The recently enacted Companies Act 2013 (the 2013 Act) is a landmark legislation and is likely

to have far-reaching consequences on all companies operating in India. While a part of the 2013
Act has already become effective, the Draft Rules are in the midst of a consultation process.
DEFINITION OF HOLDING COMPANY BARE ACT LANGUAGE
As per Section 2(87) subsidiary company or subsidiary, in relation to any other company
(that is to say the holding company), means a company in which the holding company
(i)
(ii)

controls the composition of the Board of Directors; or

exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed
Explanation.For the purposes of this clause,
(a) a company shall be deemed to be a subsidiary company of the holding company even if
the control referred to in sub-clause
(i)
or sub-clause
(ii)
is of another subsidiary company of the holding company;
(b) the composition of a companys Board of Directors shall be deemed to be controlled by
another company if that other company by exercise of some power exercisable by it at its
discretion can appoint or remove all or a majority of the directors
(c) the expression company includes anybody corporate;
(d) (d) layer in relation to a holding company means its subsidiary or subsidiaries;

PROVISIONS APPLICABLE ON HOLDING AND SUBSIDIARY COMPANY:Investment only through two layers
A company shall make investments through not more than two layers of subsidiary investment
companies unless provided otherwise.
Section 186 of the Companies Act 2013 - Loan and Investment by Company: Introduction:
The Companies Act, 2013 (Act) has come up with a change in the concept of 'Loan and
Investment by Company. The new Act provides that inter-corporate investments not to be made
through more than two layers of investment companies. There is no such provision under section
372A of erstwhile Companies Act, 1956.
Applicability:

In pursuance to the provisions of Section 186(1) of the Act, a Company shall make investment
through not more than two layers of investment companies.
'layer' in relation to a holding Company means its subsidiary or subsidiaries [explanation (d) of
Section 2(87) of the Act]
'investment Company' means a Company whose principal business is the acquisition of shares,
debentures or other securities
The provisions of Section 186 (1) shall not have effect in the following cases:
A Company acquires any Company which is incorporated outside India. Such Company
has Investment Subsidiary beyond Two layers as per the law of such country.
A subsidiary Company from having any investment subsidiary for the purpose of meeting
of the requirement under any law framed under any law for the time being in force.

Disclose requirement in the notice of general Meeting

The Notice of general meeting for passing resolution shall indicate clearly the following:
i.

the limits that will be required in excess of prescribed limits involved in the proposal;

ii.

the particulars of lending company or investing company

iii.

the purpose of loans, guarantee , security and investments

iv.

the source of funding for meeting the proposal and other details as may be specified

Limits for Loans /Guarantee/Security/Investment:

In pursuant to provisions of Section 186(2) of the Act, no Company shall directly or indirectly
give any loan to any person or other body corporate, give any guarantee or provide security in
connection with a loan to any other body corporate or person and acquire by way of subscription,
purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up
share capital plus free reserves plus securities premium account or 100% of its free reserves plus
securities premium account, whichever is more.
Since Section 186(2)(c) provides for acquisition by way of subscription, purchase or
otherwise, the securities of any other body corporate. It is not necessary that the
target entity into which investment flows must be a company. It can be any type of

body corporate. But it is to be kept in mind that the intermediary company through
which investments are made must have to be a company.This section mandates a
company to make investment only through two layers of investment companies. If
ABC Ltd. makes an investment in XYZ Ltd. and further XYZ Ltd. makes an
investment in PQR LLP whereas PQR LLP holds shares of SSB Ltd., there is no
violation of Section 186 (1) of the Act as there are not more than two layers of
investment companies.It is the investor company which shall be held liable in case
of any violation of the section; therefore, It is prudent and advisable that the
investee company to seek a declaration from the investor company whether the
investment made by the investor is coming from more than two layers up

Approval from members:

Sec.186 (12) + Rule 13(1) - Special Resolution as required under section 186 may be passed before
31st March, 15.

