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

Section 186: Loans and Investments by a Company

Updated 11 October 2026 · Fact-checked

Section 186 limits what a company can lend, guarantee, secure or invest in other bodies corporate. The ceiling is the higher of 60% of paid-up capital, free reserves and securities premium, or 100% of free reserves and securities premium. Beyond it, you need a special resolution. Investment layers are capped at two.

Understand Section 186: Loans and Investments by Company

Section 186 controls how a company deploys its funds in other bodies corporate. It covers loans, guarantees, security given for a loan, and acquisition of securities by subscription, purchase or otherwise. In an acquisition, buying shares of a target is an investment, so the section applies to you as acquirer.

The idea is simple. A company should not put too much of its money, or its credit, into outside entities without the owners' say. So the Act sets a ceiling. Within the ceiling, the board decides. Above it, members decide by special resolution.

The ceiling in sub-section (2) is sixty per cent of paid-up share capital, free reserves and securities premium account, or one hundred per cent of free reserves and securities premium account, whichever is more. It applies to the aggregate of all loans, guarantees, security and investments made so far, plus the new one proposed.

There are further guardrails. Investment must go through not more than two layers of investment companies. The board resolution needs the consent of all directors present. Where a term loan from a public financial institution subsists, its prior approval is needed. A loan cannot carry interest below the prevailing yield on the relevant Government Security. A company in default on deposits cannot lend, guarantee, secure or acquire.

Some cases are carved out. The proviso to sub-section (3) says the special resolution requirement of that sub-section does not apply where a loan, guarantee or security is given to a wholly owned subsidiary or a joint venture company, or where a holding company acquires securities of its wholly owned subsidiary. Only the special resolution is dispensed with. The other conditions still apply: board consent of all directors present under sub-section (5), the interest floor in sub-section (7), the deposit-default bar in sub-section (8), the register, and disclosure in the financial statements.

Banking, insurance and housing finance companies in the ordinary course are outside most of the section.

Key rules to remember

Limit under Section 186(2): Limit = higher of (60% × (Paid-up capital + Free reserves + Securities premium)) and (100% × (Free reserves + Securities premium)); Compare both figures and take the larger. Test the aggregate of existing and proposed loans, guarantees, security and investments against it.
Approval test: Existing + Proposed ≤ Limit → Board resolution; Existing + Proposed > Limit → special resolution in general meeting; Board resolution needs consent of all directors present at the meeting. Sub-section (3) requires prior special resolution when the limit is exceeded.
Layers of investment: Investment through not more than two layers of investment companies; Sub-section (1). Not affected for acquiring a foreign company with deeper layers under its laws, or a subsidiary with an investment subsidiary needed to meet a legal requirement.
Interest floor: Rate of interest ≥ prevailing yield of 1, 3, 5 or 10 year Government Security closest to the tenor of the loan; Sub-section (7), applies to loans given.
Penalty: Company: fine ₹25,000 to ₹5,00,000. Officer in default: imprisonment up to 2 years and fine ₹25,000 to ₹1,00,000; Sub-section (13).

How to solve Section 186: Loans and Investments by Company questions

Use this order for any case question on loans, guarantees, security or investment by a company.

1Identify the transaction: loan, guarantee, security, or acquisition of securities of a body corporate. Note whether it is direct or indirect.
2Check for exemptions first: the nature of the company (bank, insurance, housing finance, infrastructure financer, investment company, NBFC with principal business in securities), the recipient (wholly owned subsidiary or joint venture) and the type of investment (rights issue shares).
3Compute the limit: 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. Compare with the limit.
5Decide approval: within limit needs a board resolution with consent of all directors present, plus prior approval of the public financial institution if a term loan subsists, unless the proviso to sub-section (5) applies. Above limit needs a prior special resolution.
6Check the conditions: no default on deposits, interest rate not below the Government Security yield, investment layers within two.
7State compliance: disclosure in financial statements, register under sub-section (9) kept at the registered office, and the penalty for contravention.
8Write the conclusion in one line: permitted or not, and what the company must do.

Quickest way: Two-number limit check

When to use it: Use when a numerical question gives capital, reserves, premium and existing exposure and asks whether a special resolution is needed.

Write A = 60% of (capital + free reserves + premium).
Write B = 100% of (free reserves + premium).
Limit = larger of A and B.
Total exposure = existing + proposed.
If total exposure > limit, special resolution is needed. Otherwise board approval suffices.
Before computing, scan for a wholly owned subsidiary or joint venture recipient. For that transaction only, the special resolution under sub-section (3) is not required. Board consent of all directors present, the interest floor, the deposit-default bar, the register and disclosure still apply.

Common mistakes in Section 186: Loans and Investments by Company

Using only 60% of capital and reserves, or only 100% of free reserves.
Students remember one limb of the test.
Fix: Always compute both limbs and take the higher figure.
Testing only the new investment against the limit.
The question highlights the proposed amount.
Fix: Add loans, investments, guarantees and security already made. The limit applies to the aggregate.
Requiring a special resolution for a loan to a wholly owned subsidiary.
The limit is breached, so students apply sub-section (3) mechanically.
Fix: The proviso to sub-section (3) removes only the special resolution requirement for a loan, guarantee or security to a wholly owned subsidiary or joint venture company. Do not say the whole section is off. Board consent of all directors present, the interest floor, the deposit-default bar, the register and disclosure in the financial statements still apply.
Saying board approval is by majority.
Most board decisions pass by majority.
Fix: Sub-section (5) needs the consent of all directors present at the meeting.
Forgetting the interest-rate floor and the deposit-default bar.
Focus stays on the limit.
Fix: Add both to your checklist. A loan below the Government Security yield is not allowed, and a company in default on deposits cannot lend, guarantee, secure or acquire.
Treating all investment exemptions as exemption from the whole section.
Sub-section (11) is read loosely.
Fix: Sub-section (11) excludes everything except sub-section (1), so the two-layer rule still applies to the listed companies.

