Executive Overview: Corporate Governance and the Capital Preservation Philosophy of Section 186
In corporate legal theory, the deployment of corporate funds outside the operating business of an entity is subject to stringent fiduciary and statutory controls. Directors are custodians of shareholder capital and creditor liquidity; allowing unrestricted lending, cross-guarantees, or speculative equity acquisitions risks siphoning corporate wealth, destabilizing group solvency, and compromising minority shareholder rights. To safeguard against these abuses, the Parliament enacted Section 186 of the Companies Act, 2013 (replacing Section 372A of the Companies Act, 1956), read with the Companies (Meetings of Board and its Powers) Rules, 2014. Section 186 establishes an exhaustive, multi-layered regulatory architecture governing loans, guarantees, securities, and investments made by any corporate entity in India.
Unlike standard commercial authorizations that can be delegated to executive committees or managing directors, Section 186 enforces strict non-delegable governance benchmarks: (i) an absolute restriction on creating more than two layers of investment subsidiaries; (ii) mandatory prior approval by unanimous consent of all directors present at a Board meeting; (iii) a statutory ceiling of 60% of paid-up share capital, free reserves, and securities premium account, OR 100% of free reserves and securities premium account, whichever is more, beyond which prior shareholder approval by Special Resolution is mandatory; (iv) prior approval from public financial institutions and lending banks; (v) a statutory interest floor benchmarked strictly to sovereign Government Securities (G-Sec) yields; and (vi) the compulsory maintenance of a permanent statutory Register in Form MBP-2. Corporate secretarial heads, chief legal officers, and statutory auditors utilizing assureOffice and its corporate secretarial suite assurePractice must master the intricate calculation formulas, subsidiary exemptions, bank consent protocols, CARO 2020 reporting interlocks, and compounding strategies under Section 186 to eliminate severe civil and criminal penalties.
Statutory Scope and the Four Forms of Financial Accommodation
The substantive mandate of Section 186(2) applies directly whenever a company (whether private or public) directly or indirectly:
- Gives Any Loan to Any Person or Other Body Corporate: Encompasses inter-corporate deposits (ICDs), clean commercial advances, debentures subscribed as lending arrangements, and book debts converted into loans. (Excludes routine commercial advances given to suppliers in ordinary course of trade).
- Gives Any Guarantee: Providing a corporate guarantee to a commercial bank, financial institution, or vendor on behalf of another entity (such as guaranteeing credit facilities sanctioned to a subsidiary or joint venture).
- Provides Any Security in Connection with a Loan: Pledging corporate assets, mortgaging title deeds, or creating hypothecation charges over company investments to secure borrowings availed by any other person or body corporate.
- Acquires by Way of Subscription, Purchase, or Otherwise, the Securities of Any Other Body Corporate: Investing in equity shares, preference shares, debentures, bonds, or mutual fund units of any Indian or foreign company.
The Two-Layer Restriction on Investment Subsidiaries (Section 186(1))
Section 186(1) codifies a strict structural prohibition: "A company shall unless otherwise prescribed, make investment through not more than two layers of investment companies."
This anti-shell-company restriction prohibits an operating entity from channeling investments through complex multi-tier investment holding SPVs designed to obscure beneficial ownership. However, Section 186(1) provides two vital statutory carve-outs:
- A company is permitted to acquire any company incorporated in a country outside India if such foreign company has investment subsidiaries beyond two layers as per the laws of that foreign jurisdiction; and
- A subsidiary company is permitted from having an investment subsidiary for the purpose of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force (e.g., SEBI guidelines or RBI NBFC regulations).
Corporate secretarial teams can utilize assurePractice to verify group corporate cap tables and ensure compliance with the two-layer rule.
Statutory Ceilings, Special Resolution Mandate, and Prior Bank Approvals
The core computational engine of Section 186 is codified in Sub-section (2) and Sub-section (3), which establish quantitative limits based on the company's audited balance sheet:
1. The Quantitative Ceiling (Section 186(2))
No company shall directly or indirectly give any loan, guarantee, provide security, or make an investment exceeding the HIGHER of:
- 60% of its Paid-Up Share Capital, Free Reserves, and Securities Premium Account; OR
- 100% of its Free Reserves and Securities Premium Account;
whichever is MORE.
