. Simple annual interest in the examples merely translates a stated rate gap into money on constant principal; it is not a statutory damages formula or a conclusion about fees, compounding, amortisation, tax gross-up or floating-rate reset terms. Amendments, extensions and fresh disbursements need their own documented review of the actual legal facts. Companies Act section 186(3), (5), (7)–(11).
A compliant rate does not complete loan compliance
Subsections (3)–(5), (8)–(10) and other applicable provisions still require their own approvals, disclosures, default checks and records. The rate test does not authorise a loan prohibited under another provision. Keep the benchmark calculation with the executed terms and sanction records rather than attempting to cure an unsupported historical decision by attaching a later market screenshot. Resolve a shortfall through the actual legal and contractual process, not a retrospective spreadsheet assumption. Companies Act section 186(3), (5), (7)–(11).
Applicable primary references
Companies Act section 186(3), (5), (7)–(11)
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Eighteen-month tenor
Assume an 18-month loan. Its distance from the one-year security is six months and from the three-year security eighteen months; one year is closer. If its fictional prevailing yield is 6.20%, compare the loan rate with 6.20%, not an unrelated cheapest maturity.
Illustrative example 2: Four-year-eight-month tenor
Assume a 56-month loan. Distances from the three-year and five-year securities are twenty and four months respectively. Five years is closer. With a fictional five-year yield 6.70%, an offered 6.40% is below the model floor by 0.30 percentage points.
Illustrative example 3: Translate a rate gap
On constant principal ₹1,00,00,000 for a full illustrative year, a 6.70% model floor gives simple interest ₹6,70,000; a 6.40% proposal gives ₹6,40,000. Difference is ₹30,000. This is comparison arithmetic, not a determination of an automatic statutory recovery amount.
Illustrative example 4: Eight-year tenor
For an eight-year loan, the five-year security is three years away and the ten-year security two years away. Ten years is closer. If its fictional yield is 7.00% and the contractual rate 7.20%, the rate exceeds this isolated floor by 0.20 percentage points, assuming consistent bases.
Illustrative example 5: Separate loans, separate evidence
Assume two constant-principal loans of ₹50,00,000 each, independently established annual floors of 6.20% and 6.70% and a full illustrative year. Corresponding simple amounts are ₹3,10,000 and ₹3,35,000, total ₹6,45,000. One loan's benchmark is not automatically substituted for the other.
Illustrative example 6: Do not copy coupon into the yield field
Assume the relevant Government security has fictional coupon 7.00% but verified prevailing yield 6.60%. A proposed 6.50% loan is short by 0.10 percentage points against the yield test, not 0.50 against the coupon. On ₹1,00,00,000 for a model full year, the yield-based difference is ₹10,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the lender and loan | Status, activity, borrower and executed terms |
| 2 | Test applicability | Section 186(11) and relevant notified exemptions |
| 3 | Confirm the actual tenor | Disbursement and contractual maturity evidence |
| 4 | Compare prescribed maturities | One, three, five and ten years |
| 5 | Resolve ambiguous cases | Supported treatment of demand, renewal or equal-distance facts |
| 6 | Obtain prevailing-yield evidence | Reliable dated observation and security maturity |
| 7 | Separate yield from coupon | Correct metric and rate basis |
| 8 | Compare the contractual rate | Documented floor and any shortfall |
| 9 | Complete other loan controls | Approvals, defaults, disclosures and records |
| 10 | Preserve the sanction file | Benchmark, decision, agreement and later amendments |
Sixteen practitioner FAQs
1. Which provision sets this floor?
Section 186(7) of the Companies Act.
2. Does it prescribe a permanent fixed percentage?
No. It refers to the prevailing yield of the specified closest-tenor Government security.
3. Which maturities are specified?
One, three, five and ten years.
4. Can the cheapest of the four yields be selected automatically?
No. Select the maturity closest to the loan tenor.
5. Is a printed security coupon necessarily its prevailing yield?
No. Preserve the actual yield evidence.
6. Can the lender's borrowing cost replace the benchmark?
Not merely because it is a convenient internal rate.
7. Are the illustrative yields current quotations?
No. Every example uses fictional rate inputs.
8. Do the examples prescribe an interpolation method?
No. They use straightforward, non-tied tenor comparisons.
9. What if two maturities are equally close?
Obtain a supported conclusion; no invented tie-break rule is supplied.
10. Does a group-company borrower automatically remove the floor?
No. Establish the actual exemption or applicability.
11. Does subsection (3)'s subsidiary exception waive all of section 186?
No. Read its specific special-resolution scope.
12. Can a sufficient interest rate authorise an otherwise prohibited loan?
No. Other applicable restrictions remain separate.
13. Does the annual-interest comparison fix statutory damages?
No. It only translates assumed rates into simple comparison amounts.
14. Can a later screenshot prove the original prevailing yield automatically?
No. Retain contemporaneous decision-linked evidence.
15. Should extensions and revised terms be ignored?
No. Review the actual modification and its legal effect.
16. What is the core audit trail?
Loan tenor, applicable security, dated yield, rate comparison, sanction and executed terms.
Conclusion
Select the prescribed Government-security tenor closest to the loan, preserve the prevailing-yield evidence and compare the contractual rate on a consistent basis.