Corporate Restructuring, Valuation and Insolvency · Acquisition of Company or Business

Acquisition of Shares and Control of Target Company

Updated 11 October 2026 · Fact-checked

Acquiring shares means buying securities of another company to hold an investment or gain control. Under Section 186 of the Companies Act, 2013, check the 60%/100% limit, take board approval with all directors present consenting, pass a special resolution if limits are crossed, disclose the details and record it in the register.

Understand Acquisition of Shares and Control of Target Company

Control of a company usually follows from shares. A buyer who holds enough voting rights can appoint the board and shape decisions. So acquiring a controlling stake is a share purchase first, and a compliance exercise second.

For the acquirer, buying shares of another company is an investment. Section 186 of the Companies Act, 2013 governs it. It covers loans, guarantees, security and acquisition of securities of any other body corporate, whether done directly or indirectly. Your exam answer must treat the acquisition as an inter-corporate transaction and test it against this section.

Section 186(1) also limits layers. A company must invest through not more than two layers of investment companies, unless otherwise prescribed. Two exceptions: acquiring a foreign company that has investment subsidiaries beyond two layers under its own country's law, and a subsidiary having an investment subsidiary to meet a legal requirement.

The cap in Section 186(2) 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 test is on the aggregate of loans, guarantees, security and investments, including the new one. If the aggregate exceeds the cap, a special resolution in general meeting is needed under Section 186(3).

Section 186(3) gives relief for a holding company acquiring securities of its wholly owned subsidiary. The special resolution is not needed there, but the details must still be disclosed in the financial statements. Remember that a wholly owned subsidiary is a different case from a company that is merely a subsidiary.

Process matters too. Under Section 186(5) the board resolution must be passed at a meeting with the consent of all directors present. Where a term loan from a public financial institution is subsisting, its prior approval is needed, unless the aggregate stays within the Section 186(2) limit and there is no default in repayment or interest. Finally, the company must keep a register and disclose particulars in the financial statements.

Key rules to remember

Investment limit under Section 186(2): Limit = higher of (60% × [paid-up share capital + free reserves + securities premium]) and (100% × [free reserves + securities premium]); Apply to the aggregate of loans, guarantees, security and investments, including the proposed one.
When a special resolution is needed: Existing aggregate + proposed amount > limit ⇒ special resolution in general meeting (Section 186(3)); Not required for loans, guarantees or security to a wholly owned subsidiary or joint venture company, or for a holding company acquiring securities of its wholly owned subsidiary. Disclosure still applies.
Layers of investment: Not more than two layers of investment companies (Section 186(1)); Unless otherwise prescribed. Exceptions: foreign target with deeper layers under its law; subsidiary's investment subsidiary required by law.
Board approval: Board meeting resolution with consent of all directors present (Section 186(5)); Prior approval of the public financial institution is needed where a term loan subsists, unless within the limit and no default.
Rate of interest on loans: Not lower than the prevailing yield of the 1, 3, 5 or 10 year Government Security closest to the loan tenor (Section 186(7)); Applies to loans, not to share purchases.
Default bar: Company in default on deposits or interest ⇒ no loan, guarantee, security or acquisition till default subsists (Section 186(8)); Check this before any acquisition.
Penalty (Section 186(13)): Company: fine ₹25,000 to ₹5,00,000. Officer in default: up to 2 years' imprisonment and fine ₹25,000 to ₹1,00,000; State both limbs.

How to solve Acquisition of Shares and Control of Target Company questions

Use this order for any question on acquiring shares or control of another company.

1Identify the transaction: purchase of shares, subscription, loan, guarantee or security. Note who the acquirer and target are.
2Check the relationship. Is the target a wholly owned subsidiary, a joint venture, or an outsider? Is the acquirer a banking, insurance or housing finance company, or an investment company? Section 186(11) exempts several cases.
3Check layers of investment companies under Section 186(1).
4Compute the limit: the higher of 60% of (paid-up capital + free reserves + securities premium) and 100% of (free reserves + securities premium).
5Add existing loans, guarantees, security and investments to the proposed amount and compare with the limit.
6If it exceeds the limit, require a special resolution in general meeting. If a term loan from a public financial institution subsists, check the approval need.
7Apply Section 186(5) board approval, Section 186(8) default bar, Section 186(4) disclosure, and the Section 186(9) register.
8Conclude with the action list and the penalty for non-compliance.

Quickest way: Four-line limit test

When to use it: Use when a numerical question asks whether a special resolution is needed for an investment.

