Section 186 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.
Section 185 asks who you're lending to. Section 186 asks how much.
They operate independently, and a transaction can clear one and fail the other. Crucially, Section 186 is not exempted for private companies. It applies in full — and it catches ordinary commercial acts like parking surplus cash in another company's debentures, or guaranteeing a subsidiary's overdraft.
The provision most often breached in a family group structure? The interest rate floor. More on that below.
The limit is the higher of 60% of (capital + free reserves + securities premium) and 100% of (free reserves + securities premium). Inside it, a unanimous Board resolution at a meeting. Outside it, a prior special resolution. No interest-free loans, ever. MBP-2 within seven days. And the officer penalty is imprisonment and fine.
What's caught?
No company shall, directly or indirectly:
- give any loan to any person or body corporate;
- give any guarantee or provide security for a loan to any other body corporate or person; or
- acquire securities of any other body corporate by subscription, purchase or otherwise,
exceeding 60% of its paid-up share capital, free reserves and securities premium, or 100% of its free reserves and securities premium, whichever is more.
Two things to hold on to. It's "whichever is more" — you take the higher figure. And it's an aggregate limit, not a per-transaction cap: it applies to the total of everything outstanding at any time.
Computing your limit
| Component | What's in |
|---|---|
| Paid-up share capital | Equity and preference, as paid up |
| Free reserves | Section 2(43) — reserves available for dividend, excluding unrealised gains, notional gains, revaluation and any change in carrying amount recognised in equity |
| Securities premium | Full balance |
Worked example. Paid-up capital ₹2 crore, free reserves ₹3 crore, securities premium ₹1 crore.
- Limit A — 60% of (2 + 3 + 1) = 60% of ₹6 crore = ₹3.6 crore
- Limit B — 100% of (3 + 1) = ₹4 crore
- Your limit = the higher = ₹4 crore
Aggregate loans, guarantees, securities and investments beyond ₹4 crore need a prior special resolution.
What approval do you need?
Board approval — always. Section 186(5) requires the resolution to be passed at a meeting with the consent of all the directors present.
Two points people miss:
- It's unanimous consent of directors present, not a simple majority. One dissent defeats it.
- It cannot be passed by circulation. Section 179(3) makes it a meeting-only matter. Board meeting rules →
Plus the prior approval of the public financial institution where a term loan is subsisting — though that isn't needed where the aggregate stays within the limit and there's no default in instalments or interest to the PFI.
Special resolution — above the limit. Prior approval by special resolution in general meeting. The explanatory statement must disclose the particulars, the specific limits, the body corporate involved, the purpose, the specific sources of funding, and the principal terms including the rate of interest.
The WOS and JV carve-out. No special resolution is needed for a loan, guarantee or security given to a wholly owned subsidiary or a joint venture, or for a holding company acquiring securities of its WOS.
The Board resolution is still required in those cases. Only the members' resolution is dispensed with.
The rule that quietly catches every group structure
Section 186(7): no loan shall be given at a rate of interest lower than the prevailing yield of the one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan.
Read that again if your group companies lend to each other interest-free.
An interest-free inter-corporate loan contravenes Section 186(7) — even between group companies, even where it's economically neutral, even where everyone consents. There's no carve-out for related entities. This is among the most frequently breached provisions in closely held group structures, and it usually surfaces in diligence.
Also: Section 186(8) bars any loan, guarantee, security or acquisition while a default in repayment of deposits or interest is subsisting.
The two-layer restriction
Section 186(1): a company shall make investment through not more than two layers of investment companies.
Exceptions: acquiring a company incorporated outside India which has investment subsidiaries beyond two layers under that country's law; and a subsidiary having an investment subsidiary to meet the requirements of any law.
The related restriction on layers of subsidiaries generally sits in the proviso to Section 2(87) with the Restriction on Number of Layers Rules, 2017 — two layers of subsidiaries, with specified exclusions.
The MBP-2 register
Every company giving a loan, guarantee or security, or making an acquisition, must keep a register in Form MBP-2:
- entries made chronologically, within seven days of the transaction;
- kept at the registered office;
- preserved permanently, in the custody of the company secretary or a Board-authorised person;
- authenticated by that person;
- open to inspection by any member, with extracts and copies on payment.
And disclose it twice more. Section 186(4) requires full particulars of the loans, investments, guarantees and securities — and the purpose for which the recipient will use them — in the financial statements. Section 134(3)(g) requires the same particulars in the Board's Report. Statutory registers →
Who's outside Section 186?
Everything except sub-section (1) is disapplied for:
- loans, guarantees and securities by a banking company, insurance company or housing finance company in the ordinary course, or a company engaged in financing companies or providing infrastructural facilities;
- acquisitions by an NBFC registered under the RBI Act whose principal business is acquiring securities — but only for its investment and lending activities;
- acquisitions by a company whose principal business is acquiring securities;
- shares allotted under Section 62(1)(a) — a rights issue subscription.
Note the carve-out from the carve-out: sub-section (1), the two-layer restriction, applies to all of them anyway.
The penalty
| Who | Consequence |
|---|---|
| The company | Fine of ₹25,000 to ₹5,00,000 |
| Every officer in default | Imprisonment up to two years and a fine of ₹25,000 to ₹1,00,000 |
Note the conjunction for officers: imprisonment and fine, not "or". Section 186(13) was not decriminalised, so Section 446B relief doesn't apply, and where imprisonment and fine are both mandated the offence isn't compoundable. Full penalty chart →
Checklist before any loan, guarantee, security or investment
- Compute the Section 186(2) limit — the higher of the two formulae.
- Aggregate all existing loans, guarantees, securities and investments, plus the proposed one.
- Within the limit → unanimous Board resolution at a meeting.
- Beyond → prior special resolution with the Rule 13 disclosures, and MGT-14 in 30 days.
- WOS or JV → Board resolution only.
- Confirm the interest rate is at or above the closest-tenor G-Sec yield.
- Confirm no subsisting deposit default.
- Get PFI approval where a term loan subsists and the limit is exceeded or a default exists.
- Check the two-layer restriction.
- MBP-2 within seven days.
- Disclose in the financial statements and the Board's Report.
- Run the Section 185 test independently.
- Run the Section 188 related-party test independently.
Key takeaways
- No private company exemption. Section 186 applies in full.
- The limit is the higher of the two formulae, and it's an aggregate.
- Unanimous consent of directors present, at a meeting, never by circulation.
- Interest-free group loans breach Section 186(7). No exceptions for relatedness.
- WOS and JV loans skip the special resolution, not the Board resolution.
- MBP-2 within seven days, preserved permanently.
- Officer penalty is imprisonment and fine — no 446B relief, not compoundable.
Read next
- Section 185: Loans to Directors and the Private Company Exemption
- Related Party Transactions under Section 188
- Statutory Registers a Private Company Must Maintain
- Board Meetings under Section 173
- Penalties for Non-Compliance: Section-wise Chart
Disclaimer: Positions stated as on 4 September 2026. Section 186 computations depend on the Section 2(43) definition of free reserves and on your audited numbers — take professional advice before acting.