What is the penalty for violating Section 185 Companies Act

The company is liable to a fine of not less than Rs 5 lakh and up to Rs 25 lakh. Every officer of the company in default is punishable with imprisonment up to six months, or with a fine of Rs 5 lakh to Rs 25 lakh, or both. The director or other recipient of the loan is punishable with imprisonment up to six months, or with a fine of Rs 5 lakh to Rs 25 lakh, or with both. Since February 2026, Registrars of Companies have been formally appointed as adjudicating officers under Section 454.

Which entities make up the HVDLE universe and which exit under the new threshold?

Per SEBI's consultation paper and meeting note, approximately 53% of the HVDLE universe was made up of Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), Asset Reconstruction Companies (ARCs), insurance companies (regulated by IRDAI) and Banks. With the threshold lifted to Rs 5,000 crore, mid-sized issuers (typical bond outstandings of Rs 1,000–4,999 crore) — many of which are RBI/IRDAI regulated NBFCs/HFCs/ARCs — drop out of the LODR HVDLE-specific compliance net while continuing under their primary sectoral regulators.

Company Secretary - Sapna Malpani CS

₹2 Lakh AOC-4 Penalty: The Section 137 Filing Trap Every Private Company Must Close Before 15 July 2026

Sapna — Sun, 24 May 2026 11:04:37 +0000

By CS Sapna Malpani, Practising Company Secretary, Bangalore | Last updated: 24 May 2026

The Registrar of Companies, Chennai, fined Thirumalai Thirumal Nidhi Limited and its officer in default ₹37,400 each for filing one AOC-4 form 274 days late. The company eventually filed. It still paid. That is the quiet brutality of Section 137 of the Companies Act 2013: the financial statement filing obligation does not forgive a late upload just because the upload finally happened. An AOC-4 filing penalty attaches the moment the 30-day window closes, and it keeps accruing every single day after that. With the AOC-4 due date for FY 2025-26 set for 30 October 2026, and the MCA’s one-time relief window shutting on 15 July 2026, this is the cheapest moment in years to fix a pending AOC-4 — and the most expensive moment to ignore one.

Quick Summary

Deadline: AOC-4 for FY 2025-26 is due 30 October 2026. The CCFS-2026 relief window closes 15 July 2026.

Who must comply: Every company registered under the Companies Act 2013 — private, public, OPC and NBFC.

Penalty for non-compliance: Up to ₹2,00,000 on the company and ₹50,000 on each officer in default under Section 137(3), plus an uncapped ₹100/day additional fee.

Key action: File any pending AOC-4 before 15 July 2026 to pay only 10% of additional fees and escape the statutory penalty.

Time to act: The relief window is open for fewer than eight weeks. After 15 July 2026, the full fee and penalty regime returns.

The Problem: Why the AOC-4 Filing Penalty Catches Good Companies

Section 137 of the Companies Act 2013 requires every company to file a copy of its financial statements — the balance sheet, the profit and loss account, the board’s report, the auditor’s report and every document annexed — with the Registrar within 30 days of the Annual General Meeting. The form used to do this is AOC-4. It sounds routine. It is anything but, because three features of Section 137 turn an ordinary delay into a compounding liability.

First, the penalty is automatic. There is no notice-and-cure step before liability begins. The contravention is complete on day 31 after the AGM. Second, the penalty runs daily. It is not a flat fine; it is ₹100 for every day of continuing default, so a company that “gets to it next quarter” is quietly buying penalty by the week. Third, the liability is split. The company pays, and so does each officer in default — separately, from personal funds. A founder-director who treats AOC-4 as the auditor’s problem is signing up for a personal penalty cheque.

This is why an AOC-4 filing penalty rarely lands on companies that are insolvent or abandoned. It lands on running, revenue-generating private companies whose directors assumed someone, somewhere, had filed. ROC Ahmedabad penalised a company and its two directors ₹30,000 between them for an AOC-4 lapse. In a more serious matter, ROC passed an order under Section 454 read with Section 137(3) imposing ₹1,40,900 on the company and ₹50,000 on each director for persistent failure to file financial statements. None of these were shell entities. They were companies that ran out of attention, not out of cash.

AOC-4 Penalty Breakdown: What a Late Filing Actually Costs

The single most expensive misunderstanding about Section 137 is that the penalty and the additional fee are the same thing. They are not. The additional fee is what you pay the MCA to accept a late form; the penalty is what the adjudicating officer imposes for breaking the law. You can be hit by both at once.