Write the two limits side by side and pick the higher.
Add existing investments, loans and guarantees to the proposed amount.
If the total is within the limit, board resolution with all present directors consenting is enough.
If the total is above the limit, add a special resolution, unless the target is a wholly owned subsidiary and the acquirer is its holding company.

Common mistakes in Acquisition of Shares and Control of Target Company

Using only the 60% limit.
Students remember the 60% figure and forget the alternative.
Fix: Always compute both limits and take the higher.
Counting only the new investment against the limit.
The question gives the new amount prominently.
Fix: Add all earlier loans, investments, guarantees and security as well.
Saying a special resolution is never needed for a subsidiary.
The wholly owned subsidiary relief is stretched.
Fix: Relief covers acquisition by a holding company of securities of its wholly owned subsidiary, and loans, guarantees or security to a wholly owned subsidiary or joint venture company. Disclosure is still required.
Writing that a simple majority of the board is enough.
Confusion with ordinary board decisions.
Fix: Section 186(5) needs the consent of all directors present at the meeting.
Ignoring the default bar and the lender approval.
Students focus on the arithmetic.
Fix: Add a line on Section 186(8) and on public financial institution approval where a term loan subsists.
Applying Section 186 to a bank's ordinary business.
Section 186(11) exemptions are skipped.
Fix: Check the exempt categories first. Note that Section 186(1) on layers still applies.

Worked examples

Example 1

Alpha Ltd has paid-up capital of ₹50 crore, free reserves of ₹30 crore and securities premium of ₹20 crore. It has existing investments and loans of ₹70 crore in other bodies corporate. It proposes to buy shares of Beta Pvt Ltd, an unrelated company, for ₹40 crore. Is a special resolution needed?

Show the solution

Limit 1: 60% of (50 + 30 + 20) = 60% of ₹100 crore = ₹60 crore.
Limit 2: 100% of (30 + 20) = ₹50 crore.
The higher is ₹60 crore.
Aggregate after the purchase = 70 + 40 = ₹110 crore, which is above ₹60 crore.
Beta is not a wholly owned subsidiary, so no relief applies.

Answer: Yes. Under Section 186(3) Alpha needs a special resolution in general meeting before the purchase, along with a board resolution with all present directors consenting, disclosure in the financial statements and an entry in the register.

Example 2

Gamma Ltd, a holding company, wants to acquire the remaining shares of its wholly owned subsidiary Delta Ltd for ₹25 crore. Its investments already exceed the Section 186(2) limit. Advise on approvals and compliance.

Show the solution

Delta is a wholly owned subsidiary and Gamma is its holding company acquiring its securities.
The first proviso to Section 186(3) removes the special resolution requirement for this acquisition.
Section 186(5) still applies: board meeting resolution with consent of all directors present.
If a term loan from a public financial institution subsists, its prior approval is needed because the aggregate is above the limit.
Gamma must not be in default on deposits or interest, per Section 186(8).
Disclose the details in the financial statements and record the acquisition in the register.

Answer: No special resolution is required, but Gamma needs a board resolution passed with all present directors consenting, any lender approval, disclosure in the financial statements and an entry in the Section 186 register.

Exam tips

Write the provision first, then apply facts, then conclude. Examiners reward this order.
Show both limit calculations in numbers, even when one is clearly higher.
Always mention exemptions: wholly owned subsidiary, joint venture, bank, insurer, housing finance and investment company.
Close with practical steps: board resolution, notice for general meeting, register entry, disclosure and penalty.
Quote section numbers only for the rules you are sure of, such as 186(2), (3), (5), (8) and (13).

Practice questions from Acquisition of Company or Business

Acquisition of Shares and Control of Target Company in other exams

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

Acquisition of Shares and Control of Target Company: frequently asked questions

What approvals are needed to acquire shares of another company?

A board resolution passed at a meeting with the consent of all directors present is needed. A special resolution in general meeting is also needed if the aggregate crosses the Section 186(2) limit. Lender approval applies where a term loan from a public financial institution subsists.

How is the Section 186 limit calculated?

It 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. The aggregate of existing and proposed loans, guarantees, security and investments is compared with it.

Is a special resolution needed to invest in a wholly owned subsidiary?

Not where a holding company acquires securities of its wholly owned subsidiary, as per the proviso to Section 186(3). The details must still be disclosed in the financial statements. The board approval requirement still applies.

What is the penalty for breaching Section 186?

The company faces a fine of ₹25,000 to ₹5,00,000. Each officer in default may face imprisonment up to two years and a fine of ₹25,000 to ₹1,00,000.