ANALYSIS OF SECTION 185 AND 186 OF THE COMPANIES ACT

Analysis of Section 185 and 186

Sub-section (1) of section 185 starts with “Save as otherwise provided in this Act”

The implication is obvious – if there is any other provision of the Act permitting lending as covered by this section, and then such specific permission shall prevail over this section. Now let us examine section 186, which deals with “Loans and investment by company”

The most important aspect of section 185(1) is that it applies to Loans given to or guarantees given for either the directors or any other person in whom the director is interested. It no where mentions about related parties or entities controlled by the promoters.

Related party transactions are separately covered by section 188. But section 188 do not talk about Lending (giving of loan), granting of guarantee and investment (either by subscription, purchase or otherwise). Hence it is permitted even in related parties.

Sub-section (1) of section 186 starts with “Without prejudice to the provisions contained in this Act”

Section 186(1) is an over-riding provision. Section 186(1) prohibits only making of investment through more than two layers of investment companies, subject to exceptions as provided in the Proviso to section 186 (1). 

In none of the other sub-sections of section 186, the word “Without prejudice to the provisions contained in the Act” has come.

It is pertinent to note that exemption as given by section 186 (11) is exclusive of section 186 (1).

Hence Lending (giving of loan), granting of guarantee and investment (either by subscription, purchase or otherwise) is mentioned the permission by sub-section (2) to sub-section (13) of section 186.

Hence in my view, if Loans, Guarantee and investment {other than expressly prohibited by section 186(1)} are carried out in compliance with sub-section (2) to sub-section (13) of section 186, section 185 do not come with play.

Section 186 (1) has no applicability regarding Loans, Guarantee and investment (except that it prohibits making of investment through more than two layers of investment companies).

Now the question arises as to why there are two penal clauses separately as stated in sub-section (13) of section 186 and sub-section (2) of section 185.

It clearly implies that if there is violation of the provisions of sub-section (2) to sub-section (12) of section 186, the penal provisions of sub-section (13) of section 186 will apply.

And if the violation is with regard to Loans to directors and/or persons in whom directors are interested, section 185 will come into play and penal provisions as stated in section 185(2) will be attracted in addition to the penal provisions of section 186(13).

Hence it can be deduced from the discussion hereinabove, that:

A Company, whether it is NBFC or not, not having any term loan from any public financial institutions, can give loans to, guarantee for  and/or make investment in any person, whether related or otherwise subject to :

1. Limits up to 60 percent of CRP (Share Capital + Free Reserves + securities premium account ) or 100 percent of RP, whichever is higher ;
2. At a rate not lower than the prevailing yield on government  securities for such period;
3. Disclose in the financial statements full particulars of loan along with the purpose for which the loan is/was proposed to be utilized ;
4. Maintain register as prescribed and keep it open for inspection and taking extracts by member.