Corporate and Economic Laws · Investment and Loans

Exemptions and Special Cases under Section 186

Updated 11 October 2026 · Fact-checked

Section 186 of the Companies Act, 2013 controls loans, guarantees, securities and investments by a company. Sub-section (11) exempts certain entities and transactions, such as banks, insurers and housing finance companies in the ordinary course of business. To solve a question, identify the entity, the transaction and which sub-sections the exemption removes.

Understand Exemptions and Special Cases under Section 186

Section 186 limits how much a company can lend, guarantee, secure or invest in other bodies corporate. It also sets approval, disclosure, register and penalty rules. These rules suit ordinary trading and manufacturing companies. They do not suit companies whose business is lending or investing.

So the Act carves out exemptions in sub-section (11). A bank that lends to customers would be stuck if every loan needed a limit check and a special resolution. The law therefore exempts such lending when it is done in the ordinary course of business.

The key point is the scope of the relief. Sub-section (11) says nothing in the section applies to the listed cases except sub-section (1). Sub-section (1) is the limit of two layers of investment companies. So even an exempt entity must still respect the layer limit.

There are also special cases inside the section itself. Sub-section (3) gives relief from the special resolution requirement for loans, guarantees or security to a wholly owned subsidiary or a joint venture company, and for a holding company acquiring securities of its wholly owned subsidiary. Sub-section (1) has provisos for foreign acquisitions and for subsidiaries that must hold investment subsidiaries under law.

Finally, do not confuse Section 186 with Section 185. Section 185 deals with loans to directors and related persons and is far stricter. Its exemptions are separate and are listed in its own sub-section (3).

Key rules to remember

Exempt entities and transactions (s.186(11)(a)): Loan, guarantee, security or investment by a banking company, insurance company or housing finance company in the ordinary course of its business; or by a company established to finance industrial enterprises or provide infrastructural facilities; The company must be engaged in that business. Relief covers the whole section except sub-section (1).
Exempt investments (s.186(11)(b)): (i) by an investment company; (ii) in shares allotted under s.62(1)(a) or rights issues by a body corporate; (iii) by a registered NBFC (Chapter III-B of the RBI Act, 1934) whose principal business is acquisition of securities, for investment or lending activities; Clause (iii) needs both RBI registration and principal business of acquiring securities.
What is never exempt: Section 186(1): investment through not more than two layers of investment companies; Sub-section (11) says 'except sub-section (1)'.
Definitions: Investment company = principal business is acquisition of shares, debentures or other securities. Infrastructure facilities = facilities specified in Schedule VI; Both come from the Explanation to the section.
Relief from special resolution, s.186(3) provisos: No special resolution needed for loan, guarantee or security to a wholly owned subsidiary or joint venture company, or for acquisition by a holding company of securities of its wholly owned subsidiary, even if the s.186(2) limits are exceeded; Only the sub-section (3) requirement is lifted. Disclosure under (4), Board resolution with consent of all directors present under (5), the register under (9), and sub-sections (7) and (8) still apply.
Layer provisos, s.186(1): Two-layer rule does not affect (i) acquiring a foreign company with investment subsidiaries beyond two layers under that country's law; (ii) a subsidiary having investment subsidiaries to meet a legal requirement; Two narrow exceptions only.
Section 185 vs 186: s.185(1): bar on loans, guarantees and security to directors, their relatives and firms in which they are partners. s.185(2): loans etc. to a person in whom a director is interested are allowed with a special resolution and use of the loan for the borrower's principal business activities. s.185(3)(c),(d): a holding company may lend to, or give guarantee or security for, its wholly owned subsidiary, or give guarantee or security for a bank or financial institution loan to its subsidiary, if the loan is used for the subsidiary's principal business activities. s.186: loans, guarantees, investments in any body corporate or person, with limits; A transaction may need to be tested under both. Each section has its own exemptions.

How to solve Exemptions and Special Cases under Section 186 questions

Use this order for any question on exemptions and special cases under Section 186.

1Identify the lender or investor. Is it a bank, insurer, housing finance company, infrastructure or industrial finance company, investment company or NBFC?
2Check the activity. The transaction must be in the ordinary course of its business for clause (a) entities.
3Identify the type of transaction: loan, guarantee, security, investment, or shares through rights or s.62(1)(a).
4For an NBFC, confirm RBI registration under Chapter III-B and that its principal business is acquisition of securities.
5Apply the exemption: sub-section (11) removes the whole section except sub-section (1). Then test the two-layer rule separately.
6If no sub-section (11) exemption applies, look for special relief in sub-section (3) provisos, for a wholly owned subsidiary or joint venture, and note the disclosure duty.
7Check whether Section 185 also applies, for example if a director or a related party is the borrower.
8Write the conclusion clearly: which provisions apply, which do not, and why.

Quickest way: Entity, activity, layer check

When to use it: For MCQs and short case questions where you must decide quickly whether Section 186 applies.

Name the entity type. If it is not in the sub-section (11) list, there is no entity exemption.
Ask: ordinary course of business, or an investment of the listed kind?
Remember: exempt means the whole section except sub-section (1).
If the borrower is a wholly owned subsidiary or JV, no special resolution is needed even if the s.186(2) limits are exceeded. Disclosure (4), Board resolution with all directors present consenting (5), the register (9), and sub-sections (7) and (8) still apply.
If the borrower is a director or related, switch to Section 185.

