Loans and Investments explained: this guide covers what it 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.
Not a majority of the board — every director in the room must agree.
The consent requirement for loans and investments
Yes, as per Section 186(5) consent of the all directors present at the meeting is required for entering into a transaction.
Almost every other board decision passes on a majority. This one requires consent of all the directors present at the meeting — a single dissent defeats it.
The reason is what section 186 governs: the company lending its money, investing it, or guaranteeing someone else's borrowing. These are the transactions through which value most easily leaves a company without anything coming back, and they can be structured to benefit a connected party while appearing commercial.
Unanimity gives each director a veto over exactly that. It also means an independent director who is uneasy about a proposed loan does not need to persuade anyone — declining to consent is sufficient.
Note the precise formulation: all directors present at the meeting. It is unanimity among those attending, not among all directors on the board, so the composition of the meeting matters.
Section 186(7) closes the obvious way around it: no loan shall be given at a rate lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.
Without that floor, a company could lend to a connected party at a nominal rate and transfer value through the interest differential rather than the principal. The benchmark is deliberately objective — a published government security yield, matched to the tenor of the loan, leaving no room for a subjective view of what is reasonable.
The direct consequence, as the FAQ puts it: the Company shall not provide any loan without interest.
When public financial institution approval is dispensed with
As per the proviso to Section 186(5) of the CA, 2013, approval of public financial institutions is not required under the below circumstances:
- The amount involved in the transaction does not exceed 60% of the paid up share capital, free reserves and securities premium account and 100% of its free reserves and securities premium account, whichever is higher; and
- There is no default in repayment of loans and interest to public financial institutions.
Both conditions must hold. A company within the financial limit but in default on an institutional loan still needs the approval — the lender's consent is required precisely because it is already exposed.
What falls outside the section
| Item | Position |
|---|---|
| Loans to employees | Outside — the provision excludes employees of the company from the term 'person' |
| Salary advances | Outside — an advance is to be adjusted against supply of goods and services, not lending with an absolute promise to repay |
| Loan by a holding company to a wholly owned subsidiary | Exempt from section 185 under rule 10(1), provided the same is utilised for the principal business activities of the subsidiary |
| Private companies | Not exempt from section 186 |
The employee exclusion has been simplified. The FAQ records that an earlier circular imposed conditions — the loan being in terms of the company's service and remuneration policy — and that these conditions are no more applicable, as the provision directly excludes employees from the term 'person'.
The register of loans and investments
Since 1 April 2014 it is mandatory for a company to maintain the Register of Loans, Guarantee, Security and Acquisition made by the company in Form MBP-2. Registers maintained under section 372A(5) of the 1956 Act may continue as per the requirement under these provisions and the new format prescribed (MBP-2) shall be used for transactions entered on and from 1 April 2014.
Common mistakes
- Passing a loans and investments resolution on a majority rather than unanimous consent of those present.
- Granting an interest-free loan to a group company.
- Assuming a private company is exempt from section 186.
- Treating a genuine loan to an employee as an advance to avoid the section.