Liability	On the Company	On Each Officer in Default	Cap
Section 137(3) penalty	₹10,000 + ₹100/day	₹10,000 + ₹100/day	₹2,00,000 (company) / ₹50,000 (officer)
Additional filing fee	₹100 per day of delay	—	No upper limit
Wrong AOC-4 variant filed	Penalty under Section 450	Penalty under Section 450	₹10,000 + ₹1,000/day
Continued default	Director disqualification	Section 164(2) — 5 years	Bars all directorships

Read the table together and the structure becomes clear. The Section 137(3) penalty is capped — ₹2 lakh for the company, ₹50,000 per officer. The additional fee is not capped. That is the figure that runs away on a company that lets a default sit for years. A balance sheet that should have been filed in October and is filed three years later carries an additional fee measured in lakhs, before a single rupee of penalty is counted.

⚡ Section 137 By The Numbers

30 days
window to file AOC-4 after the AGM

₹2 lakh
maximum Section 137(3) penalty on the company

₹100/day
additional fee with no upper cap

10%
of additional fees payable under CCFS-2026 until 15 July

The AOC-4 Due Date for FY 2025-26 — And the One That Closes First

Two dates matter this year, and most directors are watching the wrong one.

The AOC-4 due date 2026 for a company with a financial year ending 31 March 2026 follows from the AGM. The AGM must be held within six months of the financial year close — by 30 September 2026. AOC-4 then falls due within 30 days of that AGM, which gives an outer date of 30 October 2026. A One Person Company has no AGM, so its AOC-4 is due within 180 days of the financial year end — by 27 September 2026. A first-year company gets a longer runway: its first AGM may be held within nine months of the close of the first financial year.

The date that closes first, however, is 15 July 2026. That is the last day of the Companies Compliance Facilitation Scheme, 2026 (CCFS-2026) — the MCA’s one-time amnesty window. For any company that already has a pending AOC-4 from an earlier year, 15 July is the real deadline. It is the difference between paying 10% of the accumulated additional fee with full immunity from penalty, and paying 100% of it with the Section 137(3) penalty on top.

15 April 2026 — CCFS-2026 window opened. Pending AOC-4 filings clearable at 10% additional fee.

15 July 2026 — CCFS-2026 window closes. Full additional fee and Section 137(3) penalty regime returns.

30 September 2026 — Last date to hold the AGM for FY 2025-26 (financial year ending 31 March 2026).

30 October 2026 — AOC-4 due date for FY 2025-26 (30 days after a 30 September AGM).

What CCFS-2026 Changes for a Pending AOC-4

The MCA introduced the Companies Compliance Facilitation Scheme, 2026 by General Circular dated 24 January 2026, with the operating window running 15 April to 15 July 2026. The scheme covers exactly the forms that cause the most damage when missed: MGT-7, MGT-7A, AOC-4, AOC-4 CFS, AOC-4 XBRL, ADT-1, FC-3 and FC-4, among others.

For a company carrying a pending AOC-4, CCFS-2026 does two things. It cuts the additional fee to 10% of the accumulated amount. And, more importantly, it closes the penalty exposure. Where a financial statement is filed under the scheme before an adjudication notice is issued — or within 30 days of receiving such a notice — the proceedings under Section 137 are concluded and “no penalty shall be leviable.” A company that has already received an adjudication notice for a missed AOC-4 can still use the scheme, provided 30 days have not elapsed since the notice.

One caveat that catches the unprepared: CCFS-2026 reduces the additional fee, it does not erase it. The base ₹100 per day still applies; the 90% concession is on the accumulated additional fee. The waiver of value is the penalty immunity, not free filing.

Which AOC-4 Do You Actually File?

“File AOC-4” is not one instruction. There are four variants, and filing the wrong one is a contravention in its own right. ROC has imposed penalties on companies that uploaded financial statements in the ordinary AOC-4 form when AOC-4 XBRL was required.

AOC-4 Variant	Who Files It
AOC-4	The default form for most private companies not crossing the XBRL thresholds.
AOC-4 XBRL	Listed companies and their Indian subsidiaries; companies with paid-up capital of ₹5 crore or more; companies with turnover of ₹100 crore or more.
AOC-4 CFS	Any company with one or more subsidiaries, associates or joint ventures, for filing consolidated financial statements.
AOC-4 NBFC (Ind AS)	Non-banking financial companies that prepare accounts under Indian Accounting Standards.

