CENTRAL UNIVERSITY

OF SOUTH BIHAR
****************************************************************

SCHOOL OF LAW & GOVERNANCE

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LOAN & INVESTMENT UNDER COMPANY ACT 2013.

PROJECT WORK OF Company law.

Submitted to : Dr Pradip kumar das
Associate Professor,
School of law & governance,
Central university of south Bihar.

Submitted by: Anshu kumar

Enrollment no: CUSB2013125023,
6th semester(2020-2025)
Section :A

ACKNOWLEDMENT
1
The Success and final outcome of this project required a lot of guidance and
assistance from many people.

I respect and thanks DR Pradip kumar Das sir, for providing me an opportunity
to do the project work and giving me all support and guidance which made
me complete the project successfully. I am extremely thankful to her for
providing such a nice topic for my project work.

I made this project with the help of my Self, friends and my teacher who guided
and support me in my research work and encourage me.

All the content of this project work was searched online from different websites
I have visited to complete this project work.
I would like to sincerely thank those who support and encourage me in
completing my project work.

ANSHU KUMAR
(CUSB2013125023)

( B.A.LLB 6th SEMESTER)

Content table
2
 Serial no title Page no:-

01 Introduction 04- 06

02 Legal requirement 06-12

under 186

03 Section186:- non 12-13

applicability.
04 Maintain Register 13-14

05 Inter-corporate 14-15
loan procedures
06 Penalty for 16
contravention
07 conclusion 16-17

Introduction1
1
https://www.legalwindow.in/loan-and-investment-by-company/ (visited on 16
april at 4pm).

3
The investments are made from the investor company’s funds to another
company that wishes to raise investment. These investments from one
company to another or among companies are known as inter-corporate loans
and investments. As the name suggests, this flow of funds from one
company to another can either be in the form of an investment in exchange
for equity in that company or in the form of debts at a fixed rate of interest
for a predetermined tenure. These transactions can be tricky and pose risks.
To mitigate risks and to establish a transparent framework for inter-
corporate loans and investments, they are regulated under the provisions of
the Companies Act, 2013. Section 186 of the Companies Act, 2013 deals with
inter-corporate loans and investments and the provisions related to them.
This section puts limits and restrictions on these inter-corporate loans and
investments and provides a procedural framework for doing so.

Section 186:- overview

Inter-corporate loans and investments are governed under Indian investment

laws. Companies often indulge in investing in other companies or giving them
loans. This is known as inter-corporate loans and investments. The
provisions for these inter-corporate loans and investments are provided and
regulated under Section 186 of the Companies Act, 2013. A company can
give loans and guarantees, acquire shares or make other forms of
investments in other companies after obtaining the approval of their
shareholders and fulfilling necessary requirements and regulatory
compliances. Companies mandatorily need to comply with the provisions of
Section 186 of the Companies Act, 2013, during making inter-corporate loans
and investments.

Section 186 (1): layers of investment2

The purpose behind articulating Section 186 of the Companies Act, 2013 is to
regulate the manner and limit of giving loans and making investments by one
company to another. This regulation was needed to prevent excessive loans
or investments and dilution of shares and to protect the stakeholders’ and
owners’ interests in the market. Thus, Section 186(1) of the Companies Act,
2013 talks about “layers” of investment. The provision of Section 186(1)
states that a company is not permitted to make investments beyond two
layers of investment companies. “Two layers of investment companies” mean
a flow of investment from a holding company to its two layers of subsidiaries.

For instance, suppose company A is the holding company of company B.

Company B is a subsidiary company. Further, company C is a subsidiary
company of company B. Thus, when company A makes an investment in
company B, it is the first layer of investment for company A. If this
2
https://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf
(visited on 16 at 5.30pm).

