In the financial regulations, the most complex aspect of the Companies Act 2013 Section 186, this discusses loans and investments. It plays a significant role in shaping the financial conditions of the business in India. In this article, you will get a guidance note on Section 186 of the Companies Act, 2013, where we solve certain FAQs on Section 186 of the Companies Act, 2013. Furthermore, there will be a depth discussion about the Section 186 of the Companies Act, 2013
| Table Of Content |
Overview of Layers of Investment
The concept of layers of investment is not standard or a huge identification in the sector of finance or investments. However, it might be in several contexts to define various aspects of investment performances or frameworks. Here are certain potential interpretations:
- Diversification: “Layers of investment” might refer to a strategy of diversification, where an investor allocates funds across different asset classes, industries, or geographic regions. Each layer provides various kind of investment; reduce exposure to a single asset class or market, and aims to spread risk.
- Investment Stages: In venture capital or private equity, “layers of investment” could refer to various stages of investment in an economy or startup. These stages mainly involve seed funding, such as Series A, B etc. Every layer represents a various round of investment as the company matures and reaches various milestones.
- Structured Finance: In structured finance, the term might be used to describe different tranches or layers of securities created from a pool of financial assets. These layers often have different levels of risk and return, with senior tranches considered less risky but offering lower returns compared to junior or mezzanine tranches.
- Capital Structure: In corporate finance, “layers of investment” could refer to the different components of a company’s capital structure, such as equity and various types of debt (senior, subordinated, etc.). Each layer represents a different form of financing with its own characteristics and risk profile.
Limits on Loans, Guarantees, Investments and Securities
The limits on loans, guarantees, investments, and securities under the Companies Act, 2013 section 186 are:
- Loans, Guarantees, and Securities by a Company (Section 186(2) of Companies Act, 2013): The aggregate of loans, guarantees, and securities given by a company (along with the investments made by the company in the securities of its subsidiaries) should not exceed:
- 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 more.
- Investments in the Securities of Its Subsidiaries (Section 186(4)): The Company can make investments in the securities of its subsidiaries up to the limits specified in Section 186(2) of the Companies Act, 2013.
Non-applicability of Section 186 of the Companies Act, 2013
The Companies Act, 2013 Section 186, providing the loans and investments may not be applicable in certain situations such as:
- Government Companies: As per the provisions of the Companies Act, 2013 does not apply to government companies.
- Wholly Owned Subsidiaries: The Companies Act, 2013 provisions may not apply to the companies, whose wholly-owned subsidiaries and their debts are guaranteed by the holding company.
- Specified Types of Companies: Particular kinds of companies or various sections of companies can be exempted from the applicability of the Companies Act, 2013 . It depends on certain provisions of the act.
- Transactions in Ordinary Course of Business: Transactions, which are in normal course of business and its arm’s length may be exempt from restrictions of the Companies Act, 2013.
- Transactions Not Considered Loans or Guarantees: There are specific transactions, which are not considered as loans, guarantees or investments for the motives of section 186. Thus, the section cannot implement such transactions.
- Transactions Approved by Special Resolution: These transactions are attained by the approval of a special resolution in the company will otherwise be restricted by the Companies Act, 2013 Section 186 may be permitted.
How to Comply with the Companies Act, 2013 Section 186?
Compliances with the Companies Act, 2013 includes the specific process and needs when a company is involved in loans, guarantees and investments. Here are general steps to comply with section 186:
- Review the Companies Act, 2013: Ensure a thorough understanding of the provisions of Section 186 and its subsections. Regularly check for any amendments or updates to stay compliant.
- Identify Applicability: Determine whether Section 186 applies to your company based on its structure, type, and the nature of financial transactions it is involved in.
- Board Approval: Obtain approval from the board of directors for each transaction covered under Section 186. Ensure the approval is obtained at a board meeting with the required quorum.
- Shareholder Approval (if required): In case loans, guarantees, and investments aggregate exceed the limits, acquired permission from stakeholders by a special resolution at a general meeting.
- Ensure Fair and Reasonable Terms: Make sure that the loan, guarantee or investment’s terms and conditions are reasonable, fair and not prejudicial to the company’s interests.
- Documentation: The company need to maintain the necessary documents of terms and conditions of the transaction. This includes preparing loan agreements, guarantee documents, or any other relevant contracts.
- Register of Loans and Investments: Maintain a register of loans, guarantees, and investments in the prescribed format. Keep the register at the registered office of the company and ensure it is open for inspection by directors during business hours.
- Utilization of Funds: Make sure and manage the funds, which are used by the recipient company for the goal for which they are permitted.
- Security for Loans (if applicable): In case of loan is secured, make sure that the company has the right to make sure the security is defaulted by the borrowing company.
- Disclosures in Financial Statements: In the Company’s financial statement the loans provided, guarantees given and investments created have been disclosed, which includes the motive of the loan or investment, and any other particular details.
- Compliance with Related Party Transaction Rules: The Companies Act, 2013 section 188 gives the transaction includes a related party, compliance with the provisions.
- Legal Due Diligence: Conduct legal due diligence to ensure that the transaction complies with other applicable laws and regulations.
- File Necessary Returns: File required returns (Form MGT-14 )or documents with the Registrar of Companies (RoC) as needed under the Companies Act, 2013.
Conclusion
The Companies Act, 2013 emerges as a foundation and describes the boundaries for financial transactions unfold. While concluding this article, it is evident that its provisions are not mere regulatory constraints, but, rather a protection, which fosters responsible financial conduct. The journey of Section 186 has been provided by a web of considerations, from the permissible limits on loans and investments to the situations, to which companies must follow.