A growing private company is the one most likely to slip. It files ordinary AOC-4 for years, crosses ₹5 crore in paid-up capital or ₹100 crore in turnover, and never reassesses which form applies. The next filing should have been AOC-4 XBRL. The default is silent until ROC notices it.

What You Must Do Now — Step by Step

For the current year’s AOC-4, the path is preventive. For a pending AOC-4 from an earlier year, the path is the CCFS-2026 window. Both are below.

Step 1: Audit which AOC-4 years are pending

↓

Step 2: Identify the correct AOC-4 variant

↓

Step 3: File pending years under CCFS-2026 before 15 July

↓

Step 4: Lock the FY 2025-26 AGM and AOC-4 dates

↓

✓ Section 137 compliance closed

Step 1 — Run a pending-filing audit. Pull the company’s MCA master data and list every financial year for which AOC-4 has not been filed. Do not rely on memory; rely on the SRN history. A single un-filed year from three years ago is the one quietly running an uncapped ₹100/day additional fee.

Step 2 — Confirm the correct variant. Check paid-up capital, turnover, listing status and whether consolidated statements are required. If the company crossed the XBRL thresholds in any pending year, the filing for that year must be AOC-4 XBRL — filing ordinary AOC-4 is itself penalisable under Section 450.

Step 3 — File pending years under CCFS-2026. For every pending AOC-4, file under the scheme before 15 July 2026. This caps the additional fee at 10% of the accumulated amount and, critically, closes the Section 137(3) penalty exposure. Keep the SRN and challan as proof. After 15 July, the same filing costs the full additional fee plus the penalty.

Step 4 — Lock the current-year dates. For FY 2025-26, calendar the AGM on or before 30 September 2026 and AOC-4 within 30 days of the actual AGM date — not the outer date. If the financial statements are not adopted at the AGM, the un-adopted statements must still be filed within 30 days, and the adopted version filed within 30 days of the adjourned AGM.

Step 5 — Assign an officer in default by board resolution. Section 137(3) penalises the MD, the CFO, or the director “charged by the Board with the responsibility of complying with this section.” If the board has not named that director, every director becomes an officer in default. Name one, in writing, and the exposure narrows from the whole board to one identified person who is then accountable for the filing.

Common errors to avoid: filing AOC-4 before the AGM is held (the form requires AGM details); attaching an unsigned auditor’s report; selecting “No” for consolidated statements when subsidiaries exist; and assuming the auditor files AOC-4 — the auditor signs the accounts, the company files the form.

The Deeper Implication

According to CS Sapna Malpani, the AOC-4 default is rarely a money problem and almost always an ownership problem. “In nearly every adjudication order I read, the company could easily have paid the fee on time. What it did not have was one named person who owned the filing calendar. Section 137 is unforgiving precisely because it does not care why you were late — it only measures how late.” The structural fix is not a reminder; it is a board resolution that places the AOC-4 obligation on a specific director, with a specific date, every year.

The forward prediction is straightforward. CCFS-2026 is an amnesty, and amnesties are designed to be followed by enforcement. The scheme circular itself directs Registrars to take action against companies that do not use the window. Expect a visible wave of Section 137 adjudication orders in the second half of 2026, aimed at exactly the companies that had the chance to clean up at 10% and did not. The cheap window and the expensive crackdown are two halves of the same policy.

AOC-4 vs MGT-7: The Comparison Directors Get Wrong

AOC-4 is filed under Section 137 and carries the financial statements. MGT-7 (or MGT-7A for small companies and OPCs) is filed under Section 92 and carries the annual return — shareholding, directors, corporate structure. They are different forms, different sections, different penalties and different due dates. MGT-7 is due within 60 days of the AGM; AOC-4 within 30 days.

The trap is partial compliance. A company files MGT-7, sees a “filed” status, and assumes the annual cycle is closed — while AOC-4 sits un-filed. Both must be filed. CCFS-2026 covers both, which makes this the right moment to reconcile the full annual filing history rather than one form. A clean annual-compliance scorecard checks AOC-4 and MGT-7 for every year, not the most recent one.

