Section 186(2) measures aggregate loans, guarantees, security and acquisitions against 60% of paid-up share capital plus free reserves plus securities premium or 100% of free reserves plus securities premium, whichever is higher.
Rules
- Section 186(2) measures aggregate loans, guarantees, security and acquisitions against 60% of paid-up share capital plus free reserves plus securities premium or 100% of free reserves plus securities premium, whichever is higher.
- Crossing the section 186(2) ceiling generally requires prior approval by special resolution, subject to statutory exceptions such as specified wholly-owned-subsidiary/joint-venture cases.
- Board approval is transaction-specific and the company should also test restrictions, disclosure requirements, rate requirements and defaults under the full section.
- Rule 12 requires the statutory register in Form MBP-2, with chronological particulars and timely entries.
Practical analysis
Section 186 is a company-level exposure control for loans, guarantees, securities and investments. The first step is to aggregate the transactions that fall within the section and compare them with the statutory limit based on paid-up share capital, free reserves and securities premium or the alternative prescribed measure. A board should not approve a transaction in isolation without seeing the running exposure register.
Crossing the ordinary limit can require prior special resolution, subject to statutory exceptions and conditions. Interest on covered loans also cannot be set below the prescribed benchmark linked to government security yields for the corresponding tenor. Inter-corporate structures need an additional check for section 185, related-party rules, deposits and financial-services exceptions rather than treating section 186 approval as the only corporate-law gate.
The statutory register and financial-statement disclosure are evidence controls. The company should capture counterparty, purpose, amount, approval, interest, security and outstanding balance. Where a guarantee is invoked or a loan is converted/restructured, the register and board monitoring should be updated instead of leaving the original approval as the only record.
Section 186 should be tested on an aggregate exposure schedule before the board sees the proposal. The ordinary ceiling is based on the higher of the statutory percentage of paid-up share capital, free reserves and securities premium or the alternative free-reserve/securities-premium measure. Existing loans, guarantees, securities and investments therefore matter. A transaction that is commercially small can still cross the statutory limit because earlier guarantees remain outstanding.
Decision table
| Fact pattern | Treatment |
|---|---|
| Aggregate exposure within section 186 limit | Board approval/process still applies; check exceptions and register. |
| Proposed transaction pushes aggregate above limit | Evaluate prior special resolution and statutory conditions before commitment. |
| Loan to director-related entity | Section 185 may independently restrict/condition the transaction even if section 186 limits are satisfied. |
Worked examples
Assume paid-up capital ₹5 crore, free reserves ₹3 crore and securities premium ₹2 crore. On these figures, the two section 186 benchmarks are ₹6 crore under the 60% limb and ₹5 crore under the free-reserves-plus-securities-premium limb. The higher section-186 ceiling is therefore ₹6 crore. Result: 60% × ₹10 crore = ₹6 crore; 100% × ₹5 crore = ₹5 crore.
If existing section-186 exposure is ₹5.2 crore and a new guarantee of ₹1.5 crore is proposed, aggregate exposure becomes ₹6.7 crore in the illustration and crosses the ₹6 crore ceiling. Position: ₹5.2 crore + ₹1.5 crore = ₹6.7 crore; test special-resolution requirement/exceptions.
Assume paid-up share capital is ₹10 crore, free reserves ₹4 crore and securities premium ₹1 crore. Sixty per cent of the combined ₹15 crore is ₹9 crore, while 100% of free reserves plus securities premium is ₹5 crore, so ₹9 crore is the larger reference amount before considering exceptions. If covered exposure is already ₹7 crore and a new ₹3 crore transaction is proposed, the aggregate becomes ₹10 crore. The company should analyse the special-resolution requirement and section 185 separately before committing.
Mistakes
- Testing the new loan without aggregating existing loans/guarantees/investments.
- Assuming section 186 approval cures a section 185 prohibition.
- Ignoring the minimum-interest benchmark for a covered loan.
- Failing to maintain the statutory register and disclosures.
Documents
- Latest audited paid-up capital/free reserves/securities premium figures
- Running section 186 exposure register
- Board and special-resolution papers where applicable
- Loan/guarantee/investment agreement and interest/security terms
Action steps
- Classify the proposed transaction under section 186.
- Calculate aggregate exposure before approval.
- Test the ordinary statutory limit and any applicable exemption.
- Obtain board/special resolution in the required sequence.
- Check section 185 and related corporate-law provisions separately.
- Update the statutory register and financial disclosures after execution.
FAQs
Does section 186 apply only to cash loans?
No. It also covers specified guarantees, securities and investments.
What happens when the statutory limit is exceeded?
The company should evaluate the prior special-resolution requirement and other conditions before proceeding.
Can the company lend at any interest rate?
Covered loans are subject to the statutory minimum-interest benchmark linked to government securities.
Is section 185 automatically satisfied if section 186 is approved?
No. Loans to directors/connected persons require a separate section 185 analysis.
Sources
- India Code — Companies Act, 2013 — Section 186 statutory limits, approvals and register.
- MCA — Acts and Rules eBooks — Companies Act/rules official repository.
Educational reference; verify the current official instrument and your facts.