Statutory Definitions:
- Paid-Up Share Capital: Sum of paid-up equity and preference share capital.
- Free Reserves: Reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend (excluding capital reserves, revaluation reserves, amalgamations reserves, or unrealized gains under Ind AS).
- Securities Premium Account: Premium collected on share issuance under Section 52.
2. The Special Resolution Mandate (Section 186(3))
Where the aggregate of the loans and investments so far made, the guarantees and securities so far given, together with the proposed transaction, exceeds the statutory ceiling of 60% / 100%, the company CANNOT proceed on Board approval alone! It must secure prior approval by passing a Special Resolution in a General Meeting (or via Postal Ballot for listed companies) under Section 186(3).
- The explanatory statement annexed to the notice of the general meeting must explicitly disclose: (a) total amount of financial accommodation; (b) purpose for which loan/guarantee/investment is to be utilized; (c) specific details of the recipient entity; (d) sources of funding; and (e) other relevant particulars.
- Passing a generic, blanket omnibus resolution without specifying quantitative caps is legally invalid under MCA circulars.
3. Mandatory Unanimous Board Approval (Section 186(5))
Every loan, investment, guarantee, or security—even if well within the 60% / 100% ceiling—requires prior approval at a meeting of the Board of Directors with the consent of ALL the directors present at the meeting. Approval via circular resolution under Section 175 is strictly prohibited!
4. Prior Approval of Public Financial Institutions and Banks
Under the proviso to Section 186(5), prior approval of a Public Financial Institution (PFI) or scheduled bank from which the company has availed term loans is mandatory before giving any loan, guarantee, or investment, UNLESS:
- The aggregate of loans, guarantees, and investments does not exceed the 60% / 100% ceiling; AND
- There is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the financial institution. If there is an existing loan default, PFI approval is compulsory even for ₹1 of inter-corporate investment!
Statutory Interest Rate Floor: Benchmarking against Sovereign G-Sec Yields
To prevent promoters from providing interest-free or subsidized loans to related entities or group companies, Section 186(7) establishes a non-negotiable statutory interest rate floor:
"No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan."
Key operational parameters governing the interest floor:
- Tenor Matching: If a company grants an unsecured inter-corporate loan for a tenure of 3 years, the minimum interest rate charged must be at least equal to the prevailing annualized yield of the 3-Year Government of India (G-Sec) bond on the date of loan disbursement!
- Prohibition on Interest-Free Loans: Providing an interest-free loan to any body corporate (even to a wholly-owned subsidiary or sister company) is a direct, actionable violation of Section 186(7), attracting personal monetary penalties and prosecution on the Board of Directors.
- Section 8 Exemption: Section 186(7) does not apply to companies in which twenty-six per cent or more of the paid-up share capital is held by the Central Government or one or more State Governments, or to loans given by a company established with the object of promoting industrial development.
Finance teams utilizing assureFinancials can track live RBI G-Sec yield curves to automate interest benchmark compliance on all inter-corporate loan agreements.
The Register of Loans, Investments, Guarantees and Securities (Form MBP-2)
Under Section 186(9) read with Rule 12 of the Meetings of Board Rules, every company giving a loan or giving a guarantee or providing security or making an acquisition of securities must maintain a statutory register in Form MBP-2:
- Chronological Entry: Entries in the register must be made within seven (7) days of making such loan or guarantee or security or acquisition.
- Mandatory Particulars: Date of transaction, name of body corporate/person, date of unanimous board resolution, date of special resolution (if applicable), rate of interest, repayment terms, and details of security provided.
- Custody and Preservation: Form MBP-2 must be kept permanently at the registered office of the company under the safe custody of the Company Secretary or an authorized director. It is open to inspection by members, and extracts may be furnished upon payment of prescribed fees.
Statutory Exemptions under Section 186(11)
Section 186 (except the two-layer restriction under Sub-section (1)) does NOT apply to:
- Loans made, guarantees given, or securities provided by a banking company, housing finance company, or insurance company in the ordinary course of business.