📋 Key Takeaways

✅ AOC-4 is due within 30 days of the AGM — 30 October 2026 for a 31 March 2026 financial year end.
✅ The Section 137(3) penalty is ₹10,000 + ₹100/day, capped at ₹2 lakh for the company and ₹50,000 per officer.
✅ The ₹100/day additional fee has no cap — it is the figure that runs into lakhs on old defaults.
✅ CCFS-2026 cuts additional fees to 10% and closes penalty exposure — but only until 15 July 2026.
✅ Filing the wrong AOC-4 variant (e.g. ordinary instead of XBRL) is separately penalisable under Section 450.
✅ Directors pay the penalty personally; ROC orders bar payment from company funds.
✅ Name one director as the officer charged with Section 137 compliance, or the whole board is liable.
✅ AOC-4 and MGT-7 are separate filings — check both, for every year, not just the latest.

Sources and References

Section 137, Companies Act 2013 — India Code: indiacode.nic.in
MCA — Companies Act 2013, acts, rules and forms: mca.gov.in
MCA Circular — Companies Compliance Facilitation Scheme, 2026: mca.gov.in/circulars
MCA — ROC Adjudication Orders: mca.gov.in/roc-adjudication-orders
ICSI — Guidance Note on AOC-4: icsi.edu/guidance-notes
TaxGuru — ROC penalty for 274-day delay in filing AOC-4: taxguru.in
MMJC — FAQs on CCFS-2026: mmjc.in

Worried About a Pending AOC-4?

Use the ROC Penalty Calculator to estimate your exact additional fee and Section 137 exposure before the CCFS-2026 window closes.

For a confidential review of every pending filing year: Contact CS Sapna Malpani | WhatsApp

Frequently Asked Questions

What is the penalty for late filing of AOC-4 under Section 137?

Under Section 137(3) of the Companies Act 2013, a company that fails to file AOC-4 on time is liable to a penalty of ₹10,000, plus ₹100 for every day the default continues, subject to a maximum of ₹2,00,000. The managing director and CFO, or any director charged with compliance, face a separate penalty of ₹10,000 plus ₹100 per day up to a maximum of ₹50,000 each. This statutory penalty is over and above the additional filing fee of ₹100 per day, which has no upper cap. So a single late AOC-4 can cost both a capped penalty and an uncapped fee at the same time.

What is the AOC-4 due date for FY 2025-26?

AOC-4 must be filed within 30 days of the Annual General Meeting. For a company with a financial year ending 31 March 2026, the AGM must be held by 30 September 2026, which makes the AOC-4 due date 30 October 2026. A One Person Company has no AGM, so its AOC-4 is due within 180 days of the financial year close — by 27 September 2026. The 30-day clock runs from the actual AGM date, so an AGM held earlier than 30 September pulls the AOC-4 deadline forward.

Does the CCFS-2026 scheme waive the AOC-4 penalty?

The Companies Compliance Facilitation Scheme, 2026 lets companies clear pending AOC-4 filings by paying only 10% of the accumulated additional fees. Where the financial statement is filed before an adjudication notice is issued, or within 30 days of such a notice, the Section 137 proceedings are concluded and no penalty is leviable. The scheme does not waive the base ₹100 per day additional fee — the 90% concession is on the accumulated additional fee, not the base fee. The CCFS-2026 window runs from 15 April 2026 to 15 July 2026.

Which companies must file AOC-4 in XBRL format?

AOC-4 XBRL is mandatory for listed companies and their Indian subsidiaries, companies with paid-up capital of ₹5 crore or more, and companies with turnover of ₹100 crore or more. Companies whose financial statements follow Indian Accounting Standards also file in XBRL. Filing financial statements in the ordinary AOC-4 form when AOC-4 XBRL was required is itself a contravention that ROC has penalised under Section 450, so a growing company should reassess its filing variant each year.

Can a director be penalised personally for a late AOC-4?

Yes. Section 137(3) imposes the penalty on the company and separately on the officers in default — the managing director, the CFO, or the director charged with compliance. ROC adjudication orders specify that directors must pay the penalty from personal funds, not from company accounts. Persistent non-filing can also trigger director disqualification under Section 164(2), which bars the person from all directorships for five years. Naming one director as the officer responsible for Section 137 narrows this exposure from the entire board to one person.

Is AOC-4 the same as MGT-7?

No. AOC-4 filed under Section 137 carries the financial statements — the balance sheet, profit and loss account, board report and auditor’s report. MGT-7 filed under Section 92 is the annual return, covering shareholding, directors and corporate structure. They are separate forms with separate due dates (AOC-4 within 30 days of the AGM, MGT-7 within 60 days) and separate penalties. A company that files one but misses the other is still in default for the missed form, so both should be reconciled for every financial year.