Worked examples

Example 1

Zenith Industries Ltd has paid-up share capital of ₹50,00,000, free reserves of ₹30,00,000 and securities premium of ₹10,00,000. It has existing loans and investments in other bodies corporate of ₹40,00,000. It proposes to subscribe to shares of Orion Pvt Ltd, an unrelated company, for ₹20,00,000. Does it need a special resolution?

Show the solution

Sum of capital, free reserves and premium = 50,00,000 + 30,00,000 + 10,00,000 = ₹90,00,000.
60% of this = ₹54,00,000.
Free reserves plus premium = 30,00,000 + 10,00,000 = ₹40,00,000. 100% of this = ₹40,00,000.
Limit = higher of ₹54,00,000 and ₹40,00,000 = ₹54,00,000.
Total exposure = existing 40,00,000 + proposed 20,00,000 = ₹60,00,000.
₹60,00,000 exceeds ₹54,00,000. Orion is not a wholly owned subsidiary, so no exemption applies.

Answer: Yes. The aggregate of ₹60,00,000 exceeds the limit of ₹54,00,000, so under sub-section (3) the company needs prior authorisation by a special resolution in general meeting, in addition to a board resolution passed with the consent of all directors present.

Example 2

Meridian Ltd has a limit under Section 186(2) of ₹80,00,000 and existing exposure of ₹79,00,000 (loans, guarantees, security and investments already made). It wants to give a loan of ₹25,00,000 to its wholly owned subsidiary and also a loan of ₹2,00,000 to an unrelated company. Advise on approvals.

Show the solution

Assumption: the ₹79,00,000 is the exposure already made, before either of the two proposed loans.
Test the ₹25,00,000 loan to the wholly owned subsidiary. The proviso to sub-section (3) says the special resolution requirement of that sub-section does not apply to a loan given to a wholly owned subsidiary. So this loan needs no special resolution, even though 79,00,000 + 25,00,000 = ₹1,04,00,000 exceeds the limit.
The proviso removes only the special resolution. This loan still needs a board resolution with the consent of all directors present, interest not below the Government Security yield, no default in repayment of deposits, an entry in the register and disclosure in the financial statements.
Now test the ₹2,00,000 loan to the unrelated company. No exemption applies to it. Leaving out the subsidiary loan, the aggregate is 79,00,000 + 2,00,000 = ₹81,00,000, which exceeds ₹80,00,000.
The official text does not say expressly whether an exempt loan to a subsidiary is left out of the aggregate. If you count it, the aggregate is 79,00,000 + 25,00,000 + 2,00,000 = ₹1,06,00,000, which also exceeds the limit. The conclusion is the same either way.
So the loan to the unrelated company needs prior authorisation by a special resolution in general meeting, plus the board, interest, register and disclosure requirements.

Answer: The ₹25,00,000 loan to the wholly owned subsidiary does not need a special resolution, but it still needs board consent of all directors present and must meet the interest, deposit-default, register and disclosure requirements. The ₹2,00,000 loan to the unrelated company needs a special resolution, because the aggregate exceeds ₹80,00,000 whether or not the subsidiary loan is counted (₹81,00,000 without it, ₹1,06,00,000 with it).

Exam tips

Open every answer with the provision, then apply the facts, then conclude. Examiners reward this order.
Show both limbs of the limit calculation in figures, even if one is obviously lower.
Scan the facts for a wholly owned subsidiary, joint venture, bank, insurer or investment company. These signal an exemption.
Mention compliance points: register under sub-section (9) at the registered office, disclosure in financial statements, and the penalty range.
In drafting-style questions, write the special resolution with the amount and purpose stated.

Practice questions from Acquisition of Company or Business

Section 186: Loans and Investments by Company in other exams

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

CMA FinalSection 186 Overview and Scope of Loans and Investments

Section 186: Loans and Investments by Company: frequently asked questions

What is the limit under Section 186 of the Companies Act, 2013?

The limit is 60% of paid-up share capital, free reserves and securities premium, or 100% of free reserves and securities premium, whichever is more. It covers loans, guarantees, security and investments in other bodies corporate. Exceeding it needs a prior special resolution.

Does Section 186 apply when a company acquires shares of a target company?

Yes. Acquiring securities of another body corporate by subscription, purchase or otherwise is an investment under sub-section (2). The acquirer must check the limit and obtain the required approvals.

Who is exempt from Section 186?

Under sub-section (11), banking, insurance and housing finance companies in the ordinary course, and companies financing industrial enterprises or providing infrastructure facilities, are exempt from the section except sub-section (1). Investments by an investment company, rights issue shares, and investing activity of certain NBFCs whose principal business is acquiring securities are also exempt.

What is the penalty for contravening Section 186?

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