- Any loan or guarantee given by an infrastructure company (as per Schedule VI) or Non-Banking Financial Company (NBFC) registered with the RBI whose principal business is investment or lending.
- Acquisitions of shares made by a systemically important NBFC whose principal business is investment in securities.
- Acquisitions made by an investment company.
- Allotment of rights shares pursuant to Section 62(1)(a).
- Wholly-Owned Subsidiary (WOS) Exemption (Section 186(3) Proviso): Passing a Special Resolution is NOT required for giving a loan, guarantee, or providing security to a 100% wholly-owned subsidiary, or for acquiring shares of a WOS! (However, unanimous Board approval under Section 186(5), G-Sec interest rate under Section 186(7), and Form MBP-2 register entries remain 100% mandatory!).
Practical Case Studies and Numerical Illustrations
The following eight comprehensive real-world case studies illustrate complex scenarios encountered by corporate secretarial practitioners, finance controllers, and corporate lenders under Section 186.
Case Study 1: Calculating the 60% vs. 100% Threshold and Special Resolution Trigger
Facts: Vertex Manufacturing Ltd. has the following financial position as per its latest audited balance sheet as of 31st March 2026:
- Paid-up Equity Share Capital: ₹20,00,00,000
- Paid-up 8% Cumulative Preference Share Capital: ₹5,00,00,000
- General Reserve (Free Reserve): ₹30,00,00,000
- Securities Premium Account: ₹15,00,00,000
- Revaluation Reserve (Surplus on factory land revaluation): ₹10,00,00,000
- Capital Redemption Reserve (CRR): ₹5,00,00,000
- Existing investments in listed mutual funds: ₹18,00,00,000
- Existing corporate guarantee given to bank for subsidiary: ₹12,00,00,000
The company proposes to grant an inter-corporate loan of ₹25,00,00,000 to an associate entity. Does the proposed loan require a Special Resolution?
Step-by-Step Mathematical Analysis:
- Identify Qualifying Capital and Reserves:
- Paid-Up Capital = ₹20 Cr (Equity) + ₹5 Cr (Pref) = ₹25,00,00,000.
- Free Reserves = General Reserve = ₹30,00,00,000. (Revaluation Reserve and CRR are NOT free reserves!).
- Securities Premium = ₹15,00,00,000.
- Total Capital + Free Reserves + Securities Premium = ₹25 Cr + ₹30 Cr + ₹15 Cr = ₹70,00,00,000.
- Total Free Reserves + Securities Premium = ₹30 Cr + ₹15 Cr = ₹45,00,00,000.
- Compute Section 186(2) Ceiling:
- Limit A: 60% of (Capital + Free Reserves + Sec Premium) = 60% × ₹70,00,00,000 = ₹42,00,00,000.
- Limit B: 100% of (Free Reserves + Sec Premium) = 100% × ₹45,00,00,000 = ₹45,00,00,000.
- Statutory Base Ceiling = Higher of Limit A or Limit B = ₹45,00,00,000.
- Evaluate Existing Financial Accommodations:
- Existing Mutual Fund Investments = ₹18,00,00,000
- Existing Bank Guarantee = ₹12,00,00,000
- Total Existing Commitments = ₹30,00,00,000.
- Total Cumulative Exposure Including Proposed Loan: Total Exposure = Existing Commitments (₹30 Cr) + Proposed Loan (₹25 Cr) = ₹55,00,00,000! Since ₹55,00,00,000 EXCEEDS the statutory limit of ₹45,00,00,000, the Board CANNOT sanction the loan alone!
- Verdict: Vertex Manufacturing Ltd. must convene an Extraordinary General Meeting (EGM) or conduct a Postal Ballot to pass a Special Resolution under Section 186(3) before executing the loan agreement. Corporate secretarial software like assurePractice automates these multi-variable threshold calculations.
Case Study 2: G-Sec Interest Benchmark Violation on Inter-Corporate Loans
Facts: Synergy Infotech Ltd. granted a 5-year unsecured inter-corporate loan of ₹10,00,00,000 to its joint venture partner, CloudMatrix Solutions Pvt. Ltd., on 1st July 2026. The loan agreement stipulated a friendly interest rate of 4.5% p.a. On 1st July 2026, the prevailing yield on the 5-Year Government of India Benchmark Security (G-Sec) as published by the Reserve Bank of India was 7.12% p.a.
