Section 186 of the Companies Act, 2013, is an important provision that deals with loans and investments made by companies. It sets out rules and restrictions on loans, guarantees, and securities provided by a company to other entities. Here's what you need to know about Section 186:
1. Purpose:
- The primary purpose of Section 186 is to ensure that companies make loans and investments in a manner that does not endanger their financial stability and that shareholders' interests are protected.
2. Applicability:
- Section 186 applies to all companies incorporated under the Companies Act, 2013, including public, private, and government companies.
3. Types of Transactions Covered:
- Section 186 governs various financial transactions, including:
a. **Loan to Any Person or Entity**: A company cannot directly or indirectly give any loan to any person or entity or provide guarantees or securities for loans taken by any person or entity.
b. **Acquisition of Securities**: It regulates the acquisition of securities of any other body corporate, directly or indirectly, including shares, debentures, or other instruments.
c. **Inter-corporate Loans and Investments**: It applies to loans and investments made by one company to another company in the same group or otherwise.
4. Restrictions and Conditions:
- Section 186 imposes several restrictions and conditions on such transactions:
a. **Limits on Loans and Investments**: There are limits imposed on the amount of loans and investments a company can make concerning its own paid-up capital, free reserves, and securities premium account.
b. **Board Approval**: Loans and investments must be approved by the board of directors through a resolution at a board meeting.
c. **Shareholder Approval**: Certain transactions, if they exceed specified limits, require prior approval from shareholders in a general meeting.
d. **Interest Rate**: The interest rate on loans and advances should not be lower than the prevailing yield of one-year, three-year, five-year, or ten-year government security, depending on the term of the loan.
e. **Security**: Loans and investments must be adequately secured unless exempted by the government.
f. **Utilization**: The borrowing company must utilize the funds for its principal business activities. It cannot use the funds for speculative purposes.
5. Exemptions:
- Certain types of companies and transactions are exempt from the provisions of Section 186, subject to conditions and limits as specified in the Companies Act or relevant rules.
**6. Reporting Requirements**:
- Companies are required to disclose the details of loans and investments made under Section 186 in their financial statements.
7. Non-compliance:
- Non-compliance with Section 186 can lead to penalties on the company and its officers. Loans and investments made in violation of this section can be declared void.
It's essential for company directors, executives, and financial professionals to be aware of the provisions of Section 186 to ensure that they comply with the law when making loans and investments. Consulting legal and financial experts can be helpful in navigating the complexities of this section. Additionally, since laws and regulations may change over time, it's crucial to refer to the most recent amendments and notifications related to Section 186.
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