Any company is authorized to provide loans, investments, guarantees,s, and securities, to other companies or corporate bodies but having full consent of the board or that of the shareholders.

Here, we would talk about the different provisions that Section 186 of Companies Act 2013, deals with inter-corporate loans and investments.

About Inter-Corporate Loan

Every company has a restriction on the maximum amount of the inter-corporate loan. Every company is entitled to provide 60% of the company’s paid-up share capital, free reserves, security premium account, or 100% of free reserves and security premium account whichever is more.

If the sum of the inter-corporate loan, investment, guarantee, and securities in connection with a loan that is already been made and proposed does not match with the above specific limit, inter-corporate loan and investment, then it can be processed by passing board resolution with consent of all the directors present at the board meeting.

Contrary to this, if it is beyond the specified limit, then a prior special resolution needs to be passed and prior approval is required from the financial institution is required, the latter if the term loan is subsisting.

What are the Restrictions on Inter-Corporate Loan?

Any company that has defaulted in paying the interest amount is barred from making any inter-corporate loan, guarantee, and security.

The prohibition will be effective until the default is completely cleared by the company. Also, the company is not allowed to make double layers of investment companies, except:

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Interest rates on Inter-Corporate loans

Loans are not allowed to be offered at an interest rate lower than the prevailing yield of one year, three years, five years, ten years of Government Security closest to the tenor of the loan.

This is not applicable to companies that provide loans for industrial and research development projects, where 26% or more of the paid-up capital is held by the government.

Procedure for applying

The procedure below is followed by every company for providing loans to any other corporate body, providing security or guarantee.

Step 1- Any company can offer a loan or provide security to any other corporate body through the Board resolution that is 60% of its paid-up capital, security premium account, and free reserves or 100% of its free reserves and security premium, the one that is more.

Step 2-When the above requirements get fulfilled then a Board of Directors meeting is arranged where notice and proposals for granting a loan and other important discussions are done.

Step 3- No investment, loan, guarantee, or security can be provided by any company unless every member present at the board passes with the consent of all the directors present at the meeting.

Step 4- It is required to check whether there is an existing loan from any public financial institution, and if so then prior permission from the financial institution is required. But, if the aggregate loan, investment, guarantee, and security that are proposed are within the limits as mentioned under Section 186(2) and there is no default in the repayment of loan or Interest, no prior approval of public financial institution is required.

Step 5-Once the source of funds and requirements are decided, the Board is going to decide on one of the directors or any person who will apply for the approval to the public financial institution.

Step 6-A general meeting needs to be arranged providing proper notice, where the special resolution needs to pass.

Step 7-The copy of the special resolution in Form MGT-14 needs to be filed along with the fees that need to be given as per the Companies Rules, 2014 with the Registrar within 30 days of passing the resolution.

Step 8-All the required documents need to be attached as per the requirements of the form.

Step 9-The registers need to maintain in Form MBP-2 by the company providing the loan.

Step 10-Entries in the register would be made as per the transactions of getting such a loan or providing the guarantee.

Step 11-Ensuring that no loan would be provided at an interest rate lower than the current yield of one, three, five, or ten years of the Government security close to the tenor of the loan.

Step 12-The Company needs to disclose the financial statement stating full particulars about the purpose for which the financial institution is taking the loan.

Step 13-Scrutinizing the repayment history of the company related to repayment of any deposits or interests.

Penalty for Contravention of Section 186

For Company-The Company that is a default under Section 186 needs to pay a penalty of not less than Rs. 25000 and can exceed up to Rs. 5 lakhs.

For Officer- Every officer of the company who is at default would be punishable with imprisonment for a term period that may exceed up to 2 years and the penalty would not be less than Rs. 25000 but might extend to Rs.1 lakh.