Common mistakes in Exemptions and Special Cases under Section 186

Saying an exempt entity is outside Section 186 completely.
Students remember the list but forget the words 'except sub-section (1)'.
Fix: Always add that the two-layer investment company restriction still applies.
Exempting a bank for any transaction, such as a non-business loan or investment.
The phrase 'ordinary course of its business' is skipped.
Fix: Check that the loan, guarantee, security or investment is made in the ordinary course of business.
Treating every NBFC as exempt.
Students read 'NBFC' and stop.
Fix: Exemption needs RBI registration under Chapter III-B and principal business of acquiring securities, and covers investment or lending activities.
Believing loans to a wholly owned subsidiary escape the whole section.
The proviso to sub-section (3) is over-generalised.
Fix: The proviso only removes the sub-section (3) special resolution requirement, even where the limits are exceeded. Disclosure under (4), the Board resolution under (5), the register under (9), and sub-sections (7) and (8) still apply.
Mixing Section 185 and Section 186 exemptions.
Both sections cover loans and both mention wholly owned subsidiaries.
Fix: Section 185 has its own exemptions in sub-section (3). Apply each section separately to the same transaction.
Forgetting that rights issue shares are exempt investments.
Focus stays on entity-based exemptions.
Fix: Remember clause (b)(ii): shares allotted under s.62(1)(a) or in rights issues by a body corporate.

Worked examples

Example 1

Sundaram Housing Finance Ltd lends ₹5 crore to home buyers in the ordinary course of its business. Its loans exceed the limit in Section 186(2). Does it need a special resolution under Section 186(3)?

Show the solution

Sundaram Housing Finance is a housing finance company.
Section 186(11)(a) exempts loans made by a housing finance company in the ordinary course of its business.
The exemption applies to the section except sub-section (1), so limits in (2) and the special resolution in (3) do not apply.
The two-layer investment rule in sub-section (1) is a separate matter and this transaction is a loan, not an investment through layers.

Answer: No special resolution is needed under Section 186(3). The loans are exempt under Section 186(11)(a).

Example 2

Kaveri Industries Ltd, a manufacturing company, gives a loan of ₹2 crore to its wholly owned subsidiary and a loan of ₹1 crore to Mr. Rao, a director. The total exceeds the Section 186(2) limit. Discuss.

Show the solution

Kaveri Industries is a manufacturer, so no sub-section (11) entity exemption applies.
Loan to the wholly owned subsidiary: the proviso to Section 186(3) says the requirement of that sub-section does not apply. So no special resolution is needed even though the limit is exceeded.
The proviso removes only that requirement. Under Section 186(5), the loan needs a Board resolution passed at a meeting with the consent of all directors present. Prior approval of the public financial institution is needed where a term loan is subsisting. The proviso to (5) does not excuse this here, because the limit is exceeded.
The company must also disclose the loan details in its financial statement under (4) and enter it in the register under (9). The interest rate must not be below the prevailing government security yield under (7), and the company must not be in default on deposits under (8).
Loan to the director: Section 185(1) prohibits loans to a director of the company. None of the Section 185(3) exemptions is given in the facts, for example conditions of service for all employees or a members-approved scheme for a managing or whole-time director.
Section 186 relief for its subsidiary does not help a director loan, because Section 185 applies separately.

Answer: The subsidiary loan needs no special resolution under Section 186(3), but it still needs the Section 186(5) Board resolution with all directors present consenting (and prior public financial institution approval if a term loan subsists), and it must be disclosed and registered. The loan to the director is prohibited under Section 185(1) unless a Section 185(3) exemption applies.

Exam tips

Learn the sub-section (11) list as two groups: entity-based (a) and investment-based (b).
Always write 'except sub-section (1)' when stating the effect of the exemption.
In MCQs, watch for the NBFC trap: registration under Chapter III-B and principal business of acquiring securities are both required.
For case questions, test Section 185 and Section 186 separately and state both conclusions.
Do not quote penalty figures unless asked. If asked, Section 186(13) fine is ₹25,000 to ₹5 lakh on the company.

Practice questions from Investment and Loans

Exemptions and Special Cases under Section 186 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

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Exemptions and Special Cases under Section 186: frequently asked questions

Does Section 186 apply to banking companies?

Not for loans, guarantees, security or investments made in the ordinary course of business. Section 186(11)(a) exempts banking, insurance and housing finance companies for these. Only sub-section (1), the two-layer rule, still applies.

Is an NBFC exempt from Section 186?

Only in a specific case. Under Section 186(11)(b)(iii), an NBFC registered under Chapter III-B of the RBI Act, 1934, whose principal business is acquisition of securities, is exempt for its investment or lending activities. An NBFC without that principal business does not get this exemption.

What is the difference between Section 185 and Section 186?

Section 185(1) bars loans, guarantees and security for directors, their relatives and firms in which they are partners. Section 185(2) allows them for a person in whom a director is interested, with a special resolution and use for the borrower's principal business activities. Section 185(3) also exempts, among others, a holding company's loans, guarantees and security for its wholly owned subsidiary, if used for the subsidiary's principal business. Section 186 sets limits and approvals for loans, guarantees, security and investments in other bodies corporate or persons. A transaction may attract both.

Are loans to a wholly owned subsidiary exempt from Section 186?

They are exempt from the special resolution requirement in sub-section (3), even if the limits in sub-section (2) are exceeded. The rest still applies: the Board resolution with all directors present consenting under (5), disclosure under (4), the register under (9), and sub-sections (7) and (8).