This article is for general information and does not constitute legal advice. Penalty figures reflect Section 137(3) of the Companies Act 2013 as amended. Verify current dates and fee amounts on the MCA portal before filing. For advice specific to your company, consult a practising Company Secretary.

Annual Compliance Calendar 2026-27 for a Bangalore Private Limited Company

Sapna — Sat, 23 May 2026 09:30:00 +0000

A Bangalore private limited company has a fixed set of annual compliances for the 2026-27 financial year: board meetings through the year, DPT-3 by 30 June, DIR-3 KYC by 30 September, the AGM by 30 September, AOC-4 within 30 days of the AGM and MGT-7 within 60 days, the income tax return by 31 October, and the FLA return by 15 July if the company has foreign investment. Missing these triggers daily additional fees and, after three years, director disqualification.

Annual compliance calendar — FY 2026-27 (year ending 31 March 2027)
Due date	Compliance	Form
First board meeting of the FY	Directors’ disclosure of interest and non-disqualification	MBP-1, DIR-8
15 July 2026	Foreign Liabilities and Assets return (if foreign investment)	FLA return
30 June 2026	Return of deposits and exempt money for FY 2025-26	DPT-3
By 30 September 2026	Annual General Meeting	—
30 September 2026	Director KYC for every DIN holder	DIR-3 KYC
Within 15 days of AGM	Auditor appointment intimation (if applicable)	ADT-1
Within 30 days of AGM	Filing of financial statements	AOC-4
Within 60 days of AGM	Annual return	MGT-7 / MGT-7A
31 October 2026	Income tax return (companies)	ITR
Twice a year (Apr and Oct)	Return of outstanding dues to MSME suppliers, if any	MSME-1
Through the year	Board meetings — four in the year, gap not over 120 days	—

Board meetings and the first-meeting filings

A private company must hold at least four board meetings in a financial year, with no more than 120 days between two consecutive meetings. A small company or an OPC has a lighter requirement. At the first board meeting of the year, each director files a disclosure of interest in Form MBP-1 and a declaration of non-disqualification in Form DIR-8. These are easy to forget because they are not filed with the Registrar, but they belong in the minutes and the company’s records.

The AGM and the annual filings

For a company whose financial year ends 31 March 2027, the Annual General Meeting must be held by 30 September 2026 for FY 2025-26 — the AGM always concerns the year just closed. Once the AGM is done, two filings follow on a clock: AOC-4, the financial statements, within 30 days, and MGT-7 or MGT-7A, the annual return, within 60 days. If the company is appointing or ratifying an auditor, ADT-1 is filed within 15 days of the AGM. These two annual filings, AOC-4 and MGT-7, are the ones whose non-filing leads to the heaviest consequences.

DPT-3, DIR-3 KYC and the income tax return

Three more dates anchor the year. DPT-3 is an annual return, due by 30 June, in which the company reports outstanding money it has received that is not treated as a deposit. DIR-3 KYC is due by 30 September and must be completed by every person who holds a DIN — miss it and the DIN is deactivated. The income tax return for a company is generally due by 31 October. A Bangalore company has no city-specific extra annual filing; the calendar is the national one, filed with the Registrar of Companies, Bangalore.

If the company has foreign investment

A company that has received any foreign investment must also file the annual Foreign Liabilities and Assets (FLA) return with the RBI by 15 July, reporting the year-end position. For Bangalore startups with overseas investors this is the date most often missed, because it sits outside the familiar MCA calendar.

What missing a date costs

Late filing of AOC-4 or MGT-7 attracts an additional fee of ₹100 per day, per form, with no upper limit. Let the annual filings lapse for three consecutive years and every director is disqualified for five years under Section 164(2). If your company already has a backlog, the Companies Compliance Facilitation Scheme 2026 waives 90 percent of the accumulated additional fees on annual filings made before 15 July 2026 — see our guide to the CCFS 2026 scheme.

Frequently asked questions

What are the annual compliances for a private limited company in India?

Four board meetings, the first-meeting MBP-1 and DIR-8 disclosures, DPT-3 by 30 June, DIR-3 KYC by 30 September, the AGM by 30 September, AOC-4 within 30 days and MGT-7 within 60 days of the AGM, ADT-1 if appointing an auditor, the income tax return by 31 October, and the FLA return by 15 July if the company has foreign investment.

