A Guide to Section 186: Loans and Investments by CompaniesApril 30, 2023
The Companies Act 2013 contains a lot of rules, regulations, and provisions a company has to follow. These provisions cover a lot of topics, like shares and company meetings. One such topic is loans and investing. According to the Companies Act 2013, Section 186, a company can provide loans and invest in certain parties. A company can lend money or invest in any activity one of their directors or anyone they might be interested in. There are a lot of limitations and a lot of conditions when it comes to loans by a company, though.
The Terms and conditions
The limits of this section are heavily dependent on the directors. That is to say, a company cannot provide loans, investments, or securities to any unrelated party, be it an individual or a corporate body. To sanction a loan, the company must have a director’s guarantee to ensure their financial security and put their trust in the lender.
According to the Act, a company has certain provisions when it comes to providing loans. The main goal of these provisions is to prevent companies from using their finances to benefit their directors or other related parties. These provisions include:
- The loan by the company cannot exceed 60% of its paid-up share capital or 100% of its free reserves or security premium account, whichever is higher.
- A company can provide loans larger than the prescribed limit if the shareholders pass a special resolution.
- The company needs to get prior approval from the board of directors and be transparent about the details of the loans and their treatment in the financial statements.
It is important to follow these guidelines, as failure to do so might get the company in trouble. Any deviation from the provisions opens the company and its members up to penalties, like imprisonment and fines. The conditions mentioned above are just the major ones. There are minute details that the company needs to thoroughly understand. One good way is to seek professional advice.
The rules Section 186 mentions are essential to maintain the trust and confidence of the stakeholders and other members of the organisation. The professional advice will help businesses use the abilities provided by the Companies Act without getting into trouble. And consultancies like Corporate Leaps ensure that the regulations are followed, and the companies stay safe from legal and financial repercussions. Corporate Leaps helps you navigate the Indian market by aiding you in administrative and financial operations.