Loans 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.
Sections 185 and 186 of the Companies Act, 2013 apply together to money moving inside a group: a loan, a guarantee or security given to a holding company, a subsidiary or a fellow subsidiary. Section 185 deals with persons in whom directors are interested; section 186 caps loans, guarantees, security and investments by reference to the company's own funds. This guide reads them as per the Companies Act, 2013 in the Ministry's consolidated text (last updated 29 July 2022) and the Rules as consolidated in the Ministry's e-book, consulted on 3 October 2026. Later amendments should be checked. Related reading: section 185, section 186.
Section 185(3)(c) and (d) exempt a loan by a holding company to its wholly owned subsidiary, and a guarantee or security by a holding company for a loan the subsidiary takes from a bank or financial institution, if the money is used for the subsidiary's principal business activities. Section 186(3) does not require a special resolution for loans, guarantees or security to a wholly owned subsidiary or joint venture company, but the details must be disclosed. Everything else in a group needs checking against both sections.
Section 185 in brief
Section 185(1) bars a company from directly or indirectly advancing a loan, including a loan represented by a book debt, or giving a guarantee or providing security in connection with a loan, to a director of the company or of its holding company, or a partner or relative of such a director, or a firm in which the director or relative is a partner.
Section 185(2) opens a route for any person "in whom any of the director of the company is interested". It needs a special resolution in general meeting, with an explanatory statement giving full particulars and the purpose, and the loan must be used by the borrower for its principal business activities. The Explanation defines the persons: a private company of which a director is a director or member; a body corporate in which twenty-five per cent or more of the voting power is exercisable or controlled by such director or directors; and a body corporate whose Board or managing director or manager is accustomed to act on the directions of the lending company's Board or directors.
So an inter-company loan inside a group can fall within section 185(2) if a director of the lender is interested in the borrower in one of those ways. If you want a review of a group loan structure, see our compliance advisory service.
The exemptions in section 185(3)
Section 185(3) says sub-sections (1) and (2) do not apply to:
- (c) a loan by a holding company to its wholly owned subsidiary, or a guarantee given or security provided by a holding company for a loan made to its wholly owned subsidiary;
- (d) a guarantee or security by a holding company for a loan made by any bank or financial institution to its subsidiary company;
and the proviso adds that loans under clauses (c) and (d) must be utilised by the subsidiary for its principal business activities. Clause (b) covers a company that provides loans, guarantees or security in the ordinary course of its business at an interest rate not less than the prevailing yield of the Government security the clause names. The contravention penalties are in section 185(4).
Section 186 in brief
- Layers (section 186(1)): investment through not more than two layers of investment companies, unless otherwise prescribed. Rule 2 of the Companies (Restriction on number of layers) Rules, 2017 says that, subject to its exceptions, no company shall have more than two layers of subsidiaries, and one layer of wholly owned subsidiaries is not counted.
- Limits (section 186(2)): no company shall directly or indirectly give a loan, give a guarantee or provide security in connection with a loan, or acquire securities, exceeding sixty per cent of its paid-up share capital, the reserves defined in section 2(43) (the Act uses a defined term for them) and securities premium account, or hundred per cent of those reserves and the securities premium account, whichever is more.
- Special resolution (section 186(3)): if the aggregate with the proposed amount exceeds the limits, previous authorisation by special resolution in general meeting is needed. The first proviso exempts loans, guarantees or security to a wholly owned subsidiary or a joint venture company, and acquisition by a holding company of securities of its wholly owned subsidiary, but the second proviso requires disclosure in the financial statement under section 186(4). Rule 11(1) of the Meetings Rules repeats this.
- Board approval (section 186(5)): a Board resolution at a meeting with the consent of all directors present, and the prior approval of the public financial institution where a term loan is subsisting, subject to the proviso.
- Interest (section 186(7)): no loan at a rate lower than the prevailing yield of the one, three, five or ten year Government security closest to the tenor of the loan.
- Register (section 186(9), rule 12): Form MBP 2, entries within seven days, kept at the registered office.