Though the Section 186(2) makes restriction as above, Section 186(3), empowers a Company to
give loan, guarantee or provide any security or acquisition beyond the limit but subject to prior
approval of members by a special resolution passed at a general meeting.
Disclosure of particulars of loan, guarantee given and security provided:
In pursuant to provisions of Section 186(4) of the Act, it is duty of the Company to disclose in
the Financial Statement the full particulars of the loan, guarantee given and security provided
and its utilization.
Approval of Board and Public Financial Institution:
In pursuant to provisions of Section 186(5) of the Act, every Company shall take consent of all
the directors present at the board meeting before making any investment, giving loan and
guarantee and providing security. In case of Company has already taken loan etc., from any
Public Financial Institutions, then it is mandatory to take prior approval from such Public
Financial Institution.
Provided that prior approval of Public Financial Institution shall not be required where the
aggregate loan, investment, guarantee and security proposed is within the limits as specified
under section 186(2) and there is no default in repayment of loan or interest thereon to the Public
Financials Institution.
Companies Registered under Securities Exchange Board of India (SEBI):
Section 186(6) of the Act provides that those Companies which are registered under Section 12
of SEBI Act, 1992 and other prescribed Companies can take inter-corporate loans or deposits

exceeding the prescribed limit. The intention of government is clear, if the Company is registered
under SEBI, this section is not applicable for the part of limit but, simultaneously, prescribed a
condition that:
Provided that such companies shall furnish details of loans or deposit in their Financial
Statements.
Register to be maintained:
Section 186(10) of the Act mandates every Company to maintain a register which shall contain
particulars of loan or guarantee given or security provided or investment made.
This register shall be opened for inspection and copies may be furnished to to members who
demands for the same on payment of prescribed fee.
i.

Sec. 186(9) + Rule 12(1)- Maintain (in electronic mode or manually) the register in
the Form MBP-2 from the date of its incorporation

ii.

Sec. 186(9) + Rule 12(2)- Entries to be made in the register within 7 days

iii.

Sec. 186(9) + Rule 12(3)- Place of Keeping the register- Registered office

iv.

Sec. 186(9) + Rule 12(4)- Authentication of the Register by secretary or authorised

person by BOD

v.

Sec. 186(9) + Rule 12(6) - Inspection charges not exceed Rs. 10/-for each page.

Non Applicability: The Section 186 (except Sub Section 1) of the Companies Act, 2013 does not
apply to the following:
Banking Company, Insurance Company, Housing Finance Company etc.,
Any Company whose main business of acquisition of shares or securities etc.,
Penalty: For Company:
Every Company which contravenes the provisions of this Section shall be liable to a penalty
which shall not be less than Rs. 25000/- but which may extend to Rs. 5.00 lacs.
For Officers:-

Every officer of the Company who is default shall be punishable with imprisonment for a term
which may extend to two years and fine which shall not be less than Rs. 25000/- but which may
extend to Rs. 1.00 lacs.
Note: Ministry of Corporate Affairs has issued a clarification through General Circular No.
18/2013. dated 19.11.2013 with regard to applicability of provision of Section 372A of the
Companies Act, 1956. It was unequivocally clarified in the said Circular that Section 372A of the
Companies Act, 1956 dealing with inter-corporate loans continue to remain in force till section
186, of the Companies Act, 2013 is notified.

Comparison of Section 186 of Companies Act, 2013 and Section 372A of

Companies Act, 1956.
Particulars
Section 186 of Companies Act, 2013 Section 372A of Companies Act,
(the 2013 Act)
1956 (the 1956 Act)
Heading of
Loan and Investment by Company
Inter Corporate-Corporate Loans and
Section
Advances.
Number of Sub- 13
9
Section
Restriction on
A Company shall unless otherwise
No such provision
multi layered
prescribed, make investment through not
Investment
more than two layers of Investment
Companies. Provided that above
restriction is not applicable in following
cases; (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.
Specified
transactions are
1. Loan to any Person.
1. Loan to any Other Body
covered
Corporate
2. Loan to any Body Corporate
2. Guarantee to any Body
3. Guarantee to any Person.
Corporate.

4. Guarantee to any Body

Corporate.

3. Security in connection with a

loan to Body Corporate.

5. Security in connection with a

loan to Person

4. Acquire by way of
subscription, purchase or
otherwise, the securities of
any other body corporate

6. Security in connection with a

loan to Body Corporate.
7. Acquire by way of subscription,
purchase or otherwise, the
securities of any other body
corporate
Type of Persons
Covered

Body Corporate
i.

Persons

ii.