4
investment further flows to company C, it will be considered as the second
layer investment of holding company A. This covers two layers of investment
for company A and so, it cannot make further layers of investments. For
the purpose of understanding, layers in reference to a holding company
mean a subsidiary or subsidiaries, as mentioned in Section 2(87) of the
Companies Act, 2013. An “investment company” refers to a company whose
primary business model is in the form of acquisition of shares, securities,
debentures, etc., subject to certain sectoral caps, as has been aligned with
the provisions of NBFC Company as per RBI norms by Companies
(Amendment) Act, 2017.

However, there are exceptions to this general rule of two layers. Section 186,
clause (1), sub-clause (i) and (ii) talk about these two exceptions. The first
exception to the two layers rule is that a company in India can acquire
shares and invest in more than two layers in an investment company
incorporated outside India, wherein the domestic laws permit such additional
layers of investment. This investment shall not be barred from the two layers
restriction of Indian laws as the investment company is incorporated and
functions outside India. The other exception to the two layers restriction is
when having such additional investment subsidiary layers is essential for an
investment company in compliance with any regulation or rule of law. 

Section 186 (2): limits on loans, guarantees, investments and

securities3
Section 186 (2) talks about the limitations and sectoral caps put on these
inter-corporate loans and investments. The purpose behind adding limits with
respect to inter-corporate loans and investments in the Companies Act, 2013
is to maintain a balance and control on investments made or loans given to
investment companies. Section 186 (2) puts a limit on loans, guarantees and
investments to any person, company or other body corporate, directly or
indirectly. These limitations are on all forms of capital expenditure, such as
loans, investments, guarantees, or acquisition of shares and securities. Thus,
as per the provisions of Section 186 (2) of the Companies Act, 2013, loans or
investments of any form shall not be made:

1. In excess of 60% of its paid-up share capital, free reserves, and

securities premium account combined, or
2. 100% of its free reserves and securities premium account
combined. 
The investing company may choose either of the two alternative limits while
making investments or giving loans. It is noteworthy that the two layers of

3
https://www.mca.gov.in/Ministry/pdf/
Companies_Act_1956_13jun2011.pdf (visited on 17 april at 2pm).

5
the investment rule are applicable to investment companies. However,
investments can be made to body corporates as well, by way of the
acquisition of shares and securities by way of subscription or purchase. But
the company through which this investment may flow to a body corporate
has to be an investment company and the two layers rule is applicable to two
layers of such investment companies. Therefore, suppose ABC Ltd. Makes an
investment in PQR Ltd., which further makes an investment in MNC LLP. This
MNC LLP holds shares of another XYZ Ltd. In this case, ABC Ltd. Has not
violated the two layers of investment rule articulated under Section 186 (1)
of the Companies Act, 2013 since the two layers have to be two layers of
investment companies for the limitation to hit. 

Important terms used in this clause:4

 For the purpose of this clause of Section 186, “person” does not
include an individual who is an employee of the company. 
 Further, for the purpose of this section, “free reserves” mean the
amount in the bank or reserves of the company which is free to be
distributed as dividends as per the latest audited balance sheet of
the company. This includes the balance credited or to be credited to
the securities premium account. However, this amount does not
include the amount due or reserved for the share application. 
 Further, for the purpose of Section 186 (2), the word “other body
corporate” includes body corporates other than a company. A body
corporate, as defined under Section 2(11) of the Act, is an inclusive
definition. However, this definition of a body corporate includes a
corporation incorporated outside India but does not include:

1. A cooperative society registered under any law relating to

cooperative societies in India, or
2. Any other body corporate that the Central Government may have
specifically barred.

 In Section 186, the definition of “securities” includes bonds,

debentures, warrants, derivatives, or any other kind of marketable
securities. This definition is in accordance with the meaning of
“securities” under the provisions of the Securities Contracts
(Regulation) Act of 1956.
 An “investment company” for the purpose of Section 186 refers to
companies that indulge in the following activities:

1. Subscription or purchase of shares.

4
https://legalserviceindia.com/legal/article-8763inter-corporate-
loan.html ( visited on 17 april at 6.20 pm).

