Corporate and Economic Laws · Investment and Loans

Section 186 Companies Act 2013: Scope of Loans and Investments

Updated 11 October 2026 · Fact-checked

Section 186 controls how a company lends, guarantees, provides security and buys securities of other bodies corporate. Check the transaction type, the limit of 60% of paid-up capital, free reserves and securities premium or 100% of free reserves and securities premium (whichever is more), the approvals, and any exemption in sub-section (11).

Understand Section 186 Overview and Scope of Loans and Investments

Section 186 protects shareholders and creditors from a company putting its money into other businesses without limit. It covers four kinds of transactions: loans, guarantees, security given in connection with a loan, and acquisition of securities of another body corporate by subscription, purchase or otherwise. It also restricts investment through more than two layers of investment companies.

The core cap is in sub-section (2). A company cannot, directly or indirectly, do these things beyond the higher of two limits: 60% of its paid-up share capital, free reserves and securities premium account, or 100% of its free reserves and securities premium account. The word "directly or indirectly" matters. Routing a loan through a third party does not take it outside the section.

The limit is on the aggregate. Under sub-section (3), you add all loans, investments, guarantees and security already made or given, plus the new proposal. If the total crosses the limit, the company needs a special resolution in a general meeting before it acts.

All the exemptions are in sub-section (11). Except for sub-section (1) on layers, the section does not apply to a banking company, insurance company or housing finance company acting in the ordinary course of business. It also excludes a company set up to finance industrial enterprises or provide infrastructure facilities. Investments by an investment company are excluded. So are investments in shares allotted under a rights issue, and investment or lending by a registered NBFC whose principal business is acquiring securities.

The word "person" in sub-section (2) does not include an individual employed by the company. So a loan to an employee is outside the limit. Loans to directors and related parties are governed separately by Section 185, and both sections may need to be checked.

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]); Covers loans, guarantees, security and acquisition of securities taken together.
Special resolution trigger, Section 186(3): Existing loans + investments + guarantees + security + proposed amount > Limit ⇒ special resolution in general meeting; Needed before the transaction. Not needed for a loan, guarantee or security to a wholly owned subsidiary or a joint venture company, or for acquisition of securities of a wholly owned subsidiary by its holding company.
Layers of investment companies, Section 186(1): Maximum 2 layers of investment companies; Subject to the two provisos: foreign acquisitions and subsidiaries required by law.
Board approval, Section 186(5): Board meeting resolution with consent of all directors present; Prior approval of the public financial institution is needed where a term loan is subsisting, unless the aggregate is within the limit and there is no default.
Interest rate floor, Section 186(7): Interest rate ≥ prevailing yield of 1, 3, 5 or 10 year Government Security closest to the tenor of the loan; Applies to loans given under this section.
Default bar, Section 186(8): Default in repayment of deposits or interest ⇒ no loan, guarantee, security or acquisition; The bar lasts while the default subsists.

How to solve Section 186 Overview and Scope of Loans and Investments questions

Use this order for any scope or applicability question on Section 186.

1Identify the transaction: loan, guarantee, security in connection with a loan, or acquisition of securities. Ignore other items such as trade advances unless they are loans.
2Check the company type. See if it is a bank, insurance company, housing finance company, infrastructure or industrial financing company, investment company or qualifying NBFC. If so, check the sub-section (11) exemption.
3Check the recipient. A loan to an employee is not covered. A loan to a director or related party also needs Section 185.
4Check the investment type. Rights shares and shares allotted under section 62(1)(a) are exempt. Acquisition of securities of a wholly owned subsidiary by its holding company is exempt from the special resolution.
5Compute the limit: 60% of (paid-up capital + free reserves + securities premium) against 100% of (free reserves + securities premium). Take the higher.
6Add existing loans, investments, guarantees and security to the new proposal and compare with the limit.
7State the approvals: Board resolution with all directors present consenting, special resolution if the limit is exceeded, public financial institution approval if applicable.
8Check the interest rate, any default in deposits and the register requirement, then give a clear conclusion.

Quickest way: Four-gate check

When to use it: Use in MCQs and short case questions where you must say whether Section 186 applies or whether a special resolution is needed.

Gate 1: Is it a loan, guarantee, security or purchase of securities? If not, stop.
Gate 2: Is the company or transaction in sub-section (11)? If yes, the section does not apply, except the layer limit.
Gate 3: Compute the higher of the two limits and compare it with the total including the new amount.
Gate 4: If the total is above the limit, a special resolution is needed unless the recipient is a wholly owned subsidiary or joint venture company, or it is a holding company acquiring securities of its wholly owned subsidiary.

