Corporate and Economic Laws · Investment and Loans

Restriction on Layers of Investment Companies under Section 186

Updated 10 October 2026 · Fact-checked

Section 186(1) of the Companies Act, 2013 says no company may make an investment through more than two layers of investment companies. Two exceptions apply: acquiring a foreign company that has deeper layers under its own country's law, and a subsidiary having an investment subsidiary to meet a legal requirement. To solve a question, count the layers, then test the exceptions.

Understand Restrictions on Layers of Investment Companies

Section 186 controls how companies invest, lend and give guarantees. Its first sub-section deals with something different from money limits. It limits the structure through which you invest.

A company can hold shares in another company directly. It can also hold them through an intermediate company whose business is to hold investments. That intermediate company is an investment company. If that company in turn invests through another investment company, you get a chain. Each investment company in the chain is a layer.

The rule is simple. A company cannot make an investment through more than two layers of investment companies. Two layers are allowed. A third layer is not. The purpose is to stop long chains of holding companies that hide who really owns and controls what.

The Act gives two exceptions, both in the proviso to section 186(1). First, a company may acquire a company incorporated outside India even if that foreign company has investment subsidiaries beyond two layers, provided this is as per the laws of that foreign country. Second, a subsidiary company may have its own investment subsidiary where this is needed to meet a requirement under any law, or any rule or regulation made under a law.

Do not mix this rule with the limit on the number of layers of subsidiaries under section 2(87) read with the related rules. That is a separate provision on holding and subsidiary structures. This topic is only the investment-layer restriction in section 186(1).

Key rules to remember

Core rule: Investment through investment companies ≤ 2 layers; No company shall make any investment through more than two layers of investment companies. A third layer breaches section 186(1).
Exception (a): foreign acquisition: Acquiring a company incorporated outside India with investment subsidiaries beyond two layers, as per that country's laws → not affected; The deeper layers must arise under the foreign country's laws. The exception protects the acquisition, not a fresh Indian chain of your own.
Exception (b): legal requirement: Subsidiary having an investment subsidiary to meet a requirement under any law, rule or regulation → not affected; The exception is for a subsidiary company, and the reason must be a legal or regulatory requirement.
Where the rule sits: Section 186(1), Companies Act, 2013; It is a structural limit. It is separate from the monetary limits on investments, loans and guarantees.

How to solve Restrictions on Layers of Investment Companies questions

Use the same sequence for any question on layers of investment companies. It keeps you from missing an exception or counting wrongly.

1Identify the company making the investment and the ultimate company in which money finally goes.
2List every intermediate company in the chain. Mark which ones are investment companies, meaning they exist to hold investments.
3Count the layers of investment companies between the investor and the final investee.
4If the count is two or fewer, state that section 186(1) is not breached.
5If the count is more than two, ask whether an exception applies: a foreign company acquired with deeper layers under its own country's law, or a subsidiary's investment subsidiary needed to meet a legal requirement.
6Check that the exception's condition is actually met. Look at the country of incorporation, the foreign law basis, and the legal requirement.
7Write the conclusion in one line: permitted, or contravention of section 186(1). Name the section.
8Mention that other conditions of section 186 are separate and may still apply.

Quickest way: Count, then test two exceptions

When to use it: Use this for MCQs and short case facts where you have a minute or less.

Draw the chain as arrows: Company → Inv Co 1 → Inv Co 2 → Inv Co 3.
Count the investment companies. Two or fewer: allowed.
More than two: ask only two questions. Is it a foreign company with deeper layers under its own law? Is it a subsidiary's investment subsidiary required by law?
If both answers are no, the investment breaches section 186(1).