6
 2. Subscription or purchase of share warrants. 
3. Subscription or purchase of debt securities like debentures or bonds.

 The activities that are not considered as “investment” under Section

186 are:

1. Giving loans or making advances.

2. Other financial transactions, such as giving leases, credit facilities,
etc.

 The term “infrastructure facilities” used in this section refers to

facilities specified under Schedule VI of the Companies Act, 2013.

Legal requirements under Section 1865

Requirement 1: board’s approval

When a company makes an investment in any other company or gives out
loans, it is a legal requirement under the provisions of Section 186 to obtain
the prior approval of the investment company’s board of directors. Obtaining
the approval of the board is a mandatory requirement irrespective of the
amount of loan, the form of investment, or where the number of layers is
more than two layers of investment. 

For any proposal to take practical form, the unanimous approval of the board
of directors is necessary. It is only when a unanimous resolution is passed in
a board meeting that the proposed plan of investment can be said to be
approved. Such a meeting must be conducted in the presence of all the
directors of the company and each one of them must have given their
consent to the proposal put forth to them. This cannot be substituted by
passing a resolution by circulation or a resolution by the committee of
directors. Board’s approval has to be mandatorily obtained in the prescribed
manner. 

Power of the board of directors6

5
https://www.wircicai.org/images/material/Practical-App-184-185-186-188-
AleemL.pdf ( visited on 20 april at 7.40 am).

6
https://www.taxlok.com/view/writerarticlematter/details.html/
id=7618/key=E ( visited on 20 april at 11 am).

7
The board of directors are vested with special powers in determining the
company’s affairs. They enjoy and exercise their power of discretion and
decision while approving inter-corporate loans and investments as well. A
meeting of directors is scheduled where the board has the power to decide
to:

 Give loans or make investments in another company or body

corporate.
 Give guarantees, or provide security against any loan given to a
company or body corporate.
 Acquire shares and securities by subscription or purchase of shares
in another company or body corporate.
It is essential for a company to obtain approval from all the members of the
board before indulging in any of these aforementioned activities. The
presence and consent of all the directors in a meeting of directors must be
obtained. However, the board can consent to proposals only up to the
prescribed limit as specified under Section 186 (2) of the Companies Act
2013. Whenever the limit is proposed to be exceeded, approval of the
members of the company has to be obtained in a general meeting through a
special resolution. Only then the board of directors can consent to such an
exceeding amount and execute the proposal. 

Requirement 2: approval of members

Additional to obtaining the approval of the board of directors, Section 186 (3)
also mandates the approval of the members of the company to be obtained
by way of a special resolution in cases where the amount of loan,
investment, guarantee, or the acquisition of shares and securities exceeds
the limit that has been set forth under the provisions of Section 186 (2) of
the Companies Act, 2013. A general meeting has to be conducted for this
purpose where the details of the proposed loan or investment structure are
to be discussed. The company that wants to make investments, give loans,
or acquire shares and securities by spending more than the amount which is
permitted by the provisions of Section 186 (2) has to obtain the approval of
the board of directors, discuss it with the members of the company and pass
a special resolution in favour of the motion. It is only when the proposed plan
is approved by a special majority that the company can go forward with the
investment. A special resolution has to be passed in a manner specified and
in accordance with the provisions of Section 114 of the Companies Act 2013.
A special resolution is said to have been obtained when 75% of people
present and voting have voted in favour of the motion. The special resolution
approval of the members of the company is necessary only when the limit
specified by Section 186 (2) is exceeded. 

