Section 185 and 186 explained: this guide covers what Section 185 and 186 means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Sections 185 and 186 of the Companies Act 2013 regulate the flow of funds between companies and their directors, key managerial personnel, and related parties. These provisions prevent misuse of corporate funds and ensure sound investment governance.
Section 185: Prohibition on Loans to Directors
Section 185 prohibits companies from directly or indirectly advancing loans, giving guarantees, or providing security in connection with any loan to:
- Any director of the company or its holding company
- Any partner or relative of a director
- Any firm in which a director or relative is a partner
- Any private company where a director is a director or member
- Any body corporate whose board is accustomed to act per directions of the company's directors
Exceptions to Section 185
| Exception | Condition |
|---|---|
| Loan to managing director or whole-time director | As part of service conditions or approved by special resolution |
| Loan in ordinary course of business | Company's business includes lending and interest charged at not less than bank rate |
| Government companies | Loans to entities set up for financing industrial enterprises |
Penalty for Violation of Section 185
Violation of Section 185 attracts:
- Company: Fine of Rs.5 lakh to Rs.25 lakh
- Director in default: Imprisonment up to 6 months or fine Rs.5 lakh to Rs.25 lakh, or both
- Recipient of loan: Fine equal to the loan amount
Section 186: Loans and Investments by Companies
Section 186 regulates inter-corporate loans and investments. A company cannot:
- Give a loan exceeding 60% of its paid-up share capital + free reserves + securities premium, or
- 100% of its free reserves + securities premium, whichever is higher
Compliance Requirements Under Section 186
| Requirement | Details |
|---|---|
| Board Resolution | Required for every loan/investment/guarantee |
| Special Resolution | Required if limits exceed 60%/100% threshold |
| Prior Approval | Public company: prior approval of public financial institution (if term loan outstanding) |
| Register of Loans | Maintain register per Section 186(9) open for inspection |
| Rate of Interest | Minimum rate = prevailing yield of government securities of equivalent maturity |
Exemptions from Section 186
Certain companies and transactions are exempt:
- Banking companies, insurance companies, housing finance companies
- Investments made by investment companies
- Acquisition of securities offered on rights basis
- Loans/guarantees to subsidiaries by holding companies if special resolution passed
- Government companies for government-mandated activities
Section 186 vs Section 185: Key Differences
| Aspect | Section 185 | Section 186 |
|---|---|---|
| Scope | Loans to directors/related parties | Inter-corporate loans and investments |
| Nature | Generally prohibitory | Regulatory with limits |
| Approval | Special resolution for exceptions | Board + special resolution if limits exceeded |
| Penalty | Rs.5-25 lakh + imprisonment | Rs.25,000-5 lakh company; Rs.25,000-1 lakh officers |
Filing Requirements with ROC
All loans and investments made under Section 186 must be disclosed in the annual financial statements. Companies must file particulars of loans/guarantees in Form MBP-2 (register of loans and investments). Any special resolution passed under Section 186(3) must be filed in Form MGT-14 within 30 days.
Related Party Transactions vs Section 186
Note that transactions with related parties also require compliance under Section 188 (related party transactions) read with SEBI LODR Regulation 23 for listed companies. A single transaction may trigger both Section 186 and Section 188 compliance obligations.
- Calculate aggregate loans/investments/guarantees to check 60%/100% limit
- Pass board resolution with unanimous approval (unanimous if conflict of interest exists)
- If limit exceeded, convene general meeting for special resolution
- Maintain register in Form MBP-2
- Ensure minimum interest rate is at government securities yield
- Disclose in financial statements and Board's Report
Frequently Asked Questions
Can a company give loan to its wholly owned subsidiary?
Yes, but subject to limits under Section 186. If the loan exceeds the prescribed limits, a special resolution is required. Additionally, if the company is a public company with outstanding term loans from public financial institutions, prior approval of those institutions is needed.
Is corporate guarantee covered under Section 186?
Yes, providing guarantee or security in connection with any loan by another person to any body corporate is covered under Section 186. The guarantee amount is counted toward the 60%/100% aggregate limit.
What is the minimum interest rate for loans under Section 186?
The rate cannot be lower than the prevailing yield of one-year, three-year, five-year, or ten-year Government Security closest to the tenor of the loan.