Corporate and Economic Laws · Investment and Loans

Limits on Investments, Loans and Guarantees under Section 186

Updated 11 October 2026 · Fact-checked

Under section 186(2), a company cannot give loans, give guarantees or security, or acquire securities of other bodies corporate beyond the higher of 60% of (paid-up share capital + free reserves + securities premium) or 100% of (free reserves + securities premium). To go beyond, it needs a special resolution under section 186(3).

Understand Limits on Investments, Loans and Guarantees

Section 186 stops a company from putting too much of its money into other companies or people. The idea is simple: shareholders' funds should not be drained away through loans, guarantees and investments without their consent.

The ceiling in section 186(2) covers three things, whether done directly or indirectly: loans to any person or body corporate; guarantees or security given in connection with a loan to any body corporate or person; and acquiring securities of another body corporate by subscription, purchase or otherwise. All three are added together and tested against one limit.

The limit is the higher of two figures: 60% of paid-up share capital, free reserves and securities premium account; or 100% of free reserves and securities premium account. The second figure wins when free reserves and securities premium are large compared with paid-up capital.

Section 186(3) deals with going beyond the limit. You must test the aggregate: loans and investments already made, guarantees and security already given to or in all other bodies corporate, plus the new proposal. If that total exceeds the limit, the Board cannot act alone. It needs prior authorisation by a special resolution passed in a general meeting. There is an exception: a loan, guarantee or security to a wholly owned subsidiary or a joint venture company, and an acquisition of securities by a holding company in its wholly owned subsidiary, are outside this requirement. Details must still be disclosed in the financial statements.

Section 186(5) adds a second gate. Every investment, loan, guarantee or security needs a Board resolution passed at a meeting with the consent of all directors present. Where a term loan from a public financial institution is subsisting, that institution's prior approval is also needed. The approval is not needed if the aggregate stays within the section 186(2) limit and there is no default in repaying instalments or paying interest to the institution.

Key rules to remember

Limit under section 186(2): Limit = higher of [60% × (Paid-up share capital + Free reserves + Securities premium)] and [100% × (Free reserves + Securities premium)]; Use the figures as per the last audited balance sheet unless the question says otherwise. Compute both and take the larger.
Aggregate test under section 186(3): Existing loans + investments + guarantees + security (to all bodies corporate) + proposed amount > Limit ⇒ special resolution needed; The test is on the total, not on the new proposal alone.
Headroom: Headroom = Limit − Existing aggregate; If the proposal is within headroom, only Board approval under section 186(5) is needed, subject to other conditions.
Board approval rule, section 186(5): Board resolution at a meeting with consent of all directors present; Applies to every investment, loan, guarantee or security, even within the limit.
Public financial institution approval: Needed if a term loan is subsisting, unless aggregate ≤ limit and no default in instalments or interest; Prior approval, taken before the investment, loan, guarantee or security.
Exception to special resolution: Loan, guarantee or security to WOS or JV company; acquisition by holding company of securities of its WOS; Disclosure in the financial statements is still required under section 186(4).

How to solve Limits on Investments, Loans and Guarantees questions

Use this order for any numerical or theory question on the section 186 limit.

1Identify the nature of each transaction: loan, guarantee or security, or acquisition of securities. Check the counterparty: is it a body corporate, a person, a wholly owned subsidiary, or a joint venture company?
2Check whether the company is exempt under section 186(11), such as a banking, insurance or housing finance company acting in the ordinary course, or an investment company for its investments.
3Compute the two limits: 60% of (paid-up capital + free reserves + securities premium) and 100% of (free reserves + securities premium). Take the higher.
4Add existing loans, investments, guarantees and security to the proposed amount to get the aggregate.
5Compare the aggregate with the limit. If it is within the limit, no special resolution is needed. If it exceeds, a special resolution in general meeting is needed before the transaction, unless the wholly owned subsidiary or joint venture exception applies.
6Check Board approval under section 186(5): a resolution at a meeting with the consent of all directors present.
7Check for a subsisting term loan from a public financial institution. Prior approval is required unless the aggregate is within the limit and there is no default.
8State the conclusion with the reason, and mention disclosure in the financial statements under section 186(4).

Quickest way: Two-limit comparison and headroom check

When to use it: For MCQs and short numerical questions where figures for capital, reserves and existing exposure are given.

Write A = paid-up capital + free reserves + securities premium. Write B = free reserves + securities premium.
Compute 0.6 × A and compare with B. The larger is the limit.
Subtract existing exposure from the limit to get the headroom.
If the proposal is more than the headroom, answer: special resolution needed (unless the transaction is to a wholly owned subsidiary or joint venture company).
Remember that Board consent of all directors present is needed in every case.

Common mistakes in Limits on Investments, Loans and Guarantees

Using only 60% of paid-up capital, free reserves and securities premium and ignoring the 100% alternative.
The 60% figure is the one students remember most.
Fix: Always compute both figures and pick the higher. Compare 0.6 × A with B every time.
Testing only the new proposal against the limit.
Students forget that section 186(3) looks at the aggregate of past and proposed exposure.
Fix: Add all existing loans, investments, guarantees and security to the new amount before comparing.
Leaving out guarantees and security from the aggregate.
Guarantees are not cash outflows, so they feel different from loans.
Fix: Include loans, investments, guarantees and security given in connection with a loan, all together.
Saying a special resolution is needed for a loan to a wholly owned subsidiary that exceeds the limit.
Students apply the limit rule without checking the proviso.
Fix: Remember that the special resolution requirement does not apply to loans, guarantees or security to a wholly owned subsidiary or joint venture company, or to a holding company's acquisition of securities of its wholly owned subsidiary. Disclosure is still needed.
Thinking prior approval of a public financial institution is always required.
The proviso to section 186(5) is overlooked.
Fix: Approval is needed only where a term loan is subsisting, and it is not needed if the aggregate is within the limit and there is no default in instalments or interest.
Treating Board approval as unnecessary when the amount is within the limit.
Students link the Board only with the limit breach.
Fix: Section 186(5) requires a Board resolution with the consent of all directors present for every investment, loan, guarantee or security.

Worked examples

Example 1

Sunrise Textiles Ltd has paid-up share capital of ₹50 crore, free reserves of ₹30 crore and securities premium of ₹10 crore. It has existing loans and investments in other bodies corporate of ₹40 crore. The Board proposes to give a loan of ₹20 crore to Kaveri Traders Pvt. Ltd., an unrelated company. Is a special resolution needed?

Show the solution

A = 50 + 30 + 10 = ₹90 crore. 60% of A = ₹54 crore.
B = free reserves + securities premium = 30 + 10 = ₹40 crore.
The limit is the higher of ₹54 crore and ₹40 crore = ₹54 crore.
Aggregate = existing ₹40 crore + proposed ₹20 crore = ₹60 crore.
₹60 crore exceeds the limit of ₹54 crore.
Kaveri Traders is not a wholly owned subsidiary or joint venture company, so no exception applies.

Answer: Yes. The aggregate of ₹60 crore exceeds the limit of ₹54 crore, so a special resolution in general meeting is needed before the loan is given. Board approval with consent of all directors present is also required.

Example 2

Ganga Industries Ltd has paid-up capital of ₹20 crore, free reserves of ₹60 crore and securities premium of ₹20 crore. It has existing exposure of ₹70 crore under section 186. It wants to subscribe to shares of Yamuna Ltd, an unrelated company, for ₹25 crore. A term loan from a public financial institution is subsisting and there is no default. What approvals are needed?

Show the solution

A = 20 + 60 + 20 = ₹100 crore. 60% of A = ₹60 crore.
B = 60 + 20 = ₹80 crore.
The limit is the higher of ₹60 crore and ₹80 crore = ₹80 crore.
Aggregate = 70 + 25 = ₹95 crore, which exceeds ₹80 crore.
Because the limit is exceeded, a special resolution in general meeting is needed under section 186(3).
Board resolution at a meeting with consent of all directors present is needed under section 186(5).
A term loan is subsisting. The proviso exemption from the institution's approval applies only if the aggregate does not exceed the limit. Here it exceeds, so prior approval of the public financial institution is needed.

Answer: The limit is ₹80 crore and the aggregate is ₹95 crore. The company needs a special resolution, a Board resolution with the consent of all directors present, and the prior approval of the public financial institution.

Exam tips

Always show both limit calculations, even if one is clearly larger. Marks are given for the method.
In case-based MCQs, check whether the investee is a wholly owned subsidiary or joint venture company before declaring that a special resolution is needed.
Include guarantees and security in the aggregate. Examiners often hide them in the case facts.
For theory answers, quote the three layers of approval: Board resolution with consent of all directors present, special resolution if the limit is exceeded, and public financial institution approval where a term loan is subsisting.
Close each answer with a clear conclusion and mention disclosure in the financial statements.

Practice questions from Investment and Loans

Limits on Investments, Loans and Guarantees in other exams

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

CS ProfessionalSection 186: Loans and Investments by Company

Limits on Investments, Loans and Guarantees: frequently asked questions

What is the limit under section 186(2) of the Companies Act, 2013?

The limit is the higher of 60% of paid-up share capital, free reserves and securities premium account, or 100% of free reserves and securities premium account. It covers loans, guarantees, security and acquisition of securities of other bodies corporate.

When is a special resolution needed under section 186?

It is needed when the aggregate of existing loans, investments, guarantees and security, plus the proposed one, exceeds the section 186(2) limit. It must be passed in a general meeting before the transaction. It is not required for loans, guarantees or security to a wholly owned subsidiary or joint venture company.

When is prior approval of a public financial institution required?

It is required when a term loan from a public financial institution is subsisting. It is not required if the aggregate is within the section 186(2) limit and there is no default in repaying instalments or paying interest to that institution.

Do guarantees count towards the section 186 limit?

Yes. Giving a guarantee or providing security in connection with a loan to any body corporate or person is covered by section 186(2). It must be included in the aggregate along with loans and investments.