ICD as a Section 186 Deployment
An inter-corporate deposit is a loan to a body corporate and therefore falls squarely within the four categories regulated by Section 186: loans, guarantees, securities, and investments. The label “deposit” does not remove it from the section. Whether the instrument is called an ICD, a demand loan, or an inter-corporate advance, the compliance analysis is identical: aggregate exposure, approval tier, interest floor, and disclosure.
The Approval Sequence for an ICD
The board resolution comes first, every time. The resolution should identify the borrower, the amount, the tenor, the purpose, the rate of interest with reference to the applicable G-sec yield, and the aggregate Section 186 headroom after the proposed deployment. If the aggregate crosses the prescribed limit, the special resolution must be passed before the ICD is disbursed. A board resolution that authorises the ICD “subject to shareholder approval” and permits disbursement before the general meeting is not compliant.
Pricing the ICD: The G-sec Floor
Section 186(7) sets the minimum rate at the yield on government securities closest to the tenor of the loan. For a three-year ICD, the reference is the three-year G-sec yield; for a demand ICD repayable on call, the closest tenor is typically the one-year benchmark. The loan agreement should state the benchmark, the date of reference, and the margin. An ICD priced at “mutually agreed” interest without a benchmark recital is vulnerable to an adverse inference in adjudication.
The Aggregation and Headroom Certificate
Before each ICD, the company secretary or CFO should issue a headroom certificate computing the two Section 186 formulas against the latest audited balance sheet and adding the proposed ICD to the existing aggregate. The certificate should be placed before the board with the resolution. Without it, the board has no documented basis for concluding that the limit has not been breached, and the resolution is exposed to a later finding of non-application of mind.
ICD to a Subsidiary or Group Entity
A loan to a wholly owned subsidiary is exempt from the special resolution requirement, but not from the board resolution, the interest floor, or the disclosure obligations. Where the subsidiary is not wholly owned, the exemption does not apply and the aggregate test must be run. An ICD to a group entity that is also a related party may trigger Section 188 in addition to Section 186; the two analyses must be performed separately, because Section 188 addresses the terms and approval of the related-party transaction, while Section 186 addresses the deployment ceiling.
Default and Recovery
An ICD that turns non-performing raises a distinct compliance question: the board must record the default, the recovery steps, and the provisioning in its minutes. A silent rollover of an overdue ICD without a fresh board resolution is both an accounting issue and a Section 186 governance issue, because the aggregate exposure continues to count against the limit while the approval on record relates to a matured instrument.
Documentation Set
A complete ICD file contains the board resolution, the headroom certificate, the special resolution if applicable, the ICD agreement with the G-sec benchmark recital, the borrower’s board resolution accepting the deposit, the TDS computation, and the register entry. Where the ICD is secured, the security documents should be executed before disbursement, not after.
Call to Action: For ICD documentation review, Section 186 headroom certification, or board resolution drafting, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.