Body Corporate

Section 372A of 1956 Act covers only

Body Corporate, whereas Section 186 of
the 2013 Act covers Perons and Body
Corporate. The word Person has not
been defined under the 2013 Act. As per
Section 2(31) of the Income Tax Act
1961, person includes:
i.

an individual,

ii.

a Hindu undivided family,

iii.

a company,

iv.

a firm,

v.

an association of persons or a
body of individuals, whether
incorporated or not,

vi.

a local authority, and

vii.

every artificial juridical person,

not falling within any of the

preceding sub-clauses.
Applicability
1. Public Companies

1. Public Companies

2. Private Limited Companies.

2. Private Limited Companies

which are Subsidiaries of
Public Companies.

The above applicability is subject to

exemption provided under Section and
Rules.

The above applicability is subject to

exemption provided under Section.
Exemptions from (a) to a loan made, guarantee given or (a) to any loan made, any guarantee
applicability
security provided by a banking company given or any security provided or any
or an insurance company or a housing investment made by (i) a banking
finance company in the ordinary course company, or an insurance company,
of its business or a company engaged in or a housing finance company in the
the business of financing of companies ordinary course of its business, or a
or of providing infrastructural facilities; company established with the object
(b) to any acquisition (i) made by a of financing industrial enterprises, or
non-banking financial company
of providing infrastructural facilities;
registered under Chapter IIIB of the
(ii) a company whose principal
Reserve Bank of India Act, 1934 and
business is the acquisition of shares,
whose principal business is acquisition stock, debentures or other securities;
of securities: Provided that exemption to (iii) a private company, unless it is a
non-banking financial company shall be subsidiary of a public company; (b)
in respect of its investment and lending to investment made in shares allotted
activities; (ii) made by a company
in pursuance of Rights Issue; (c) to
whose principal business is the
any loan made by a holding company
acquisition of securities; (iii) of shares to its wholly owned subsidiary; (d) to
allotted in pursuance of Rights Issue. any guarantee given or any security
Rule 11 (1) of the Companies (Meetings provided by a holding company in
of Board and its powers) Rules, 2014
respect of loan made to its wholly
provides that provisions of Section 186 owned subsidiary; or (e) to
is applicable to wholly owned
acquisition by a holding company, by
subsidiary except sub section (3) of
way of subscription, purchases or
Section 186 of the 2013 Act
otherwise, the securities of its wholly
owned subsidiary.
Requirement of The Section requires to obtain
The Section requires to obtain
Section
theunanimous approval of the board if theunanimous approval of the
it; a) gives any loan to any person or
board if it; a) makes any loan to any
other body corporate b) gives any
other body corporate b) gives any
guarantee or provide security in
guarantee, or provide security, in
connection with a loan to any other body connection with a loan made by any
corporate or person; and c) acquire by other person to, or to any other

Interest rate on
Loans

Penalty

way of subscription, purchase or

otherwise, the securities of any other
body corporate, not exceeding 60% of
its paid-up share capital, free reserves
& securities premium account or 100%
of its free reserves and securities
premium account, whichever is more If
the above said limits exceeds then prior
approval of Members by means of
Special Resolution would be
require. Note:While Computing the
above said limit the Security Premium
is included in addition to paid up share
capital and free reserve whereas under
the 1956 Act Security premium was
not included in computing the limit.
Rate of interest shall not be lower than
the prevailing yield of 1 year, 3 years, 5
years or 10 years Government Security
closest to the tenor of the loan

person by, any Body Corporate; and

c) acquire by way of subscription,
purchase or otherwise, the securities
of any other body corporate,not
exceeding 60% of its paid-up share
capital, free reserves or 100% of its
free reserves, whichever is more. If
the above said limits exceeds then
prior approval of Members by means
of Special Resolution would be
require.

Rate of interest shall not be lower

than the prevailing bank rate, being
the standard rate made public under
section 49 of the Reserve Bank of
India Act, 1934
The company shall be punishable with The company and every officer of the
fine which shall not be less than twenty- company who is in default shall he
five thousand rupees but which may
punishable with fine which may
extend tofive lakh rupees and every
extend tofive thousand rupees and
officer of the company who is in default also with a further fine which may
shall be punishable with imprisonment extend to five hundred rupees for
for a term which may extend to two every day after the first day during
years and with fine which shall not be which the default continues
less than twenty-five thousand rupees
but which may extend to one lakh
rupees