8
To facilitate this special resolution, a proposal is made to the members in a
general meeting to secure their votes in favour of the proposal. This proposal
must contain all necessary details such as: 

1. The total amount till which the board is already authorised to make
investments, give loans, or acquire shares and securities in another
company by spending the company’s reserves. This has to be
specified as a figurative value.
2. Further, the resolution should specify the amount exceeding this
authorised amount that the company wishes to use.
3. Company in which the investment is proposed to be made.
4. The reason for exceeding the limit.
5. Such other details as may be required.
When these details are read out in the general meeting and after all the
queries and concerns of the members have been addressed, voting is
conducted. If the resolution is agreed upon and consented to by a special
majority, i.e., 75% of members present and voting vote in favour of the
motion, the resolution is said to have passed. Thereafter, the company can
go forward in its pursuit of making investments exceeding the regulatory
limit.

Passing a special resolution is not necessary in the following cases: 

1. When the investments, loans, guarantees, or acquisition of shares

and securities are within the limit specified under the provisions of
Section 186 (2) of the Companies Act 2013, passing a special
resolution is not essential. 
2. When the loans given or investments made are to a wholly owned
subsidiary of the investment company, the company does not need
to pass a special resolution of its members.
3. When the loans given or investments made are to a joint venture
company (JVC) of the investment company, the company does not
need to pass a special resolution of its members.
4. When a guarantee is given or security is provided to a wholly owned
subsidiary, or venture company (JVC) of the investment company,
the company does not need to pass a special resolution of its
members.
5. When a holding company acquires securities in its wholly owned
subsidiary by means of purchase or subscription of shares, the
investment company does not need to pass a special resolution of
its members.
One exception to this requirement of obtaining special resolution of members
of the company does not apply to specified IFSC public and private

9
companies if a resolution is passed by the company in a meeting of the board
or by circulation. 

Requirement 3: disclosure requirements

Section 186 (4) talks about the mandatory disclosure requirements under the
Companies Act 2013 in inter-corporate loans and investments. This provision
is made in alignment with the interests of members of the company. It
ensures that transparency is maintained and members are well informed
about the financial activities of the company. Therefore, for maintaining
clarity and transparency, the disclosure requirements as per Section 186 (4)
mandates the company to disclose the following information to their
members in their annual financial statement:

 The particulars and full details of the loans given, investments

made, guarantees granted, or securities provided through channels
of inter-corporate loans and investments. The particulars will
contain details of the amount of investment, the company invested
in, layers of investment made, and all other relevant details. 
 The financial statement must also contain the purpose for which the
loan was given, investment was made, security was provided or
guarantee was given to that company. This is the proposed utility
model of the company that raised the loan or investment. 
 Such other disclosures that the board may deem fit.
Disclosure requirements shall also be fulfilled while preparing the proposal
for the general meeting. The notice for the general meeting shall disclose the
following information: 

 The excess to which investments, loans, guarantees or securities

are made by the company to the provided limit.
 A further limit that is essential to determine in excess of the
prescribed limit. 
 The particulars and details of the company or body corporate in
which the proposed investments will be made, loans will be given,
securities will be provided, or guarantees will be given.  
 The purpose for such investment, loan, guarantee, or security.
 The source from which such investment, loan, guarantee, or
security will be provided when it exceeds the prescribed limit. 
 All other details as may be required. 

Requirement 4: approval of public financial institutions

10
We have already discussed the requirement of obtaining the approval of all
the directors of the board before making an investment, loan, guarantee, or
security. After obtaining this approval of the board, Section 186 (5) further
makes provisions for obtaining the approval of the concerned public financial
institution where any term loan is subsisting. When a company has taken a
term loan from a Public Financial Institution, the prior approval of that Public
Financial Institution and all of them, if there are more than one, before giving
loans, investments, guarantees, or securities. This is a mandatory provision
under Section 186 (5) as it helps to provide a deciding power on the Public
Financial Institution whose money is at stake. The company which has taken
loans from a Public Financial Institution has to take their prior approval
before rolling this money further in making investments or giving loans to
other companies or body corporates. However, this mandate applies when
the investment company is proposing to go beyond the prescribed limit of
investment and is in the process of obtaining the approval of members and
the board of directors for the same.

