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Are you familiar with Section 186 of the Companies Act 2013? If not, don’t worry – you’re not alone. Businesses often overlook this section, but it’s crucial to understand its legal requirements and implications. Section 186 regulates inter-corporate loans, investments, guarantees or securities made by companies, and non-compliance can lead to hefty penalties. In this blog post, we’ll take a closer look at what Section 186 entails and all the necessary information you need to know about it as a business owner or investor in India. So keep reading!
Section 186 of the Companies Act 2013 – Outline
Section 186 of the Companies Act 2013 is a crucial piece of legislation that regulates inter-corporate loans, investments, guarantees or securities made by companies. It aims to safeguard the interests of shareholders and prevent misuse of company funds for personal gains.
This section lists specific legal requirements companies must comply with while making such transactions. For instance, companies must obtain prior approval from their board of directors before making any loan or investment exceeding prescribed limits.
Moreover, Section 186 also mandates that companies maintain a register detailing all their loans, investment decisions, and other relevant information. This helps in ensuring transparency and accountability in financial dealings.
Non-compliance with Section 186 can lead to severe penalties, including fines and imprisonment. Hence, businesses must understand its implications and follow its provisions diligently.
In summary, Section 186 is an essential provision under the Companies Act 2013 aimed at preventing the abuse of corporate power by regulating inter-corporate financial transactions.
Legal requirements under Section 186
Legal requirements under Section 186 of the Companies Act 2013 are essential to understand for every company. The section outlines specific provisions and restrictions related to inter-corporate loans, investments, guarantees or securities.
According to the act, a company can only invest through up to two layers of investment companies except to acquire equity shares in a step-down subsidiary. Also, loans granted by any banking company, insurance company or housing finance company do not fall under this category.
The total amount of loans a firm gives can only exceed its paid-up capital and free reserves if shareholders approve it in the general meeting via special resolution. Additionally, such transactions must be disclosed in the financial statement with details like terms and conditions and justification for making such investments/loans/guarantees/securities.
Furthermore, an officer involved in any infringement shall be imprisoned for up to two years or a fine ranging from one lakh rupees up to five crores or both. Thus, compliance with these legal requirements is crucial, as failure may lead to severe consequences for officers and firms.
Non-applicability of Section 186 of the Companies Act 2013
Section 186 of the Companies Act 2013 lays down specific legal requirements for companies to follow when making loans, investments, guarantees or securities. However, there are certain situations where this section does not apply.
One such situation is when a holding company gives a loan to its wholly-owned subsidiary company. Section 186 does not apply in such cases as both companies are considered part of the same group and share common interests.
Another instance where Section 186 is non-applicable is when a guarantee or security has been provided by one company regarding any loan taken by another company from any bank or financial institution. Again, this exemption applies only if the lending entity has already approved and consented to such an arrangement.
Furthermore, loans made by banking companies and registered NBFCs (Non-Banking Financial Companies) are exempted from complying with Section 186’s provisions since they are governed under separate regulations that ensure compliance with necessary guidelines.
Businesses need to consider these exemptions while dealing with inter-corporate transactions to avoid unnecessary penalties and stay within the bounds of legal problems.
Maintaining register for loans, investments, guarantees, or securities – Section 186
Section 186 of the Companies Act 2013 requires companies to maintain a register for all loans, investments, guarantees or securities made by them. The record should contain details such as the name of the entity receiving the loan or investment, the amount involved and other relevant information.
It is essential that this register is maintained accurately and kept up-to-date. Failing to do so can lead to penalties & legal repercussions for companies. In addition, maintaining an accurate record can help companies assess their financial position and make informed business decisions.
The provision also requires updating any changes to these transactions immediately. This ensures transparency within the company’s financial affairs and helps prevent fraudulent activities.
Companies must ensure that they comply with Section 186 by keeping accurate records of all loans, investments, guarantees or securities given or received by them. The corporation and its directors risk fines if they don’t comply.
Organizations must have proper systems to effectively manage their finances, including complying with Section 186 requirements.
Procedure for making inter-corporate loans and investments
Section 186 of the Companies Act 2013 outlines strategies for making inter-corporate loans and investments. As per this section, a company can provide a loan or investment to any other corporate body only after passing a board resolution.
The board resolution must specify the purpose of the loan or investment, the maximum amount to be invested or lent, terms and conditions of such transactions, security, if any, offered etc.
Further, before providing any inter-corporate loan or investment as per Section 186 of the Companies Act 2013, companies need to obtain credit rating reports from at least two credit rating agencies which RBI recognizes. It is also mandatory for companies to disclose these ratings in their financial statements.
Moreover, no company shall make an inter-corporate investment exceeding 60% of its paid-up share capital and free reserves. If such a limit is exceeded, prior approval from shareholders through a special resolution must be taken.
Section 186 sets out detailed procedures that need to be followed for making inter-corporate loans and investments. By ensuring compliance with these regulations, companies can avoid legal hassles while carrying out their business activities smoothly.
Contravention of Section 186 of the Companies Act 2013 – Penalty
Contravention of Section 186 of the Companies Act 2013 can result in severe penalties for companies and their officers. If a company fails to comply with the provisions of this section, it may face fines up to Rs. 25 lakh or three times the amount involved in contravention, whichever is higher.
The responsibility also lies on officers found guilty of non-compliance with Section 186. The officer-in-default could be liable to pay a fine between Rs.1 lakh and Rs.5 lakhs.
The penal provision under Section 186 ensures that companies do not give way to any activity that might jeopardize their financial success or adversely affect the interests of shareholders.
In addition to monetary penalties, non-compliance with Section 186 can lead to significant reputational damage for companies as it indicates poor governance practices, which could deter potential investors from investing in such entities.
Therefore, companies and their officers must comply with all legal requirements under Section 186 to avoid attracting scrutiny from regulatory authorities or incurring heavy penalties that will eat into profits and erode shareholder value over time.
Conclusion
Section 186 of the Companies Act 2013 is an essential legal provision that aims to regulate inter-corporate loans and investments. It lays down strict guidelines for companies to ensure transparency and accountability in their financial dealings with other entities.
Companies must comply with the legal requirements under Section 186 while making any loan or investment, failing which they may face severe penalties. However, certain exemptions are available as well.
Companies must maintain a register of all loans, investments, guarantees or securities they make under this section. Furthermore, they must follow the correct procedure when making such transactions to avoid contravening the provisions of this section.
In summary, compliance with Section 186 of the Companies Act 2013 is necessary for companies engaging in inter-corporate loans and investments. Adhering to its provisions can help prevent fraudulent practices and promote good corporate governance practices across industries.