Can Your Company Lend, Invest or Guarantee? Layers, Limits and Locks Under Section 186

Startups routinely move money sideways: a bridge loan to a subsidiary, a guarantee for a group company's bank line, a strategic stake in a peer. Section 186 of the Companies Act, 2013 governs loans, investments, guarantees and security through a two-layer cap on investment companies, a ceiling of 60% or 100% (whichever is more) (s.186(2)), a special-resolution requirement above that ceiling (s.186(3)), board sanction by all directors present (s.186(5)), an interest floor tied to government securities (s.186(7)), and a register that members can inspect. Read it before the money moves. A breach can carry imprisonment for officers in default (s.186(13)).

Legal basis: Companies Act, 2013, s.186.

Two layers only: no daisy chains of investment companies

"Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies" (s.186(1)). Two things are carved out by the proviso: a company acquiring a company incorporated outside India that has investment subsidiaries beyond two layers under that country's laws, and a subsidiary having an investment subsidiary to meet the requirements of any law, rule or regulation in force (proviso to s.186(1)). Note that s.186(11) says nothing in the section other than sub-section (1) applies to banks, insurers, housing finance companies and the other classes listed there, so the two-layer limit still reaches them.

If you are drawing a three-tier holding structure for one operating asset, test it against this limit on paper before incorporating the third tier.

The ceiling: 60% of capital and reserves, or 100% of free reserves, whichever is more

"No company shall directly or indirectly (a) give any loan to any person or other body corporate; (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more" (s.186(2)).

Loans, guarantees, security and acquisitions of securities are tested against one ceiling, computed both ways, taking the higher. The Explanation to s.186(2) says the word "person" does not include any individual who is in the employment of the company, so advances to employees do not count against the ceiling as loans to a "person".

Above the ceiling: special resolution first, except for wholly owned subsidiaries and joint venture companies

"Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting" (s.186(3)).

The test is existing exposure plus the proposal, taken together. A company already close to its ceiling that proposes even a small new loan can cross it, and then the members must authorise the transaction first.

The first proviso to s.186(3) removes the requirement where a loan or guarantee is given, or security is provided, to a wholly owned subsidiary company or a joint venture company, or where a holding company acquires securities of its wholly owned subsidiary company. The second proviso keeps the disclosure: the company "shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section (4)". Under s.186(4), the company discloses to members in the financial statement "the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient". Skipping the vote does not skip the disclosure.

Board sanction, interest floor and the deposit-default bar

Board sanction. "No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained" (s.186(5)). Every director present must consent, so one dissenting director in the room blocks the resolution. The proviso removes the need for prior approval of the public financial institution where the aggregate stays within the s.186(2) limit and there is no default in repayment of loan instalments or payment of interest to that institution.

Interest floor. "No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan" (s.186(7)). Match the loan's tenor to the nearest of those four yields. An interest-free loan to a group company is a loan given under the section and has to clear this floor.

Deposit default. "No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting" (s.186(8)). A company in default on deposits cannot lend, guarantee, give security or make an acquisition until the default ends.

Listed and SEBI-registered companies: a separate borrowing limit

Section 186(6) is a different limit from the ceiling in s.186(2): "No company, which is registered under section 12 of the Securities and Exchange Board of India Act, 1992 and covered under such class or classes of companies as may be prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits." It applies only to a company that is both registered under section 12 of the SEBI Act and in a prescribed class. The prescribed class and limit are in rules that are not covered here, so a company that may be in that class should confirm them before borrowing from group companies.

The register members can inspect

"Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed" (s.186(9)). The register must be kept at the registered office, be open to inspection there, and any member may take extracts and be furnished copies on payment of the prescribed fee (s.186(10)). The particulars and manner are fixed by rules, which this article does not set out.

Who is outside the section

Section 186(11) says nothing in the section, except sub-section (1), applies to: loans, guarantees, security or investments made in the ordinary course of business by a banking company, an insurance company or a housing finance company; a company established with the object of and engaged in financing industrial enterprises or providing infrastructural facilities; investments made by an investment company; investments in shares allotted under s.62(1)(a) or in shares allotted in rights issues by a body corporate; and investments or lending by a registered non-banking financial company whose principal business is acquisition of securities. An "investment company" is one whose principal business is the acquisition of shares, debentures or other securities, and the section deems that test met where investments are at least fifty per cent of total assets or investment income is at least fifty per cent of gross income. Assume the section applies unless your CA confirms an exemption.

