(12^th February 2024)

“Empowering growth, together”

SHORT SUMMARY:

In the following editorial, the author will explore a very significant subject concerning the applicability of Section 186 on non-bank financial companies (NBFC).

Brief about Section 186:

Section 186 of the Companies Act, 2013 deals with loans and investments made by a company. It specifies the conditions under which a company can provide loans to other entities, make investments, or provide guarantees or securities. The section imposes restrictions on the amount of loans, investments, or guarantees that a company can provide, and it mandates compliance with certain procedural requirements such as obtaining prior approval from the board of directors and shareholders.

The primary objective of Section 186 is to ensure transparency, accountability, and prudent financial management within companies.

Legal Provision:

[1]Section 186 (11) Nothing contained in this section, except sub-section (1), shall apply—

(a) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;

(b) to any investment—

(i) made by an investment company;

(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;

(iii) made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.

(12) The Central Government may make rules for the

Meaning of “business of financing companies” [Section 186(11)(2) Rule 11(2)] “business of financing industrial enterprises” shall include, with regard to a NBFC registered with RBI, “business of giving of any loan to a person or providing any guarantee or security for due repayment of any loan availed by any person in the ordinary course of its business.

KEY TAKE AWAY FROM SECTION:

This Section cover the following transaction:

·      give any LOAN to any person or other body corporate ;

·      give any GUARANTEE or PROVIDE SECURITY in connection with a loan to any other body corporate or person; and

·      ACQUIRE by way of subscription, purchase or otherwise, the securities of any other body corporate,

Fully exemption from Section 186:

Section 186 shall not be applicable in case of providing of Loan, Guarantee Security by:

     i.       Banking Company

   ii.        Insurance Company

  iii.       Housing Finance Company

  iv.       A company in Infrastructure Facilities

Understanding from NBFC point of view:

As per Section 186(11), it seems that there is partial exemption to NBFC from the provisions of Section 186.

    I.       Exemption in Investment:

If the principal business of NBFC is acquisition of securities, then Section 186 shall not be applicable to such NBFC for any investment made by an NBFC.

When a non-bank financial company (NBFC) has a primary activity that is not the acquisition of securities, then it is possible to hold the opinion that this exemption is not applicable to such NBFC.

  II.       Exemption in Business of financing:

As per Rule 11(2), if business of NBFC (which is registered with RBI) giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business.

As per this, NBFC exempt to give Loan, Guarantee or Security only if the other person use such Loan, Guarantee or security for due repayment of its loan, which has taken by such person in ordinary course of business.

Because of this, one could argue that NBFC companies are not completely free from the provisions of Section 186. In the scenario described above, it is entitled to a partial exemption from NBFC. Any time an NBFC provides a loan, guarantee, or security, with the exception of the situations described above, the NBFC is required to comply with the provisions of Section 186 regarding the limit, interest, and other related matters.

CONCLUSION:

Section 186 of the Companies Act, 2013 does not specifically exempt Non-Banking Financial Companies (NBFCs) from its provisions. However, NBFCs are subject to regulation by the Reserve Bank of India (RBI) and must adhere to the guidelines and regulations issued by the RBI regarding loans, investments, and other financial transactions. These regulations often cover similar aspects as Section 186 but may have specific provisions tailored to the functioning and operations of NBFCs.

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com). 

Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information. 

IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION