Section 186 of Companies Act 2013—Complete Practical Guide
If you’ve ever worked with Indian company law—whether as a founder, director, finance professional, or compliance advisor—you’ve likely come across Section 186 of the Companies Act 2013. On paper, it looks like just another compliance provision. But in practice, it plays a critical role in preventing misuse of company funds, protecting shareholders, and maintaining transparency in corporate structures.
I’ve seen many businesses—especially growing private companies—run into trouble not because of bad intent, but because Section 186 wasn’t fully understood. Loans given casually to group companies, guarantees signed without realising limits, or investments made assuming “it’s all within the group anyway”—these are the situations where Section 186 quietly steps in.
This article breaks down Section 186 of the Companies Act 2013 in plain language, with limits, approvals, exemptions, penalties, and practical examples you can actually relate to.
Understanding the Purpose of Section 186
At its core, Section 186 of the Companies Act 2013 governs how a company can:
- Give loans
- Provide guarantees
- Offer securities
- Make investments
It restricts a company from directly or indirectly deploying funds in a manner that could endanger shareholders’ interests or allow promoters to divert money without accountability.
The intent is simple:
Company money should not be treated like personal or group money.
What Exactly Does Section 186 Cover?
Under Section 186 of the Companies Act 2013, the following transactions are regulated:
- Loans given by a company
- Guarantees provided by a company
- Securities provided by a company
- Investments made by a company
These can be to:
- Any person
- Any body corporate
- Any other entity
Whether done directly or indirectly, the section applies.
Limits Prescribed Under Section 186
One of the most searched aspects is that Section 186 of the Companies Act, 2013, limits—and rightly so.
A company can give loans, guarantees, securities, or investments up to the higher of:
- 60% of paid-up share capital free reserves securities premium, OR
- 100% of free reserves securities premium
Whichever is higher becomes the permissible limit without shareholder approval.
Simple Example
Let’s say:
- Paid-up capital: ₹2 crore
- Free reserves: ₹1 crore
- Securities premium: ₹50 lakh
60% of total = 60% of ₹3.5 crore = ₹2.1 crore
100% of free reserves premium = ₹1.5 crore
👉 The higher amount is ₹2.1 crore
That’s your Section 186 limit without special resolution.
What Happens If the Limit Is Exceeded?
Once a company crosses the threshold under Section 186 of the Companies Act 2013, it must:
- Obtain prior approval of shareholders
- Pass a special resolution in a general meeting
This requirement ensures transparency and gives shareholders a voice before large sums are committed.
Unanimous Approval of the Board—A Critical Requirement
A point many people miss is that unanimous approval of the board is required in all cases under Section 186.
This means:
- Every director present at the meeting must approve
- No majority voting within the Board
- One dissenting director = approval fails
This reinforces collective responsibility and discourages rubber-stamping.
Interest Rate Condition on Loans
Another practical safeguard under Section 186 of the Companies Act 2013 is the interest rule.
Loans cannot be given at an interest rate lower than:
- The prevailing yield of Government Security
- With a tenure corresponding to the loan period
This ensures companies don’t give interest-free or concessional loans that could be seen as fund diversion.
Applicability—Who Does Section 186 Apply To?
One of the most common questions relates to the applicability of Section 186 of the Companies Act, 2013.
It applies to:
- Private companies
- Public companies
- Listed companies
- Unlisted companies
Unless specifically exempted, all companies must comply.
Exemptions Under Section 186
There are specific carve-outs under Section 186 of the Companies Act, 2013 exemptions.
Entities Exempted
- Banking companies
- Insurance companies
- Housing finance companies
- NBFCs (in the ordinary course of business)
These exemptions exist because lending and investment are their primary business activities.
Exemption to Private Companies—A Common Misunderstanding
Many founders search for Section 186 of the Companies Act, 2013, exemption to private companies, assuming private companies are fully exempt.
The reality:
- Private companies are not fully exempt
- Certain relaxations apply subject to conditions
- Transactions must still be within limits and disclosed properly
Private companies often assume flexibility—but Section 186 still applies in substance.
Relationship with Section 185 and Section 188
It’s important not to confuse:
- section 185 of the Companies Act, 2013—loans to directors
- Section 186 – loans and investments by companies generally
- section 188 of the Companies Act 2013—related party transactions
A single transaction may attract all three sections simultaneously.
Example:
A loan to a director-controlled entity could trigger:
- Section 185
- Section 186
- Section 188
Compliance must be checked holistically.
Disclosure and Registration Requirements
Under Section 186 of the Companies Act 2013, companies must:
- Maintain a register of loans, guarantees, securities, and investments
- Record particulars of each transaction
- Keep the register open for inspection
This ensures traceability and audit transparency.
Penalties for Non-Compliance
Ignoring Section 186 can be expensive.
Penalties Include:
- Company: ₹25,000 to ₹500,000
- Officers in default: Imprisonment up to 2 years OR fine ₹25,000 to ₹100,000 (or both)
Penalties apply even if the transaction was commercially reasonable but procedurally incorrect.
Section 186 with Examples (Practical Scenarios)
Search intent around Section 186 of the Companies Act, 2013, with examples is high—because examples make the law real.
Example 1: Group Company Loan
Company A gives a ₹3 crore loan to its subsidiary.
If this exceeds the Section 186 limit:
- Special resolution required
- Board approval must be unanimous
No shortcuts.
Example 2: Guarantee to Bank
The company provides a guarantee for a group entity’s bank loan.
Even without cash outflow:
- It counts under Section 186
- Limits and approvals apply
Example 3: Strategic Investment
The company invests in shares of another entity.
Even equity investments fall under Section 186.
Compliance is mandatory.
Indirect Transactions Are Also Covered
A powerful but often overlooked line in the law is
“Directly or indirectly”
This means:
- Routing loans through intermediaries
- Using subsidiaries to pass funds
- Layered structures
All can still fall under Section 186 of the Companies Act 2013 if intent is traced.
Practical Compliance Tips from Experience
From real-world advisory work, here are some actionable tips:
- Always compute Section 186 limits before approving transactions
- Keep Board minutes detailed and clear
- Never assume “group company” means exemption
- Cross-check with Sections 185 and 188
- Maintain updated registers at all times
Proactive compliance is far cheaper than retrospective correction.
Is Section 186 Really About Control?
In practice, yes—but not in a negative way.
Section 186 of the Companies Act 2013 exists to:
- Prevent fund diversion
- Protect minority shareholders
- Enforce discipline in capital deployment
- Promote transparency
It’s not anti-business—it’s pro-governance.
Availability of Section 186 Text and References
Many professionals look for Section 186 of the Companies Act, 2013 PDF, or summaries from platforms like Section 186 of the Companies Act, 2013, TaxGuru.
While summaries are helpful, always refer to
- Bare Act
- MCA notifications
- Latest amendments
Because interpretations evolve.
Final Thoughts
Section 186 of the Companies Act 2013 may appear restrictive, but it reflects a mature governance mindset. Companies that respect these limits rarely face shareholder disputes, audit issues, or regulatory scrutiny.
If there’s one takeaway, it’s this:
Treat company funds as a public trust, not promoter convenience.
Understanding and applying Section 186 correctly is not just legal compliance—it’s good corporate hygiene.
For clear, practical guidance on company law and board-level compliance, you can explore expert support at callmyca.com—because in corporate governance, clarity always comes before control.