Statutory Analysis & Penal Consequences:
- Breach of Section 186(7): Section 186(7) prohibits any company from giving a loan at an interest rate lower than the prevailing yield of the Government Security closest to the tenor of the loan. The tenor is 5 years; the 5-year G-Sec yield was 7.12%. Charging 4.5% is a blatant statutory violation!
- Penalties under Section 186(13):
- On the Company: Liable to a fine which shall not be less than ₹25,000 but which may extend to ₹5,00,000.
- On Every Officer in Default: Liable to imprisonment for a term which may extend to two years AND with fine which shall not be less than ₹25,000 but which may extend to ₹1,00,000.
- Remediation: The company must execute a supplementary loan agreement amending the interest rate to at least 7.15% retrospective from 1st July 2026, recover the differential interest from CloudMatrix, and file a compounding application under Section 441 before the Regional Director using assurePractice.
Case Study 3: Wholly-Owned Subsidiary Exemption vs. Mandatory Governance Requirements
Facts: Titan Engineering Ltd. holds 100% of the equity shares of Vector Precision Components Pvt. Ltd. (WOS). Vector requires an urgent bridge loan of ₹15,00,00,000 to acquire machinery. Titan's existing loans and investments already exceed the 60% / 100% statutory ceiling. Can Titan disburse the loan without a Special Resolution?
Analysis under Proviso to Section 186(3) & Rules:
- Special Resolution Exemption: Under the first proviso to Section 186(3) read with Rule 11 of the Meetings of Board Rules, where a loan or guarantee is given or where a security has been provided by a company to its wholly-owned subsidiary company or a joint venture company, or acquisition is made by a holding company of the securities of its wholly-owned subsidiary, no Special Resolution is required! Even though Titan exceeded the statutory ceiling, it does NOT need to convene a general meeting.
- Surviving Mandatory Governance:
- Unanimous Board Resolution: Section 186(5) is NOT exempt. The Board of Titan must pass a unanimous resolution at a physical/video meeting.
- G-Sec Interest Rate: Section 186(7) is NOT exempt. Titan CANNOT provide an interest-free loan. It must charge at least the prevailing G-Sec rate.
- Form MBP-2 Register: Section 186(9) is NOT exempt. The entry must be recorded in Form MBP-2 within 7 days.
Case Study 4: The Circular Resolution Pitfall and Unanimous Consent at a Board Meeting
Facts: Orion Pharma Ltd. needed to guarantee a ₹20,00,00,000 working capital facility for its associate company. Since the next scheduled Board meeting was two months away, the Company Secretary circulated a draft resolution under Section 175 by email to all 8 directors. Seven directors emailed their affirmative approval, while one director was traveling abroad and did not respond. The guarantee was executed on the basis of the passed circular resolution.
Statutory Invalidation under Section 186(5):
- Statutory Mandate: Section 186(5) explicitly states: "No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting..."
- Fatal Flaw: Passing a resolution under Section 186 by circulation is strictly prohibited in law! Section 186 requires a convened meeting of the Board of Directors.
- Legal Consequences: The corporate guarantee is unauthorized, ultra vires the powers of the Board, and exposes directors to personal liability. The guarantee must be urgently ratified at a properly convened meeting of the Board of Directors, and compounding filed for the procedural default.
Case Study 5: Prior Bank Consent Mandate where Existing Loan Default Exists
Facts: Greenfield Agro Ltd. availed a ₹50,00,00,000 project term loan from State Bank of India (SBI). The company defaulted on paying its quarterly interest installment of ₹1,20,00,000 due to SBI on 30th June 2026. On 15th July 2026, the company decided to invest ₹5,00,00,000 in equity shares of an unquoted startup. The company's total investments were well within the 60% ceiling.
Statutory Analysis under Proviso to Section 186(5):
- Statutory Mandate: Under the proviso to Section 186(5), prior approval of the public financial institution is NOT required if the investment is within limits AND there is no default in repayment of loan installments or interest.