Therefore, the mandatory requirement of obtaining the prior approval of the

Public Financial Institution does not apply when:

 The loan, investment, guarantee, or securities collectively does not

breach the prescribed permissible limit as per the provisions of
Section 186 (2) of the Companies Act 2013.
 Obtaining the Public Financial Institution’s approval is also not
required when the company has maintained good credit with the
public financial institution by making no defaults in payment of
instalments or interests due to the Public Financial Institution. When
the company has complied with all the terms and conditions of the
term loan of the Public Financial Institution, obtaining their approval
becomes an optional requirement. 

Section 186 (6): SEBI-registered companies

While Section 186 of the Companies Act 2013 has prescribed detailed and
mandatory limits on inter-corporate loans and investments, there lies an
exception. The Securities and Exchange Board of India is the regulatory body
in India that governs affairs of investments in the securities market and
persistently aims to protect the interests of investors and other stakeholders
in the securities and capital market in India. SEBI is the regulatory body that
works under the guidance of the provisions enshrined in the Securities and
Exchange Board of India (SEBI) Act of 1992. 

The Companies Act, 2013 and the Securities and Exchange Board of India
(SEBI) Act, 1992 work in cooperation and coordination without overlapping
or infringing the provisions of the respective counterparts. In this regard, the
provisions for inter-corporate loans and investments enshrined under Section
186 of the Companies Act, 2013 make an exception for companies registered

11
under the SEBI. When a company falls within the ambit of a company
registered with the SEBI under Section 12 of the Securities and Exchange
Board of India (SEBI) Act of 1992, it is not restricted by the regulatory
limitations of Section 186 (2) of the Companies Act, 2013. 

A company registered under Section 12 of the Securities and Exchange Board

of India (SEBI) Act of 1992 can make inter-corporate loans and investments
beyond the limits of Section 186 (2) of the Companies Act, 2013 by
disclosing them in their annual financial statements. The benefit of these
provisions extends to all the companies registered under Section 12 of the
Securities and Exchange Board of India (SEBI) Act of 1992, as well as to
those companies or classes of companies as may be prescribed by the SEBI
from time to time. 

Requirement 5: rate of interest determination 

When a company gives loans to another, it fixes a particular percentage of
interest that the company taking the debt must pay on the principal amount.
This percentage is usually fixed for different tenures. For instance, the tenure
or period for which the debt is given is also predetermined and is usually in a
multiple of two, five, or otherwise. 

As per the provisions of Section 186 (7) of the Companies Act 2013, this rate
of interest on loans or debt is fixed as per the prevailing market rate of
interest of 1 year, 3 years, 5 years, or 10 years equivalent of government
securities. Thus, when an inter-corporate loan is given for a period of 5
years, the rate of interest at which it will be given will be the same as the 5
years government security rate of interest. Even if the inter-corporate loan is
given for a period of 4.5 years, the rate of interest will be similar to the 5
years government security rate of interest since that is the closest
equivalence. 

Requirement 6: no continuing defaults

Section 186 (8) of the Companies Act 2013 puts a restriction on companies
that have made any defaults in the past and those defaults are subsisting.
This provision applies to a company that has previously accepted any
deposits as investments or loans in the past and holds these deposits
currently or held them in the past. The legal requirement of this provision of
Section 186 arises when a company eventually made defaults in the
repayment of these debts, their instalments or interests and these defaults
subsist. As per the provisions of Section 186 (8) of the Companies Act 2013,
when a default in deposits subsists, the company cannot make further
investments or give loans to other companies or body corporates. Thus, to
be eligible to indulge in inter-corporate loans and investments, a company
must not have any subsisting defaults in deposits towards another.

12
Therefore, if a company has subsisting defaults, it is essential to first clear
these defaults before being able and eligible to make investments, give
loans, or acquire shares and securities in another. 

