As per section 186 of Companies Act 2013, approval of the Board is required by means of a unanimous resolution passed at a Board meeting in all cases irrespective of the amount of loan, investment, guarantee or security.

Further no company shall directly or indirectly —

• Give any loan, guarantee or provide any security in connection with a loan to any person or other body corporate; and Acquire by way of subscription, purchase or otherwise, the securities of any other body corporate exceeding 60 % of its (paid-up share capital + free reserves + securities premium account) OR 100 % of its (free reserves + securities premium account), whichever is more.
• Where the investments, loans, guarantee or security proposed to be made and already made exceeds the limit specified section 186; and
• If there is default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan.

Exemption from Shareholders’ Approval

Companies (Amendment) Act, 2017 exempts certain transactions within the ambit of shareholders’ approval for ease of doing business and to increase investment powers of the Company. The following transactions are exempt:

• 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, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company.

Points to Ponder

• No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.
• The company shall disclose in the financial statement the particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.
• The rate of interest on loan provided should not be less than the prevailing yield of Government security closest to the period of the loan.

Exemption from Section 186

Section 186 doesn’t apply to:

• Any loan made, any guarantee given or any security provided or any investment made by:
  • A banking company, or
  • A housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities.
• Any investment made by an investment company;
• In respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.