Penalty

"If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees" (s.186(13)).

In figures: the company faces a fine of ₹25,000 to ₹5,00,000. Each officer in default faces imprisonment of up to two years and a fine of ₹25,000 to ₹1,00,000.

The Jan Vishwas (Amendment of Provisions) Act 2026 lists amendments to section 186 that change the wording of its penalty provisions, and it comes into force on a date the Central Government notifies. Check the current text of s.186(13) on the date you act before relying on the figures above.

A worked ceiling

Take a company with ₹10 crore paid-up capital, ₹20 crore free reserves and ₹5 crore securities premium.

• Test one, 60% of paid-up capital, free reserves and securities premium: 60% of ₹35 crore is ₹21 crore.
• Test two, 100% of free reserves and securities premium: ₹25 crore.
• The ceiling is the higher figure, ₹25 crore, for loans, guarantees, security and acquisitions of securities, existing and new together.

An existing ₹16 crore loan to a subsidiary plus a ₹6 crore guarantee for a group company totals ₹22 crore, within the ceiling. Adding a ₹5 crore stake in an unrelated company takes the aggregate to ₹27 crore, which exceeds it, so a special resolution passed in a general meeting is needed first (s.186(3)). If the recipients were wholly owned subsidiaries or joint venture companies, the s.186(3) requirement would not apply and the disclosure in the financial statement under s.186(4) would still be required. Run both computations on the latest financial statements, because s.186(3) counts what has "so far" been made, not only the new proposal.

Section 185 sits alongside section 186

Loans to directors and to persons connected with them are separately restricted by section 185 of the Act. A transaction that clears s.186 can still fall within s.185, so check both before a loan leaves the company.

The deployment checklist

• Investment layers: two or fewer, unless a proviso to s.186(1) applies.
• Aggregate of old and new exposure tested against both the 60% and the 100% figures (s.186(2)).
• Special resolution passed in a general meeting before crossing the ceiling, unless the recipient is a wholly owned subsidiary or joint venture company (s.186(3)), with disclosure under s.186(4).
• Board resolution passed at a meeting with the consent of all directors present, and prior approval of the public financial institution where a term loan subsists and no proviso applies (s.186(5)).
• Interest at or above the yield of the Government Security closest to the tenor (s.186(7)).
• No subsisting deposit default (s.186(8)).
• Register kept at the registered office and open to inspection (s.186(9) and (10)).

What to do now

• Next step: work out the ceiling under s.186(2) from your latest financial statements, add everything already lent, guaranteed, secured or invested, and add the proposal (s.186(2), (3)).
• Before the money moves: if the total exceeds the ceiling and the recipient is not a wholly owned subsidiary or joint venture company, obtain a special resolution in a general meeting first (s.186(3)); in every case pass the board resolution with the consent of all directors present (s.186(5)).
• Deadline: the section sets none; the requirements apply before the loan, guarantee, security or investment is made (s.186(3), (5)).
• Consequence of getting it wrong: a fine on the company of ₹25,000 to ₹5,00,000, and for each officer in default imprisonment up to two years with a fine of ₹25,000 to ₹1,00,000 (s.186(13)), subject to the current wording of that sub-section.

Have a CA review your facts before you act or file.

FAQ

How many layers of investment companies are allowed?
Not more than two layers, subject to the two provisos to s.186(1) and to anything otherwise prescribed.

What is the s.186 ceiling?
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 (s.186(2)). Loans to employees are outside the word "person" for this purpose.

Can a holding company fund its wholly owned subsidiary without a special resolution?
Yes, the special resolution requirement does not apply to a loan, guarantee or security to a wholly owned subsidiary or joint venture company (s.186(3)). Board sanction under s.186(5), the interest floor under s.186(7), disclosure in the financial statement and the register still apply.

What interest floor applies?
Not lower than the prevailing yield of the one year, three year, five year or ten year Government Security closest to the tenor of the loan (s.186(7)).

What does a violation cost?
A company fine of ₹25,000 to ₹5,00,000, and for each officer in default up to two years' imprisonment plus a fine of ₹25,000 to ₹1,00,000 (s.186(13)); check the current wording as noted above.

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See Also

• Can Your Company Lend You Money? Section 185 Director Loans Explained for Founders
• Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail
• Sweat equity shares: issuing shares for know-how instead of cash (s.54)