Section 186 of the Companies Act 2013: non-

applicability.7
The provisions of Section 186 of the Companies Act 2013 are general
provisions applicable to companies operating in India. However, there are a
few exceptions to their applicability which are discussed in sub-section (11)
Section 186. Section 186 of the Companies Act 2013 is not applicable in the
following cases: 

 The restrictions of Section 186 are not applicable to government

companies that are engaged in defence-related activities and
productions. 
 The restrictions of Section 186 (except sub-section 1) are not
applicable to a banking company giving loans, making investments,
giving guarantees, or acquiring shares and securities in their
ordinary course of business. 
 The restrictions of Section 186 (except sub-section 1) are not
applicable to an insurance company giving loans, making
investments, giving guarantees, or providing security in their
ordinary course of business. 
 The restrictions of Section 186 (except sub-section 1) are not
applicable to a housing finance company giving loans, making
investments, giving guarantees, or providing security in their
ordinary course of business. 
 The restrictions of Section 186 (except sub-section 1) are not
applicable to a company giving loans, making investments, giving
guarantees, or acquiring shares and securities in their ordinary
course of business of financing other companies or engaging in
providing infrastructural facilities.
 The restrictions of Section 186 (except sub-section 1) are not
applicable to the acquisition of shares by a Non-Banking Financial
Company (NBFC) registered under Chapter IIIB of the Reserve Bank
of India Act, 1934 whose primary business is the acquisition of
shares and securities. The exemption is available for the investment
and lending activities of these NBFCs.

7
https://legalserviceindia.com/legal/article-8763inter-corporate-
loan.html (visited on 20 april at 8pm).

13
  The restrictions of Section 186 (except sub-section 1) are not
applicable to companies whose primary business activity is the
acquisition of shares and securities.
 The restrictions of Section 186 (except sub-section 1) are not
applicable to the shares of any company allotted as per the
provisions of Section 62 (1) (a) of the Companies Act 2013.

Maintaining register for loans, investments, guarantees,

or securities: Section 186 (9) and (10)8
Every company indulging in inter-corporate loans and investments must
prepare and maintain a register with entries of such loans, investments,
guarantees and securities. This register shall be updated by the company at
regular intervals and all the recent loans, investments, guarantees, or
securities provided by the company shall be entered into this register with
the latest details. These entries shall be accompanied by relevant particulars
in the manner specified under Section 186 (9) and (10) of the Companies Act
2013 as well as the constitutional documents of the company. 

As per the provisions of Section 186 (9) and (10) of the Companies Act 2013,
this register shall be kept available at all times in the registered office of the
company and be open for inspection. Members of the company can obtain a
copy of the register in a prescribed manner by paying the prescribed fees.
The members can also take out extracts of the register by paying prescribed
fees. 

This register shall be maintained in Form – MBP 2. It shall be made and

maintained with immediate effect right from the day of incorporation of the
company. Since the day of its creation, it shall be maintained permanently
and updated regularly. The register is maintained under the custody and
supervision of the Company Secretary of the company, who shall ensure that
all regulatory and sectoral standards and adhered to. The Company
Secretary or any other authorised individual shall ensure that the entries of
the register are true and accurate information. For ease of doing business,
the register may either be maintained manually or in electronic mode. 

Procedure for making inter-corporate loans and investments

Inter-corporate loans and investments are regulated and monitored by the
provisions of the Companies Act, 2013 as well as different authorised bodies
and individuals. For this purpose of inter-corporate loans and investments, a
definite procedure must be followed. Every company that wishes to make
inter-corporate loans and investments need to go through the route of this

8
https://www.mca.gov.in/Ministry/pdf/
Companies_Act_1956_13jun2011.pdf (visited on 21 april at 7 pm).

