A loan, guarantee or investment by an Indian company can fall under two provisions of the Companies Act, 2013 at the same time. Section 185 asks who the borrower is and whether a director is behind it. Section 186 asks how much the company has already lent, guaranteed and invested, and whether the new transaction takes it past a statutory limit. A transaction can clear one section and still fail the other, so finance and secretarial teams should run both tests in order and keep the working on file.
The Institute of Company Secretaries of India sets out both provisions, with the relevant rules and MCA clarifications, in its Guidance Note on Loan to Directors and Loan, Guarantee, Security and Investment by Companies (GN-12, October 2024 edition). The statutory text and figures below follow that guidance note.
Section 185: start with the borrower
The prohibited group
Section 185(1) says a company shall not, directly or indirectly, advance any loan, including a loan represented by a book debt, or give any guarantee or provide any security in connection with a loan taken by:
- any director of the company or of its holding company;
- any partner or relative of such a director;
- any firm in which such a director or relative is a partner.
This is a prohibition, not an approval test. A Board or members' resolution does not make such a loan valid unless one of the exceptions in section 185(3) applies.
Persons in whom a director is interested
Section 185(2) allows a loan, guarantee or security to "any person in whom any of the directors of the company is interested", but only if all three conditions are met:
- a special resolution is passed by the company in general meeting;
- the explanatory statement to the notice discloses the full particulars of the loan, guarantee or security, its purpose and other relevant facts;
- the borrowing company uses the loan for its principal business activities.
The Explanation to section 185(2) defines the interested persons:
- any private company of which any such director is a director or member;
- any body corporate at a general meeting of which not less than 25% of the total voting power is exercised or controlled by any such director, or by two or more such directors together;
- any body corporate whose Board, managing director or manager is accustomed to act in accordance with the directions or instructions of the Board or of any director of the lending company.
End-use is a real condition, not a recital. If the borrower is a private company whose principal business is manufacturing, the resolution and the loan agreement should state that the money will fund that manufacturing activity, and the lender should keep evidence of how it was used.
The exceptions in section 185(3)
Section 185 does not apply to:
- a loan to a managing or whole-time director given as part of the conditions of service extended to all employees, or under a scheme approved by the members by special resolution;
- a company that, in the ordinary course of its business, provides loans, guarantees or security for the due repayment of any loan, where interest is charged at not less than the prevailing yield of the one-year, three-year, five-year or ten-year Government security closest to the tenor of the loan;
- any loan made by a holding company to its wholly owned subsidiary, or any guarantee or security given by a holding company for a loan made to its wholly owned subsidiary;
- any guarantee given or security provided by a holding company for a loan made by a bank or financial institution to its subsidiary.
For the holding-subsidiary exceptions, the subsidiary must use the loan for its principal business activities.
Penalty under section 185(4)
| Person | Consequence |
|---|---|
| Company | Fine of not less than Rs 5 lakh, extendable to Rs 25 lakh |
| Every officer in default | Imprisonment up to six months, or fine of Rs 5 lakh to Rs 25 lakh, or both |
| Director or other person to whom the loan, guarantee or security is given | Imprisonment up to six months, or fine of Rs 5 lakh to Rs 25 lakh, or both |
These amounts are also stated in the ICSI's Chartered Secretary review of sections 185 and 186 (February 2026).
Section 186: measure the exposure
Layers of investment companies
Section 186(1) bars a company from making investments through more than two layers of investment companies. It does not stop a company from acquiring a foreign company that already has more layers under the law of its country, or a subsidiary from having an investment subsidiary where a law requires it.
The limit in section 186(2)
A company cannot, directly or indirectly, give a loan to any person or body corporate, give a guarantee or provide security in connection with a loan to any person or body corporate, or acquire the securities of any other body corporate, beyond the higher of:
- 60% of its paid-up share capital, free reserves and securities premium account; or
- 100% of its free reserves and securities premium account.
The test is on the aggregate: existing loans, guarantees, security and investments plus the proposed one. For this sub-section, "person" does not include an individual in the employment of the company.
Worked example: which limb applies
| Item | Company A (Rs crore) | Company B (Rs crore) |
|---|---|---|
| Paid-up share capital | 10.0 | 5.0 |
| Free reserves | 6.0 | 20.0 |
| Securities premium | 2.0 | 5.0 |
| 60% of all three | 10.8 | 18.0 |
| 100% of free reserves and premium | 8.0 | 25.0 |
| Section 186(2) limit (higher) | 10.8 | 25.0 |
Company A, with modest reserves, gets its limit from the 60% limb. Company B, with large reserves and small capital, gets it from the 100% limb.