When is the AGM due for FY 2025-26?

For a company with a financial year ending 31 March, the Annual General Meeting for FY 2025-26 must be held by 30 September 2026.

When are AOC-4 and MGT-7 due?

AOC-4, the financial statements, is filed within 30 days of the AGM, and MGT-7 or MGT-7A, the annual return, within 60 days of the AGM.

Is there a separate compliance calendar for Bangalore companies?

No. A Bangalore private limited company follows the same national MCA calendar; its filings simply go to the Registrar of Companies, Bangalore. Stamp duty on certain documents follows Karnataka rates.

What happens if annual filings are missed?

An additional fee of ₹100 per day per form accrues with no cap, and three continuous years of non-filing disqualifies every director for five years under Section 164(2).

Reviewed by CS Sapna Malpani, a practising Company Secretary in Bangalore who manages annual ROC compliance for private companies. This is general information, not legal advice — confirm current due dates against MCA notifications. About Sapna Malpani.

Last reviewed: May 2026.

How Do I Increase the Authorised Share Capital of My Company?

Sapna — Fri, 22 May 2026 10:30:00 +0000

To increase your company’s authorised share capital, first check that the Articles of Association allow it, and alter them if they do not. Then pass a board resolution, hold a general meeting, and pass an ordinary resolution to alter the capital clause of the Memorandum. Finally, file Form SH-7 with the Registrar within 30 days of the resolution, along with the prescribed fee and stamp duty on the increased amount.

What authorised capital is, and when you need to raise it

Authorised capital is the ceiling on the share capital a company is allowed to issue. Paid-up capital is what it has actually issued. You can issue shares freely up to the authorised ceiling, but the moment you want to issue more, to bring in an investor, expand an ESOP pool, or convert instruments, you first have to lift the ceiling. This is a routine step, but it has a defined procedure and a 30-day filing clock, and skipping it blocks the allotment you actually wanted to make.

The step-by-step process

Check the Articles. The AoA must contain a power to increase authorised capital. If it does not, you alter the AoA first, which needs a special resolution.
Board meeting. The board passes a resolution approving the proposed increase and calling a general meeting of shareholders.
General meeting. Shareholders pass an ordinary resolution to alter the capital clause of the Memorandum. An increase of authorised capital is an ordinary resolution; it does not need a special resolution.
File Form SH-7. File SH-7 with the Registrar of Companies within 30 days of the resolution, attaching the amended Memorandum and the resolution.
Pay the fee and stamp duty. The MCA fee and the stamp duty on the increased capital are paid with the form.

Fees and stamp duty

Two amounts apply when you file SH-7. The MCA filing fee is calculated on the amount of the increase and the company’s revised capital. Stamp duty is charged on the increased authorised capital and is a state subject, so the rate depends on the state in which the company is registered. Because stamp duty scales with the size of the increase, it is worth deciding the new ceiling deliberately rather than picking a round number, but also leaving enough headroom that you are not back here in six months.

How long it takes

The procedure itself is quick once the paperwork is ready. The longer general meeting notice period can be shortened with shareholder consent, which most closely held companies use. The real timeline driver is whether the Articles already permit the increase. If they do, this is a matter of days. If the AoA has to be altered first, you add a special resolution to the same general meeting and file the AoA change as well.

Common mistakes

The recurring ones are simple. Founders allot shares to an investor first and discover only afterwards that the allotment breaches the authorised ceiling, which forces an awkward fix. Others miss the 30-day SH-7 deadline and pick up an additional fee. And some forget to check the Articles, then realise mid-process that an AoA alteration was needed. Sequence it properly: confirm the Articles, raise the ceiling, then allot.

Frequently asked questions

What resolution is needed to increase authorised capital?

An ordinary resolution of the shareholders to alter the capital clause of the Memorandum. If the Articles do not already permit an increase, a special resolution to alter the Articles is also required.

Which form is filed to increase authorised capital?

Form SH-7 is filed with the Registrar of Companies within 30 days of the resolution, along with the amended Memorandum, the MCA fee and stamp duty on the increased capital.

Is stamp duty payable on an increase in authorised capital?

Yes. Stamp duty is charged on the increased authorised capital. It is a state subject, so the rate depends on the state where the company is registered.

Can I issue shares beyond my authorised capital?

No. A company cannot allot shares beyond its authorised capital. You must increase the authorised capital first, then make the allotment.