14
well-defined systematic procedure. Let us understand this procedure step by
step:

 The very first thing that a company that wishes to indulge in making
inter-corporate loans and investments needs to do is ensure that the
loans given, investments made, or securities provided by them are
within the prescribed threshold limit of Section 186 (2) of the
Companies Act, 2013. In case the company aims to breach this
threshold limit, it first has to undergo all the necessary requirements
under the provisions of Section 186 by obtaining a special resolution of
the members of the company along with the consent of all the
directors of the company. The company also needs to obtain approval
from any Public Financial Institution from whom they have secured
loans, if any. 
 For completing step 1, a meeting of all the directors of the company
must be arranged. A notice is to be sent to all the directors, calling for
the meeting. A board resolution must be passed with the presence and
consent of all the directors of the board in favour of the proposed loan
or investment. Obtaining the board’s approval is required whether or
not the company is breaching the threshold of Section 186 (2) of the
Act.
 After obtaining the approval of the board of directors and passing the
board resolution in the prescribed manner, a special requirement in
case the loan or investment breaches the threshold is to be met. A
meeting of members of the company will be arranged to obtain their
approval of exceeding the threshold. A notice is sent to all the
members of the company with essential particulars and with the date,
time and venue of holding the general meeting. In this meeting, the
quorum must be met and the proposal must be approved by passing a
special resolution (approval of 75% of people present and voting).
 After passing the board resolution and the special resolution of
members of the company (if applicable), approval of any involved
Public Financial Institution is to be obtained. This provision is
conditional and applies when the company holds an ongoing debt from
any PFI. Further, obtaining this approval is not mandatory if the
company has made no defaults in payment of instalments or interests
to the PFI or when the proposed investment is well within the
threshold of Section 186 (2) of the Act.
 After obtaining all the necessary approvals, a copy of the special
resolution of the company will be filed in Form No. MGT -14 with the
prescribed fees as per the Companies (Registration of offices and fees)
Rules, 2014 to the Registrar of Companies. This copy must be
submitted in the prescribed form and with the prescribed fees within
30 days from the day of passing the special resolution. All the
additional documents that are required to be submitted shall be
attached to this copy while submitting. All these procedural
requirements are to be met before a company can go forward with
giving loans, investments, guarantees, or securities to another. While
doing so, the two layers mandate must be adhered to without any

15
 exceptions unless it is expressly allowed by the domestic laws of the
country where the company or body corporate where investment will
be made resides. For the companies incorporated and operating within
India, complying with the two layers restriction as per Section 186 (1)
of the Act is a mandatory provision.
 The aforementioned requirements must be met before a company
makes an investment, gives a loan, provides security, or acquire
shares of another company. After meeting these requirements, the
company executes their proposed investment plan. When the
investment is made, a loan is given, security is provided, or shares of
another company are acquired, certain procedural requirements follow.
These requirements are met in the post-investment stage. These steps
ensure that the data of the companies are appropriately preserved and
transparency is maintained. These provisions protect the interests of
the investors and other stakeholders of the company. Thus, the post-
investment requirement consists of disclosure requirements and
mandates.
 After the inter-corporate loans and investments have been facilitated,
the company needs to create and maintain a register with entries
containing all the updated details with important information and
particulars related to any or all of the inter-corporate loans and
investments made by the company. Entries will be made in a
chronological manner with the updated details of each entry. This
register will be maintained in Form MBP – 2. The register will be made
available at the registered office of the company for inspection or
taking copies or extracts whenever required, in a prescribed manner
after the payment of prescribed fees. 
 The details of all the transactions made by a company, loans given,
investments made, securities provided and shares acquired by them
shall be disclosed in the financial statement of the company for that
financial year. It shall entail details like the rate of interest at which
the loan is given or the term for which the security is provided. The
financial statement shall disclose all such inter-corporate loans and
investments made by the company, the entities in which they are
made and the reasons or purpose for which it is made. It is also the
duty of the directors and members to ensure that the rate of interest is
equivalent to a similar tenure of government securities. 
 When a company has made an investment, given a loan, or used up
the company’s reserves in providing securities and acquiring shares of
a company in excess of the threshold mentioned in Section 186 (2),
the financial statement should also contain the details of these
transactions, such as the amount used in excess, the purpose for
which the threshold is exceeded and the utilisation model of the
company to which this amount is transacted.
 It is also a procedural requirement for the company making inter-
corporate loans and investments to check and ensure that they have
repaid all their subsisting debts and that there is no subsisting defaults
on their part. A company with subsisting defaults arising due to failure
in timely payment of instalments or interests cannot further make