- Breach: Because Greenfield Agro had defaulted on its interest payment to SBI on 30th June, the statutory safe harbour is forfeited! The company CANNOT make any investment without prior written approval from SBI. Making the ₹5 Crore investment while in default constitutes an actionable offence under Section 186(13), exposing the directors to criminal prosecution.
Case Study 6: Interlocking Reporting under CARO 2020 Clause (iv) and Form 3CD
Facts: During the statutory audit of Zenon Logistics Ltd. for FY 2025-26, the statutory auditor discovered that the company granted a ₹3,00,00,000 inter-corporate deposit to an entity in which two directors were interested. The loan was approved by a simple majority at a board meeting, charged an interest rate of 5% (G-Sec was 7.2%), and was not entered in Form MBP-2.
Audit Reporting under CARO 2020:
- CARO 2020 Clause (iv) Mandate: The auditor must report: "in respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with and if not, provide the details thereof."
- Adverse Auditor Qualifications: The auditor must issue severe qualifications in the Independent Auditor's Report, detailing: (a) non-compliance with Section 185 (loan to director-interested entity); (b) failure to obtain unanimous board approval under Section 186(5); (c) interest rate charged below G-Sec yield under Section 186(7); and (d) non-maintenance of Register in Form MBP-2 under Section 186(9).
- Form 3CD Clause 31 Interlock: The tax auditor simultaneously cross-reports these transactions in Form 3CD, triggering scrutiny notices under Section 68 and Section 56(2) from the Income Tax department. Corporate governance workflows in assurePractice prevent these cross-statutory audit disasters.
Case Study 7: Cross-Border Loans to Foreign Wholly-Owned Subsidiaries (FEMA & Section 186)
Facts: TechGlobal India Ltd. establishes a 100% Wholly-Owned Subsidiary in the United Kingdom, TechGlobal UK Ltd. To fund European sales expansion, the Indian parent proposes to grant a loan of £1,000,000 (approx ₹10.5 Crores) to its UK subsidiary.
Dual-Regulatory Compliance Architecture:
- Companies Act Section 186:
- Special Resolution: Exempt under the first proviso to Section 186(3) (WOS exemption).
- Unanimous Board Resolution: Mandatory under Section 186(5).
- Interest Rate Floor: Under Section 186(7), must the rate be Indian G-Sec (approx 7%) or UK Gilt yield? In landmark MCA and RBI clarifications, for foreign currency loans, the interest rate floor is benchmarked to the benchmark interest rate of the currency of the loan (such as 6-month SOFR or UK Gilt yield plus appropriate credit spread).
- Register in Form MBP-2: Must be entered within 7 days.
- FEMA / Overseas Direct Investment (ODI) Rules: The loan must comply with the Foreign Exchange Management (Overseas Investment) Rules, 2022. The loan can be granted only if the Indian parent has made equity investment in the foreign entity, and total financial commitment is within 400% of net worth.
Case Study 8: Downstream Lending Restrictions and Non-Operating Holding Companies
Facts: Alpha Holdings Pvt. Ltd. (a non-operating investment company) borrowed ₹50 Crores from an NBFC at 11% interest. On the next day, Alpha lent the entire ₹50 Crores to its operating manufacturing subsidiary, Beta Factory Ltd., at 11% interest.
NBFC Regulatory & Section 186 Scrutiny:
- Principle Business Test (50-50 Rule): Under RBI regulations, if more than 50% of an entity's assets are financial assets and more than 50% of its income is financial income, the entity is deemed to be a Core Investment Company (CIC) or Non-Banking Financial Company (NBFC) and must obtain a Certificate of Registration from the RBI!
- Section 186 Defense: Even though Beta is a subsidiary, Alpha must ensure it does not violate Section 186(1) (two-layer investment ceiling). Furthermore, borrowing funds for the sole purpose of on-lending without operating business risks classification as an unregistered NBFC. Corporate secretarial teams use assurePractice to ensure holdco structures maintain total company law and RBI alignment.
