A group CFO moves ₹2 crore from the flagship company to a sister company to tide it over a cash crunch, clears it with the two directors who happened to be in office that afternoon, and books it. Routine treasury management — except the board approval wasn't unanimous, the amount breached the company's Section 186 ceiling, and no special resolution was passed. Three defaults in one wire transfer.
The bottom line
A company can lend, invest, guarantee or secure up to the higher of 60% of (paid-up capital + free reserves + securities premium) or 100% of (free reserves + securities premium) — beyond that, a special resolution is mandatory.
Every such transaction needs a unanimous board resolution at a meeting (never by circulation), interest at or above the relevant Government-security yield, and an MBP-2 register entry within 7 days.
Breach costs the company ₹25,000–₹5 lakh, and each officer in default up to 2 years' jail plus ₹25,000–₹1 lakh.
Does Section 186 even apply to my transaction?
Almost certainly, if money or securities are leaving your company for another. Section 186 governs four things, taken together:
- any loan to any person or body corporate;
- any guarantee given, or security provided, in connection with a loan to any person or body corporate;
- any acquisition of securities of any other body corporate, by subscription, purchase or otherwise.
Section 185 deals with loans to directors and connected persons; Section 186 deals with everything else — the ordinary inter-corporate plumbing of a group. A single transaction can trip both, so clear the s.185 question first, then come here.
There's also a quieter rule in s.186(1) that catches structuring: a company cannot make investments through more than two layers of investment companies. The exceptions are narrow — a foreign acquisition with deeper layers abroad, or a layer mandated by another law.
How much can I lend or invest without asking shareholders?
This is the number every finance team should know cold.
📊 The Section 186(2) ceiling
The aggregate of loans + guarantees + securities + investments cannot exceed the higher of:
(a) 60% of (paid-up share capital + free reserves + securities premium account), or
(b) 100% of (free reserves + securities premium account).
Cross that line and you need a special resolution (75% of members voting) before proceeding.
Read it as a single running total, not a per-transaction allowance. A company that has already lent up to its limit cannot make a fresh ₹10 lakh investment on board approval alone — the aggregate is what's tested. The special resolution must state the total amount up to which the Board is authorised to lend, guarantee, invest or secure.
What approvals do I actually need?
Three layers, and the first one catches more companies than any other.
Board approval — always, and it must be unanimous. Regardless of amount, every s.186 transaction needs a resolution passed at a duly convened board meeting with the consent of all directors present. A resolution by circulation won't do. A committee can't substitute for the Board. This is the single most overlooked requirement — finance teams treat small inter-company loans as routine and skip the board meeting entirely.
Special resolution — only if you exceed the limit. As above. Loans, guarantees or security to a wholly-owned subsidiary or joint venture, and acquisition of a WOS's securities, are exempt from the special resolution requirement — but not from the unanimous board approval.
PFI approval — if a term loan is outstanding. Where the company has taken a term loan from a public financial institution and there's a subsisting default, prior approval of that PFI is required.
Interest, layers, and the MBP-2 register
⚠️ Interest-free inter-corporate loans are not allowed
Under s.186(7), the interest rate on a loan cannot be lower than the prevailing yield of the 1, 3, 5 or 10-year Government Security closest to the loan's tenor. A 0% loan to a sister company is a contravention, however friendly the group.
📋 The MBP-2 register
Maintain a register in Form MBP-2 at the registered office, with entries made chronologically within 7 days of each loan, guarantee, security or acquisition, authenticated by the company secretary or an authorised person. Auditors check this first.
Who's exempt?
The limits and several requirements don't bite the same way for: banking companies, insurance companies, housing finance companies and infrastructure-finance companies lending in the ordinary course of business; NBFCs registered with the RBI whose principal business is acquisition of securities (for the lending part); and government companies (subject to conditions). Loans/guarantees/security to a WOS or JV escape the special-resolution requirement but not board approval. Don't read "exempt" as "ignore the section" — the registers and disclosure obligations often still apply.
What's the penalty?
🚫 Penalty under Section 186(13)
Company: fine of ₹25,000 to ₹5,00,000.
Every officer in default: imprisonment up to 2 years and fine of ₹25,000 to ₹1,00,000.
Note the conjunction for officers: imprisonment and fine, not "or". This is a stiffer personal exposure than it first appears, and it lands on the people who actually pushed the transaction through.
A worked example
Apex Manufacturing Ltd has paid-up capital ₹1 crore, free reserves ₹3 crore, securities premium ₹50 lakh. It wants to lend ₹3 crore to an associate company.
Run the ceiling: - 60% of (₹1 cr + ₹3 cr + ₹50 lakh = ₹4.5 cr) = ₹2.7 crore. - 100% of (₹3 cr + ₹50 lakh) = ₹3.5 crore. - The higher figure governs: the limit is ₹3.5 crore.
The ₹3 crore loan sits within the ₹3.5 crore ceiling, so no special resolution is needed — but Apex still needs a unanimous board resolution, must charge interest at or above the relevant G-Sec yield, and must enter the loan in MBP-2 within 7 days. Had the associate been a wholly-owned subsidiary, the same applies minus the ceiling test. Had the loan been ₹4 crore, the special resolution becomes mandatory.
Five mistakes that trip companies up
- Skipping the board meeting for "small" loans. Every s.186 transaction needs unanimous board approval, no de minimis exception.
- Passing the resolution by circulation. Explicitly insufficient — it must be a meeting.
- Making interest-free or token-rate loans. Below the G-Sec yield floor is a contravention under s.186(7).
- Testing each transaction in isolation. The 60%/100% limit applies to the running aggregate, not the single deal.
- Forgetting MBP-2. No register, or late entries beyond 7 days, is its own default the auditor will flag.
Checklist before the money moves
- [ ] Confirm it's a s.186 transaction (loan / guarantee / security / investment) and not a s.185 one.
- [ ] Compute the ceiling: higher of 60%/100%, and add the proposed amount to the existing aggregate.
- [ ] If over the limit, pass a special resolution stating the total authorised amount.
- [ ] Pass a unanimous board resolution at a meeting — every time.
- [ ] Check the two-layer investment restriction if structuring through investment companies.
- [ ] Set interest at or above the relevant G-Sec yield.
- [ ] Obtain PFI approval if a term loan is outstanding/defaulted.
- [ ] Make the MBP-2 entry within 7 days.
FAQ
Can a company give an interest-free loan to its subsidiary? No. Section 186(7) requires interest at or above the relevant Government-security yield. The WOS exemption removes the special resolution requirement, not the interest-rate floor.
Is board approval needed even for a tiny inter-corporate loan? Yes — and it must be unanimous, at a meeting. There is no minimum threshold below which board approval is excused.
Do I need a special resolution for a loan to my wholly-owned subsidiary? No special resolution, but you still need unanimous board approval and must comply with the interest, register and disclosure requirements.
How is the 60% / 100% limit calculated? Take the higher of 60% of (paid-up capital + free reserves + securities premium) or 100% of (free reserves + securities premium), and test your aggregate exposure against it.
What's the difference between Section 185 and Section 186? Section 185 restricts loans to directors and connected persons; Section 186 governs general inter-corporate loans, guarantees, security and investments, with its own limits, the MBP-2 register and the two-layer rule.
This piece reflects the law as amended by the Companies (Amendment) Act, 2017 and is general information, not advice on your specific transaction.
Primary sources - Section 186, Companies Act, 2013 — MCA - Companies (Meetings of Board and its Powers) Rules, 2014 — Rules 11, 13 and Form MBP-2 - MCA General Circular 06/2015 dated 9 April 2015 (yield clarification for tax-free bonds)