Common mistakes in Restrictions on Layers of Investment Companies

Treating three layers as allowed because the limit sounds like three tiers in total.
Students read 'more than two' loosely or count the investor and the final investee as layers.
Fix: Count only investment companies in the chain. Two are permitted. A third investment company in the chain is the breach.
Confusing this rule with the restriction on layers of subsidiaries in section 2(87).
Both deal with 'layers' and both concern group structures.
Fix: Keep them apart. Section 186(1) is about investing through investment companies. Section 2(87) is about layers of subsidiaries. Read the question for which one it tests.
Applying the foreign-company exception to any chain a company builds abroad.
Students remember 'foreign company' and stop reading the condition.
Fix: The exception covers acquiring a company incorporated outside India that already has deeper investment subsidiaries as per its country's laws. It does not let an Indian company create a new deep chain.
Applying exception (b) to any company, or without a legal requirement.
Students skip the words 'subsidiary company' and 'requirements under any law'.
Fix: Check both: the entity is a subsidiary, and the investment subsidiary is needed to meet a requirement under a law, rule or regulation.
Mixing the layer rule with the percentage limits on investments, loans and guarantees.
All of it sits in section 186, so students apply the 60% and 100% limits to a layers question.
Fix: A layers question needs a count, not a calculation. Do the money limits only when the question gives amounts and asks about limits.

Worked examples

Example 1

Aryan Industries Ltd invests in Bharat Holdings Ltd, an investment company. Bharat Holdings invests in Chola Capital Ltd, an investment company. Chola Capital invests in Dhruv Ventures Ltd, also an investment company. Dhruv Ventures holds shares in Eastern Steel Ltd, an operating company. No exception applies. Does Aryan Industries' structure comply with section 186(1)?

Show the solution

Chain: Aryan Industries → Bharat Holdings → Chola Capital → Dhruv Ventures → Eastern Steel.
Investment companies in the chain: Bharat Holdings, Chola Capital, Dhruv Ventures. That is three.
Eastern Steel is an operating company and is the final investee, so it is not counted as a layer.
Section 186(1) allows investment through no more than two layers of investment companies. Three is more than two.
Neither exception applies: no foreign company with deeper layers under its own law, and no subsidiary's investment subsidiary required by law.

Answer: No. Investment through three layers of investment companies contravenes section 186(1). Only two layers are allowed.

Example 2

Sundaram Textiles Ltd, an Indian company, acquires Hartley Fabrics PLC, incorporated in the United Kingdom. Under UK law, Hartley Fabrics already holds its operations through three layers of investment subsidiaries. Is the acquisition barred by the two-layer restriction in section 186(1)?

Show the solution

Hartley Fabrics has investment subsidiaries beyond two layers, which on its face goes beyond the two-layer limit.
The proviso to section 186(1) says the restriction does not affect a company acquiring a company incorporated outside India if that company has investment subsidiaries beyond two layers as per the laws of that country.
Hartley Fabrics is incorporated outside India, and the facts say its layers exist under UK law. Both conditions are met.
So the exception applies. The acquisition is not hit by the two-layer restriction.
This protects the acquisition only. Sundaram Textiles should not build additional investment layers of its own beyond two without a valid exception.

Answer: No. The acquisition is not barred. The proviso to section 186(1) protects the acquisition of a foreign company with investment subsidiaries beyond two layers as per that country's laws.

Exam tips

In MCQs, the answer usually turns on the number two. Count investment companies carefully before choosing.
Write the exceptions precisely. Two exceptions, each with its own condition: foreign company under its own law, and subsidiary's investment subsidiary for a legal requirement.
In case scenarios, check whether the entity is a subsidiary and whether a legal requirement is stated. Facts are usually planted for this.
State the section number, section 186(1), in written answers. A clear conclusion line earns marks.
Do not bring in the monetary limits unless the question gives amounts.

Practice questions from Investment and Loans

Restrictions on Layers of Investment Companies: frequently asked questions

What does section 186(1) say about layers of investment companies?

It says no company shall make any investment through more than two layers of investment companies. A chain with a third investment company breaches the section unless an exception applies.

What are the exceptions to the two-layer restriction?

There are two. A company can acquire a foreign-incorporated company that has investment subsidiaries beyond two layers as per that country's laws. A subsidiary company can also have an investment subsidiary to meet a requirement under any law, rule or regulation.

Is the layers restriction the same as the limit on layers of subsidiaries?

No. Section 186(1) deals with investment through investment companies. The limit on layers of subsidiaries comes from section 2(87) and the related rules. Read the question to see which one is being tested.

Does the layers restriction involve any calculation?

No. It is a counting rule. Any calculation in a section 186 question will relate to the separate limits on investments, loans and guarantees.