Worked example: crossing the limit
Company A already has Rs 4 crore of loans outstanding, Rs 3.5 crore of investments and a Rs 2 crore guarantee, a total of Rs 9.5 crore. It proposes a further Rs 2 crore loan to an unrelated body corporate. The aggregate becomes Rs 11.5 crore, Rs 0.7 crore above the Rs 10.8 crore limit. The new loan therefore needs prior approval by special resolution in general meeting under section 186(3).
If the same Rs 2 crore were lent to Company A's wholly owned subsidiary, no special resolution would be needed, because section 186(3) exempts loans and guarantees to a wholly owned subsidiary or joint venture and acquisitions by a holding company of securities of its wholly owned subsidiary. The exempt amount still counts in the aggregate for later transactions and must be disclosed under section 186(4).
Board approval and lender consent
Under section 186(5), no loan, guarantee, security or investment can be made unless the Board resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present. Where a term loan from a public financial institution is subsisting, that institution's prior approval is also needed. That approval is not required if the aggregate stays within the section 186(2) limit and there is no default in repaying the term loan or paying interest on it.
Minimum interest, deposit defaults and disclosure
- Interest floor, section 186(7): no loan can be given at a rate 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. For a three-year loan, record the three-year yield on the date of sanction in the Board papers.
- Deposit default, section 186(8): a company in default in repaying deposits or paying interest on them cannot give any loan, guarantee or security or make an acquisition while the default continues.
- Disclosure, section 186(4): the financial statements must give full particulars of the loan, investment, guarantee or security and the purpose for which the recipient will use it.
- Register, section 186(9) and (10): the company keeps a register in Form MBP-2 at its registered office. Members can inspect it and take extracts on payment of a fee of up to Rs 10 a page.
Who is outside section 186
Under section 186(11), except for sub-section (1), the section does not apply to loans, guarantees or security given in the ordinary course of business by a banking company, an insurance company, a housing finance company, a company whose principal business is financing industrial enterprises or providing infrastructural facilities, or an RBI-registered NBFC. It also does not apply to investments made by an investment company, to shares allotted under section 62(1)(a) rights issues, or to investments by an NBFC whose principal business is acquiring securities.
Penalty under section 186(13)
The company is liable to a fine of Rs 25,000 to Rs 5 lakh. Every officer in default faces imprisonment of up to two years and a fine of Rs 25,000 to Rs 1 lakh.
Loans to employees and other MCA clarifications
The ICSI Guidance Note records MCA's clarification of 9 April 2015 that loans given to employees in the ordinary course, at rates in line with section 186(7), are compliant, and that where the effective yield on tax-free bonds exceeds the yield of a comparable Government security there is no violation of section 186(7). It also records the 13 June 2017 exemption from section 186(7) for companies with at least 26% Central or State Government shareholding that give loans for industrial research and development in line with their memorandum.
A two-stage review before every loan
- Identify the recipient. Is it a director, a director's relative or firm, a private company where a director is a member, a body corporate with 25% director voting power, a subsidiary, a joint venture or an unrelated party?
- Run section 185. Classify the transaction as prohibited, permitted with a special resolution, or within a section 185(3) exception.
- Document end-use wherever the law requires principal-business use.
- Compute the section 186(2) limit from the latest balance sheet and add all existing exposures to the proposal.
- Get approvals: unanimous Board consent, a special resolution if the limit is crossed, and lender consent where a public financial institution term loan subsists.
- Check the interest floor and deposit status on the sanction date.
- Update MBP-2 and the financial statement note, and reconcile them with minutes and agreements at each year end.
The frequent error is to treat the two sections as alternatives. Section 185 decides whether the company may deal with the borrower at all; section 186 then sets the quantity limit, approvals, pricing and records. A loan to a director-linked private company, for example, needs a section 185(2) special resolution and must still fit within, or be separately approved under, section 186.
Updated on 27 September 2026: retitled; added the full section 185 exceptions and penalties, the section 186 layer rule, exemptions and penalties, two worked limit calculations, and MCA clarifications as recorded in the ICSI Guidance Note.