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 inter-corporate loans and investments. The investment company must
scrutinise their own records. 
 When the company has fulfilled and complied with all the mandatory
requirements for making inter-corporate loans and investments as per
the provisions of Section 186 of the Companies Act, 2013, the
company must finally keep track and record in the register the status
of subsisting loans and investments made by them. This again ensures
that the interests of the company’s stakeholders are not hampered due
to any default on the part of the companies that have raised loans or
investments from the investing company.

Penalty for contravention of section185:-9

Just like any other contravention, contravention of Section 186 of the
Companies Act 2013 also attracts penalties. Provisions for penalties are
mentioned in sub-section (13) of Section 186. This section provides
punishment (penalty) in two forms: penalty for contravention by companies
and penalty for officers responsible for such contravention. 

When a company contravenes any provision of Section 186 of the Companies

Act 2013, the company can be penalised with a minimum fine of Rs.
25,000/- which may go up to Rs. 5,00,000/- and the officer or every officer
in default will be individually sentenced to imprisonment of two years
(maximum) as well as fine of Rs. 25,000/- which may extend to a maximum
of Rs. 1,00,000/- depending upon the grievousness of the contravention.

Conclusion
India is a hub for innovation and entrepreneurship is at a boom. The sway of
newly formed companies is seen every day. These innovations and start-up
companies require funds for their running and administration. There are also
many pre-existing companies whose functioning requires huge Cap-Ex
(capital expenditure). To ulfil these needs and gain profits from them,
companies frequently indulge in giving and taking inter-corporate loans and
investments. One company gives loans or makes an investment in another,
or acquires shares and securities in them, which in turn helps them make
profits from the business and revenue of the company they invested in. this
ecosystem helps both companies and creates a win-win situation for both
which in turn booms the capital market. Since this method of inter-corporate
loans and investments is so frequent in India, it is essential to be regulated.
For this purpose, the Companies Act, 2013 makes provisions under Section
186. Section 186 of the Companies Act, 2013 makes provisions for inter-
corporate loans and investments, the mandatory requirements that a
company must follow and the procedural requirements. It also mentions the
9
https://www.mca.gov.in/Ministry/pdf/
Companies_Act_1956_13jun2011.pdf ( visited on 21 april at 9.30 pm).

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conditions under which a company can or cannot make inter-corporate loans
and investments. Section 186 focuses on disclosure requirements to be
complied with by the company in order to uphold the stakeholders’ and
investors’ interests in the market. Corporate fraud of high scale is subsisting
risks in the market and they swipe away huge capital and give rise to other
risks and losses. Therefore, it is essential to regulate the sector and areas
which are prone to such risks. This is why Section 186 of the Companies Act,
2013 was framed. It helps mitigates risks by maintaining transparency.

References:-
 https://cleartax.in/s/section-186-companies-act-
2013
 https://www.legalwindow.in/loan-and-investment-
by-company/
 https://www.wircicai.org/images/material/
Practical-App-184-185-186-188-AleemL.pdf
 https://www.mca.gov.in/Ministry/pdf/
Companies_Act_1956_13jun2011.pdf
 https://www.taxlok.com/view/writer-article-
matter/details.html/id=7618/key=E
 https://legalserviceindia.com/legal/article-
8763inter-corporate-loan.html
 https://vinodkothari.com/wpcontent/uploads/
2020/04/Back-to-Basics_179-to-188U.pdf

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