Common mistakes in Section 186 Overview and Scope of Loans and Investments

Using only 60% of the base and ignoring the 100% of free reserves and securities premium alternative.
Students remember the 60% figure and forget the word "whichever is more".
Fix: Always compute both figures and pick the higher one.
Checking each transaction separately against the limit.
Students treat each loan as a standalone event.
Fix: Add all loans, investments, guarantees and security made so far plus the new proposal, as sub-section (3) requires.
Saying a special resolution is needed for every investment.
Confusion between the Board approval and the special resolution.
Fix: The Board resolution is always needed. The special resolution is needed only when the aggregate exceeds the limit, and not for the wholly owned subsidiary and joint venture company cases in the proviso.
Treating a loan to an employee as covered by the limit.
The Explanation to sub-section (2) is overlooked.
Fix: Remember that "person" excludes an individual in the employment of the company.
Applying the full section to a bank or insurance company.
Students forget sub-section (11).
Fix: Exemptions cover only the ordinary course of business. Sub-section (1) on layers still applies.
Ignoring Section 185 when the borrower is a director or related party.
The two sections are studied separately.
Fix: Check Section 185 first for directors, their relatives and firms. Then apply Section 186 if relevant.

Worked examples

Example 1

Ashoka Textiles Ltd has paid-up share capital of ₹50,00,000, free reserves of ₹30,00,000 and securities premium of ₹20,00,000. It has already given loans and made investments of ₹90,00,000 in other bodies corporate. The Board proposes a further loan of ₹15,00,000 to an unrelated company. Is a special resolution required?

Show the solution

Total of capital, free reserves and securities premium = ₹50,00,000 + ₹30,00,000 + ₹20,00,000 = ₹1,00,00,000.
60% of this = ₹60,00,000.
Free reserves plus securities premium = ₹30,00,000 + ₹20,00,000 = ₹50,00,000. 100% of this = ₹50,00,000.
The higher limit is ₹60,00,000.
Aggregate with the proposal = ₹90,00,000 + ₹15,00,000 = ₹1,05,00,000.
₹1,05,00,000 exceeds ₹60,00,000, and the borrower is neither a wholly owned subsidiary nor a joint venture company, so no exception applies.

Answer: Yes. The limit is ₹60,00,000 and the aggregate would be ₹1,05,00,000, so the loan needs prior authorisation by a special resolution in a general meeting, in addition to a Board resolution with all directors present consenting.

Example 2

Bharat Infra Finance Ltd is a company engaged in providing infrastructural facilities. It grants a loan in the ordinary course of business and invests in the shares of another company. Does Section 186 apply? What if the same company holds investments through three layers of investment companies?

Show the solution

Sub-section (11)(a) exempts loans, guarantees, security and investments made by a company established with the object of, and engaged in, providing infrastructural facilities.
The exemption covers every provision of Section 186 except sub-section (1).
So the 60% and 100% limits, the special resolution and the other conditions do not apply to the loan and the investment in the ordinary course of business.
Sub-section (1) allows investment through not more than two layers of investment companies, subject to the two provisos.
Three layers exceed the limit, so the company must check whether a proviso applies, such as a foreign acquisition or a subsidiary required by law.

Answer: Section 186, other than sub-section (1), does not apply to the loan and investment in the ordinary course of business. The three-layer structure breaches sub-section (1) unless a proviso applies.

Exam tips

In MCQs, watch for "whichever is more". Compute both limits before choosing an option.
Learn the sub-section (11) list as a checklist: bank, insurance, housing finance, industrial or infrastructure financing company, investment company, rights issue shares, qualifying NBFC.
In case scenarios, check if the borrower is a director, relative or related firm. If so, mention Section 185 as well.
Use the exact words: special resolution for the limit breach, Board resolution with all directors present consenting.
Remember the penalty: fine of ₹25,000 to ₹5 lakh on the company, and on every officer in default imprisonment up to two years and fine of ₹25,000 to ₹1 lakh.

Practice questions from Investment and Loans

Section 186 Overview and Scope of Loans and Investments 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

Section 186 Overview and Scope of Loans and Investments: frequently asked questions

What does Section 186 of the Companies Act, 2013 cover?

It covers loans, guarantees, security in connection with a loan, and acquisition of securities of other bodies corporate. It also limits investment to two layers of investment companies.

Which companies are exempt from Section 186?

Under sub-section (11), banking, insurance and housing finance companies acting in the ordinary course of business are exempt. So are companies financing industrial enterprises or providing infrastructural facilities. Investment by an investment company and by a qualifying NBFC in its investment or lending activities is also exempt. Sub-section (1) on layers still applies.

When is a special resolution needed under Section 186?

It is needed when the total of existing loans, investments, guarantees and security plus the new proposal exceeds the limit in sub-section (2). It is not needed for a loan, guarantee or security to a wholly owned subsidiary or joint venture company, or for a holding company acquiring securities of its wholly owned subsidiary. Disclosure in the financial statement is still required.

Does Section 186 apply to loans to employees?

No. The Explanation to sub-section (2) says that the word person does not include an individual in the employment of the company. Loans to directors are separately covered by Section 185.