Understanding Section 186: Key Investment Regulations for Companies

Overview of Investment Regulations under Section 186

Section 186 governs the investment practices of companies, delineating the parameters within which investments must be made. The regulations aim to ensure corporate governance by limiting investment layers and protecting shareholder interests.

Investment Limits and Compliance

Layers of Investment

1. Sub-section 186(1) states that a company must, unless specified otherwise, make investments through no more than two layers of investment companies. However, exceptions to this rule include:
   • A company can acquire shares in a foreign entity whose laws permit more than two layers.
   • A subsidiary may have investment subsidiaries if required by applicable laws or regulations.

Acquisition Limits

2. Sub-sections 186(2) and 186(3) specify that no company shall, directly or indirectly, acquire through subscription, purchase, or other means, securities exceeding:

   • 60% of its paid-up share capital, free reserves, and securities premium account, or
   • 100% of its free reserves and securities premium account, whichever is greater.

   If either of these thresholds is crossed, a Special Resolution (SR) must be passed. When calculating limits, consider both the previously obtained amounts and any proposed acquisitions.

3. Acquisition by a holding company of its wholly owned subsidiary does not require compliance with these limits.

Disclosure Requirements

4. Sub-section 186(4) mandates that a company must disclose in its financial statements the complete details of loans granted, investments made, or guarantees provided. This includes specifying the intended use of the loan or guarantee by the recipient.

Board Resolution and PFI Approval

5. Sub-section 186(5) specifies that a Board Resolution with unanimous consent from all attending directors must be passed. Additionally, prior approval from the relevant public financial institution (PFI) is required if an existing term loan is involved. Note that only the PFIs defined in regulations are considered, not all institutions.

Important Point:

• Approval from the PFI is crucial if the investment limits are crossed or if there is a default in loan repayments or interest as per the loan's terms with the public financial institution.

Default Provisions

6. Sub-section 186(8) clarifies that there is no default unless associated with the repayment of deposits or interest on those deposits, whether before or after the Act's enforcement.

Maintenance of Records

7. Sub-section 186(9) requires companies to maintain a register regarding the investments and related transactions.

Exemptions from Section 186

8. Sub-section (11) states that the following are exempt from this section, except for sub-section (1):
   • Loans, guarantees, or securities provided by banking companies, insurance companies, housing finance companies, or entities engaged in financing industrial projects or infrastructure.
   • Investments made by investment companies.
   • Investments in shares allocated pursuant to clause (a) of sub-section (1) of Section 62 or rights issues by a corporation.
   • Non-banking financial companies registered under Chapter III-B of the Reserve Bank of India Act, 1934, whose primary operations involve securities acquisition.

Conclusion

Understanding the provisions of Section 186 is crucial for companies to ensure compliance while making investments. Adhering to these regulations helps protect shareholder interests and uphold corporate governance standards.