Section 187 of the Companies Act, 2013 deals with something fundamental yet frequently overlooked: how a company must hold its investments. Whether it’s shares, securities, or other assets, the law has a strong preference—they should be in the company’s own name.
In practice, many companies unknowingly violate this rule due to legacy structures, convenience-based decisions, or simple lack of awareness. I’ve personally seen founders shocked during due diligence when this section came up as a compliance gap. Understanding Section 187 early can save companies from uncomfortable explanations, penalties, and governance red flags later on.
What Is Section 187 of the Companies Act, 2013?
At its core, Section 187 mandates that companies must hold investments in their own name.
These investments include:
- Shares
- Debentures
- Other securities
- Property or assets capable of being invested
The idea is simple but powerful: ownership should be transparent, traceable, and properly recorded.
Why the Law Insists on Investments in the Company’s Own Name
Lawmakers included this provision to prevent:
- Benami holdings
- Misuse of company funds
- Hidden ownership structures
- Manipulation during audits or disputes
When investments are held in the company’s name, accountability becomes clear—and governance improves naturally.
This is why the Act clearly states: Investments of company to be held in its own name.
Situations Where Exceptions Are Allowed
Section 187 recognises that business realities aren’t always straightforward. So, it allows limited exceptions.
- Subsidiary Shares Held Through Nominees
A company may hold shares in its subsidiary through nominees to maintain the statutory minimum number of members.
This usually arises when:
- One company owns almost 100% of another
- Legal minimum shareholder requirements must be met
- Securities Deposited With Banks
Companies may deposit securities:
- With banks for collection of dividends or interest
- As security for loans
Here, holding isn’t about ownership transfer—it’s operational necessity.
Mandatory Register for Exceptions – Form MBP-3
If investments are not held in the company’s own name, compliance doesn’t end there.
The law requires:
- Recording full details in a special register
- Using Form MBP-3
- Mentioning:
- Nature of investment
- Reason for not holding in company’s name
- Name of the person/entity holding it
- Date of acquisition
This record ensures that even exceptions remain transparent.
Practical Example (From Real Experience)
I once reviewed a mid-sized company preparing for external funding. During diligence, it emerged that several investments were still held in the founder’s personal demat account—done years ago “just for convenience.”
Legally? A clear Section 187 issue.
The fix wasn’t impossible, but it delayed the deal and raised unnecessary governance concerns. This is exactly what Section 187 aims to prevent.
Responsibilities of the Board of Directors
Directors play a critical role under Section 187.
They must:
- Ensure all investments are properly titled
- Approve and document any exception clearly
- Maintain accurate registers
- Review compliance periodically
Neglecting this isn’t just a clerical slip—it’s a governance failure.
What Happens If Section 187 Is Violated?
Non-compliance can lead to:
- Regulatory scrutiny
- Penalties under the Companies Act
- Qualification in audit reports
- Issues during mergers, funding, or acquisitions
Even if penalties seem modest, reputational damage can be far more costly.
Section 187 and Corporate Governance
Strong governance isn’t about avoiding penalties—it’s about clarity.
Section 187:
- Ensures assets actually belong to the company
- Protects shareholders’ interests
- Builds trust with investors and regulators
- Reduces future legal disputes
It’s a classic example of how good law quietly enforces discipline.
How Section 187 Impacts Startups & Growing Companies
Startups often:
- Move fast
- Use personal accounts temporarily
- Delay formal compliance
Section 187 doesn’t ignore these realities—but it does require timely correction. The sooner investments are regularised, the safer the company’s future looks.
Simple Compliance Checklist
Here’s a quick self-check:
- ✅ Are all investments in the company’s name?
- ✅ If not, do they fall under permitted exceptions?
- ✅ Is Form MBP-3 properly maintained?
- ✅ Has the board approved and reviewed these holdings?
If any answer is unclear—it’s time to act.
Conclusion
Section 187 of the Companies Act, 2013 may look procedural, but it reflects a deeper principle: companies must clearly own what they invest in. By mandating that investments be held in the company’s own name—and requiring transparency when exceptions apply—the law strengthens trust, governance, and long-term stability.
If you’re reviewing past investments or planning new ones, understanding this section early can prevent major compliance headaches later.
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