Reviewed by CS Sapna Malpani, a practising Company Secretary in Bangalore who handles capital alterations and share allotments for private companies. This is general information, not legal advice. About Sapna Malpani.

Last reviewed: May 2026.

Form SH-4 Share Transfer: The Rs 5 Lakh Section 56 Penalty Trap Every Founder Walks Into (2026 Guide)

Sapna — Wed, 20 May 2026 06:52:53 +0000

Form SH-4 Share Transfer: The Rs 5 Lakh Section 56 Penalty Trap Every Founder Walks Into (2026 Guide)

Last updated: 20 May 2026 | By CS Sapna Malpani, Practising Company Secretary, Bangalore

The ROC, Kolkata penalised a private company and its directors roughly Rs 1.5 lakh for one share transfer that moved shares without consideration. The instrument was signed, the shares changed hands, the company thought the deal was done. It was not. The transfer breached Section 56 of the Companies Act 2013, and the penalty order followed. If you have raised a round, bought out a co-founder, or moved shares into a holding entity, you have almost certainly executed a Form SH-4 share transfer — and there is a good chance at least one step was missed. This guide walks through the entire share transfer procedure, the 60-day rule, the 0.015% stamp duty, the real penalties, and the 30 September 2026 demat deadline that quietly shuts the door on physical transfers.

Quick Summary

What it is: Form SH-4 is the instrument used to transfer physically held shares under Section 56 of the Companies Act 2013.

Key deadline: The executed SH-4 must reach the company within 60 days of execution; the new certificate must be issued within one month of lodging.

Stamp duty: 0.015% of the consideration, uniform across India since 1 July 2020.

Penalty for non-compliance: Section 56(6) penalty of Rs 50,000 on the company and Rs 50,000 on every officer in default; older ROC orders quote a fine of up to Rs 5 lakh.

Watch this: Once a private company falls under the Rule 9B demat mandate, physical SH-4 transfers stop. FY 2024-25 non-small companies must comply by 30 September 2026.

Why a Form SH-4 Share Transfer Goes Wrong So Often

Share transfer feels like paperwork. A founder sells secondary shares to an incoming investor, a departing co-founder hands back equity, or shares are reorganised between promoter entities. Everyone signs, money moves, and the company moves on. The problem is that a share transfer under Section 56 of the Companies Act is not complete when money changes hands. It is complete only when the company registers the transfer, after a properly executed and stamped instrument has been lodged and the board has approved it. Until then, the seller is still the legal member and the buyer owns nothing the law recognises.

This gap matters most for startups. During a funding round the cap table is rebuilt in days, SH-4 forms are signed in bulk, and the lawyers focus on the shareholders’ agreement. The instruments of transfer are then handed to a founder or an office manager — and frequently never lodged, never stamped correctly, or never approved by the board. Two years later a due diligence team for the Series B finds the cap table does not reconcile with the Register of Members, and the round stalls. The same gap hurts mature private companies when a director changes, a family settlement happens, or a strike-off is reversed.

Section 56 sits inside the same family of provisions that govern your statutory registers. A transfer that is not recorded correctly contaminates the Register of Members, the annual return in MGT-7, and every future filing that relies on shareholding data.

The Section 56 Penalty Table — What Non-Compliance Actually Costs

Section 56(6) is the enforcement teeth. The exact wording has been amended over time: the Companies (Amendment) Act 2020 converted the older fine-based punishment into a flat penalty, while many ROC adjudication orders still cite the earlier fine range. Either way, the exposure is real and it falls on the company and on every officer personally.

Default under Section 56	Company penalty	Officer in default	Trigger
Failure to register a valid transfer / SH-4 default (current Section 56(6))	Rs 50,000	Rs 50,000	Per default
Older fine range still quoted in ROC orders	Rs 25,000 to Rs 5,00,000	Rs 10,000 to Rs 1,00,000	Per default
Transfer without consideration treated as void (e.g. Pre-Stressed Udyog matter)	~Rs 1.5 lakh combined	Included above	ROC order
Late / non-issue of share certificate after transfer	Section 56(6) penalty	Section 56(6) penalty	Beyond one month

The number that should worry a founder is not the headline figure but the multiplication. ROC adjudication tends to count each defective transfer and each delayed certificate as a separate default. A company that botched six transfers during a funding round is not looking at one penalty — it is looking at six, plus officer penalties on every director who signed off the accounts while the defaults sat unremedied. Run your own figure through the MCA Penalty Calculator before you assume the exposure is small.

