Section 186 of the Companies Act, 2013 governs the loans, guarantees, investments and securities that a company can give or make. The section has limits and a layering restriction.
The limits
A company cannot give a loan, guarantee or security, or make an investment, beyond 60% of its paid-up capital plus free reserves plus securities premium, or 100% of its free reserves plus securities premium, whichever is more. If the company wants to exceed this limit, it must obtain a special resolution.
The layering restriction
A company cannot make an investment through more than two layers of investment companies. The restriction is designed to prevent the diversion of funds through a chain of companies. The restriction does not apply to a company that is a holding company or a subsidiary company.
The approval
The board approval is required for a loan, guarantee, security or investment. If the limit is exceeded, a special resolution is required. The company must file Form MGT-14 with the special resolution.
The practical points
The company should compute the limit before giving a loan or making an investment. The company should check the layers of investment companies before investing. The company should obtain the board or special resolution and file MGT-14 within the prescribed time.
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