- Default (section 186(8)): no loan, guarantee, security or acquisition while a default in repaying deposits or paying interest subsists.
Section 186(11) lists entities and investments outside the section other than sub-section (1). Rule 10 of the Meetings Rules, on section 185, is omitted in the e-book; the exemptions are now in the Act itself.
Guarantees: "performance" and "financial"
Neither section defines "performance guarantee" or "financial guarantee". Both sections reach a company that gives "any guarantee or provide any security in connection with any loan" taken by another person; section 185(1) uses "directly or indirectly" and section 186(2) uses "directly or indirectly" for loans, guarantees and security. A guarantee that is not "in connection with a loan" is therefore a question of reading the words of the section against the facts; the Act supplies no separate rule.
Table: direction of the money
| Direction | Section 185 | Section 186 |
|---|---|---|
| Holding to wholly owned subsidiary: loan, guarantee, security | Exempt by section 185(3)(c), if used for principal business activities | No special resolution under 186(3) first proviso; disclose per 186(4); register; interest floor in 186(7) as printed |
| Holding to a subsidiary that is not wholly owned: loan | Check 185(2) if a director is interested; 185(3)(c) does not cover it | 186(2) limits; 186(3) special resolution if exceeded |
| Holding to bank or institution for a subsidiary's loan: guarantee or security | Exempt by 185(3)(d) for a subsidiary, if used for principal business | 186 limits, subject to the exemption above where wholly owned |
| Subsidiary to holding | Check 185(1) and (2) | 186(2), (3): no exemption in the proviso for a loan to a holding company |
| Between fellow subsidiaries | Check 185(2) if a director of the lender is interested | 186(2), (3): no exemption in the proviso |
| To a joint venture company | Check 185(2) | 186(3) first proviso: no special resolution; disclose |
Worked example (invented figures)
Omega Holdings Limited has paid-up share capital of Rs 50,00,000 and the section 2(43) reserves and securities premium together of Rs 40,00,000. Limit under section 186(2): sixty per cent of (50,00,000 + 40,00,000) = 60 x 90,00,000 / 100 = Rs 54,00,000; hundred per cent of Rs 40,00,000 = Rs 40,00,000; whichever is more is Rs 54,00,000. Omega lends Rs 20,00,000 to Omega Retail Limited, a subsidiary that is not wholly owned. If total loans, guarantees, security and investments with this amount stay within Rs 54,00,000, the 186(3) special resolution is not needed, but the Board resolution under 186(5) and the MBP 2 entry are. A loan to a wholly owned subsidiary would be outside 186(3) in any case.
Common mistakes
- Treating section 185(3)(c) as covering all subsidiaries; it covers wholly owned subsidiaries only (clause (d) covers bank guarantees for any subsidiary).
- Missing that a fellow subsidiary is not exempt under the provisos.
- Lending at below the Government security yield.
- Not keeping the MBP 2 register.
- Giving a guarantee without Board approval with the consent of all directors present.
Need help with group loans?
If your group moves money between companies, we can check each transaction against sections 185 and 186, prepare the resolutions and set up the register. See our compliance advisory service.
Key takeaways
- Section 185 covers directors and persons they are interested in; section 186 caps loans, guarantees, security and investments.
- Holding to wholly owned subsidiary: exempt from section 185 and from the section 186(3) special resolution.
- Fellow subsidiaries and subsidiary-to-holding loans need full analysis.
- Interest must not be below the Government security yield in section 186(7).
- Keep Form MBP 2.
Read next
- Section 185: Loans to Directors
- Loans to a Private Company From Directors and Members
- Is a Subsidiary's Associate Also an Associate of the Holding Company
- Incorporating a Wholly Owned Domestic Subsidiary
Disclaimer: Based on the Companies Act, 2013 in the Ministry of Corporate Affairs consolidated text (last updated 29 July 2022), the Rules as consolidated in the Ministry's e-book and the other official texts named in this article, as consulted on 3 October 2026. Later amendments, notifications, circulars, forms and fees should be checked. Formats are general drafts to be adapted to the company's articles and facts. This article is general information, not legal advice; check the official text before acting.