10-Step Audit Verification Matrix for Section 186 Compliance
Practicing company secretaries, secretarial auditors issuing Form MR-3, and statutory auditors must follow a structured verification framework. The following 10-step matrix details the audit verification program:
| Step | Audit Dimension | Verification Protocol & Substantive Testing | Compliance Deliverable |
|---|---|---|---|
| 1 | Two-Layer Investment Structure Audit | Examine corporate shareholding structures across all subsidiaries. Verify that investments do not traverse through more than two layers of investment companies. | Two-Layer Investment Certification |
| 2 | Financial Accommodation Census | Extract all ledger balances of loans, inter-corporate deposits, share acquisitions, mutual fund units, and bank guarantee contracts. | Section 186 Exposure Master Schedule |
| 3 | 60% / 100% Threshold Computation | Compute 60% of (Paid-up capital + Free reserves + Securities premium) vs. 100% of (Free reserves + Securities premium) from audited balance sheet. | Section 186 Statutory Ceiling Memo |
| 4 | Board Meeting Unanimity Audit | Review Board minutes. Confirm that resolutions were passed at a convened meeting with the unanimous consent of all directors present. | Board Unanimity Verification Note |
| 5 | Special Resolution & EGM Scrutiny | Where cumulative exposure exceeds limits, verify that a Special Resolution was passed in general meeting and Form MGT-14 filed with the ROC. | Special Resolution & MGT-14 Dossier |
| 6 | PFI & Bank Prior Consent Review | Examine loan sanction letters. If term loans exist, verify prior bank NOCs or confirm zero default in principal/interest repayments. | Bank Prior Consent Verification Sheet |
| 7 | G-Sec Interest Rate Benchmarking | Obtain RBI sovereign G-Sec yield curve for corresponding tenors (1/3/5/10 yrs). Verify that loan agreement interest rates exceed the benchmark. | G-Sec Interest Rate Benchmark Memo |
| 8 | Form MBP-2 Register Audit | Inspect the physical Register of Loans, Investments, Guarantees and Securities in Form MBP-2. Confirm entries were recorded within 7 days. | Updated Form MBP-2 Register |
| 9 | Subsidiary Exemption Verification | For transactions claiming WOS exemption from Special Resolution, verify 100% shareholding structure and maintain board approvals. | Wholly-Owned Subsidiary Exemption File |
| 10 | CARO 2020 Clause (iv) Cross-Check | Cross-verify all findings against CARO 2020 Clause (iv) reporting requirements and draft clean auditor disclosure working papers in assurePractice. | CARO Clause (iv) Compliance Dossier |
Statutory Penalties and Secretarial Compounding under Section 441
Non-compliance with Section 186 attracts severe statutory liabilities under Section 186(13):
- Corporate Penalty: The defaulting company is punishable with a fine which shall NOT be less than ₹25,000 but which may extend to ₹5,00,000.
- Officer Liability: Every officer of the company who is in default is punishable with imprisonment for a term which may extend to two (2) years AND with fine which shall not be less than ₹25,000 but which may extend to ₹1,00,000.
- Compounding Mechanics under Section 441: Because the offence under Section 186(13) is punishable with imprisonment or fine, it is a compoundable offence under Section 441 of the Act.
- If fine exceeds ₹25 Lakhs: Compounding application must be submitted to the National Company Law Tribunal (NCLT).
- If fine does not exceed ₹25 Lakhs: Compounding application is adjudicated by the Regional Director (RD).
By leveraging assurePractice, corporate secretarial teams can automate the end-to-end management of Section 186 governance, maintain digital Form MBP-2 registers, track G-Sec yields, and eliminate personal penal liabilities on directors.
Frequently Asked Questions (FAQs) for Corporate Practitioners
Below are 16 detailed, practitioner-grade answers to the most common legal, operational, and procedural questions regarding Section 186:
Q1: Can an inter-corporate loan under Section 186 be approved by a circular resolution?
Answer: Absolutely not. Section 186(5) explicitly commands that the resolution sanctioning a loan, guarantee, security, or investment must be passed "at a meeting of the Board with the consent of all the directors present at the meeting". Approval via circular resolution under Section 175 is illegal and void.
Q2: Does Section 186 apply to a private limited company?
Answer: Yes. Section 186 applies to every company, whether private or public. Unlike certain exemptions available to private companies under Section 185, no blanket exemption from Section 186 is granted to private companies.
