Do You Know the Maximum Investment Limit for Companies?

Let’s suppose you are the managing director of a company named Alpha Sigma Private Limited which has been performing well in recent past. The company is well capitalized with good profits and excess cash. You are planning to invest the excess cash in the securities of other well-performing companies. Before going ahead with the investment plan, you should consider the legal restrictions prescribed under Companies Act, 2013.

1. What is the Maximum Limit for Companies investment?

Section 186(2) of the Companies Act, 2013 states that companies shall not give any loan to any person or body corporate or provide any guarantee/security in relation to a loan or make an investment in the securities of a Company in excess of the following limits;

60% of the paid-up share capital, free reserves and security premium reserves; or

100% of free reserves and security premium reserves;

whichever is higher.

Example: Let’s understand the permissible limit with following numbers:

Paid-up Capital: Rs. 20,00,000
General Reserves: Rs. 10,00,000
Securities Premium Reserve: Rs. 5,00,000

The maximum permissible limit shall be higher of Rs. 21,00,000 (35,00,000*60/100) or 15,00,000 (10,00,000+5,00,000). In this case the maximum amount of loan/guarantee/security/investment which can be made would be Rs. 21,00,000.

2. What is the Approval Process to be Followed by the Board?

The loan being given, guarantee/security being made or the proposed investment shall be approved at a meeting with consent of all the members of the Board of Directors. The consent of a Public Financial Institution (PFI) shall also be taken, if the above-mentioned threshold is breached and there is any loan taken by the Company pending repayment.

3. What shall be the Rate of Interest of the Loans made under this Section?

The loans granted under this section shall bear an interest which shall not be less than current yield of one-year, three-year, five-year or ten-year government security closest to the tenure of loan except in case of a company in which 26% or more of paid-up share capital is owned by a Central Government or one or more State Governments or both for loans provided to financing Industrial Research and Development project.

4. What to do if the threshold limit is about to be breached?

Where the total amount of loan made, guarantee/security given or investments made is about to exceed the prescribed threshold, prior approval through a special resolution in the general meeting shall be taken.

5. Maintenance of Register and Disclosure Requirements

The company which has attracted the requirements of this section shall maintain a register in Form MBP-2 which shall be kept at the registered office a disclosure of the loan/guarantee/security/investments in the Board Report.

6. Non-Applicability of this Section:

The restrictions contained in this section shall not be applicable in the following cases:

Where the loan is given, guarantee or security in respect of loan is provided by a holding company to a joint venture company or wholly owned subsidiary company or the investment is made in securities of its wholly owned subsidiary company.
Where the loan is given, guarantee or security in respect of loan or investment is made by a banking company, insurance company, housing finance company in the ordinary course of business or by a company engaged in the business of financing industrial enterprises or infrastructure projects.
In case of an investment made:
By an investment company;
Under the Rights issue under Section 62(1)(a);
By an NBFC whose principal business is acquisition of Securities.

7. What are the Consequences of Non-Compliances with these Provisions?

In case of contravention with these regulatory requirements, the company shall be punishable with a fine which shall not be less than Rs. 25,000 but it can go up to Rs. 1,00,000 and every officer in default shall also be subjected to similar fine as well as imprisonment which extend to 2 years.

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