Q3: Is an interest-free loan to a wholly-owned subsidiary permitted under Section 186?
Answer: No. Under Section 186(7), every loan must carry interest at a rate not lower than the prevailing yield of Government Securities (G-Sec) of matching tenor. The Act provides no exemption from the interest rate floor for wholly-owned subsidiaries.
Q4: What is the time limit for making entries in Form MBP-2?
Answer: Under Rule 12(1) of the Meetings of Board Rules, entries in the Register of Loans, Investments, Guarantees and Securities (Form MBP-2) must be made within seven (7) days of making such loan or guarantee or security or acquisition.
Q5: Does a company need a Special Resolution to give a guarantee to a bank on behalf of its wholly-owned subsidiary?
Answer: No. Under the first proviso to Section 186(3) read with Rule 11, giving a loan, guarantee, or security to a 100% wholly-owned subsidiary is exempt from the requirement of passing a Special Resolution, even if the aggregate limits exceed the 60% / 100% ceiling.
Q6: Are investments in mutual funds covered under Section 186?
Answer: Yes. Mutual fund units represent "securities" under Section 2(81) of the Companies Act read with Section 2(h) of the Securities Contracts (Regulation) Act, 1956. Acquiring mutual fund units is an acquisition of securities subject to Section 186 limits and board approvals.
Q7: Can a company give a loan to its managing director under Section 186?
Answer: Loans to directors are governed by Section 185 of the Companies Act, 2013, which imposes strict prohibitions and specific conditions. Section 186 regulates loans to bodies corporate and other persons, but cannot be used to bypass the restrictions of Section 185.
Q8: What is the definition of "Free Reserves" for computing Section 186 limits?
Answer: Under Section 2(43), free reserves are reserves available for distribution as dividend as per the latest audited balance sheet. Revaluation reserves, capital reserves, and unrealized gains are strictly excluded.
Q9: When is prior approval of a lending bank mandatory under Section 186?
Answer: Prior approval of a Public Financial Institution or bank is mandatory if the proposed loan/guarantee/investment exceeds the 60%/100% ceiling, OR if the company has an existing default in repayment of loan installments or interest to that financial institution.
Q10: Does Section 186 apply to advance salary given to employees?
Answer: No. Reasonable advances given to employees against monthly salaries or under standard employee housing/welfare schemes in terms of conditions of service do not constitute inter-corporate loans under Section 186.
Q11: What is the penalty for violating Section 186?
Answer: Under Section 186(13), the company is liable to a fine of ₹25,000 to ₹5,00,000, and every officer in default is liable to imprisonment up to two years AND fine of ₹25,000 to ₹1,00,000.
Q12: Can a company invest through three layers of investment subsidiaries?
Answer: No. Section 186(1) explicitly prohibits a company from making investments through more than two layers of investment companies, subject only to narrow statutory carve-outs for foreign acquisitions and statutory regulatory requirements.
Q13: Does subscribing to rights shares offered by a company attract Section 186 limits?
Answer: Under Section 186(11)(b), the acquisition of shares allotted in pursuance of a rights issue under Section 62(1)(a) is exempt from the quantitative ceilings of Section 186.
Q14: How does a company determine the prevailing G-Sec yield for a foreign currency loan?
Answer: For foreign currency loans granted to overseas subsidiaries under FEMA, the interest rate floor is benchmarked to the benchmark interest rate of the foreign currency (e.g., 6-month SOFR or matching sovereign bond yield) plus appropriate credit spread, rather than Indian rupee G-Sec yields.
Q15: Can an unlisted public company pass a Special Resolution under Section 186 by postal ballot?
Answer: An unlisted public company may pass a Special Resolution at an extraordinary general meeting. Listed companies with more than 200 members must pass the resolution through postal ballot in accordance with Section 110 and Rule 22.
Q16: How does assurePractice streamline corporate governance under Section 186?
Answer: assurePractice provides an automated corporate financing governance engine: it dynamically calculates 60%/100% ceilings from trial balances, automates unanimous board resolutions and explanatory statements, benchmarks live RBI G-Sec yields, manages the statutory Register of Loans in Form MBP-2 within 7 days, and tracks CARO 2020 Clause (iv) disclosures.