What Changed: The Demat Mandate Is Quietly Killing Physical Transfers

For most of the life of the Companies Act 2013, the Form SH-4 route was the default. That is ending. Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, inserted on 27 October 2023, requires every private company that is not a small company to dematerialise its securities and to facilitate dematerialisation of all its holdings.

The consequence for transfers is blunt. Once a company is inside the Rule 9B net, a shareholder holding a physical certificate cannot transfer those shares at all until they are dematerialised. The company also cannot issue further securities or carry out a buy-back while non-compliant. The original compliance date of 30 September 2024 was extended to 30 June 2025, and for companies incorporated in FY 2024-25 that are not small companies as on 31 March 2025, the date is on or before 30 September 2026 — roughly four months away as this guide is published. Demat non-compliance attracts the residuary penalty under Section 450, generally read as Rs 10,000 plus Rs 1,000 per day of continuing default.

If you read our earlier guide on the dematerialisation of shares process, treat this as the companion piece: demat is the conversion event, and the share transfer is the transaction that demat is about to reshape.

By The Numbers

60 days
To deliver the executed SH-4 to the company

0.015%
Stamp duty on the consideration, uniform across India

Rs 5 lakh
Upper fine range quoted in ROC Section 56 orders

30 Sep 2026
Demat deadline for FY 2024-25 non-small private companies

The Share Transfer Procedure, Step by Step

Here is the full share transfer procedure for a private limited company, in the order an ROC adjudicating officer will check it.

Step 1: Check the Articles for transfer restrictions and pre-emption rights

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Step 2: Execute Form SH-4 — both parties sign, date it

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Step 3: Pay 0.015% stamp duty via share transfer stamps

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Step 4: Lodge SH-4 + share certificate with the company within 60 days

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Step 5: Board resolution registering the transfer

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Step 6: Update the Register of Members (Form MGT-1)

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Step 7: Issue endorsed certificate within one month — transfer complete

Step 1 — Articles and pre-emption. A private company by definition restricts the transfer of its shares. Almost every set of Articles, and almost every shareholders’ agreement, contains a pre-emption or right of first refusal clause. Skipping the offer to existing members is the most common way a transfer is later challenged. Read the Articles before anyone signs.

Step 2 — Execute Form SH-4. The instrument must be in Form SH-4, signed by both transferor and transferee, and must carry the date of execution, the consideration, the class and number of shares, and the distinctive numbers. The date of execution starts the 60-day clock — get it wrong and you have created a defect on day one.

Step 3 — Pay stamp duty. Stamp duty is 0.015% of the consideration. For physical transfers this is paid through share transfer stamps affixed to or franked on the SH-4. An unstamped or under-stamped instrument is not valid and the board cannot act on it.

Step 4 — Lodge within 60 days. The executed, stamped SH-4 plus the original share certificate must reach the company within 60 days of execution. Delivering it on day 75 does not void the transfer outright, but it moves the decision into the board’s discretion and creates a documented default. This is the single step founders miss most.

Step 5 — Board approval. The transfer must be placed before the Board, which passes a resolution registering it. The minutes are the proof the ROC will ask for. No board resolution means no valid registration.

Step 6 — Register of Members. Enter the transfer in the Register of Members in Form MGT-1. The cap table the company shows investors and the statutory register must say the same thing. When they diverge, due diligence stops.

Step 7 — Issue the certificate. Endorse and deliver the share certificate to the transferee within one month of the company receiving the instrument of transfer. Only now is the transfer complete and the buyer a legal member.

By The Numbers: Common Errors That Trigger Section 56 Orders

Across ROC adjudication orders on Section 56, the recurring failures are consistent: SH-4 lodged after 60 days, stamp duty unpaid or paid at the wrong rate, no board resolution registering the transfer, share certificate not issued within a month, and transfers shown without genuine consideration. In the Pre-Stressed Udyog (India) matter, the ROC found shares had moved without consideration and treated the transfer as void, penalising the company and its directors. Separately, the ROC, Bangalore has penalised companies for executing a physical share transfer when the securities should already have been in demat form — a preview of the post-30 September 2026 world.

What You Must Do Now

The action list is short and unforgiving.

1. Audit every transfer of the last three years. Pull every SH-4 executed since FY 2023-24. For each one, confirm the execution date, the 60-day lodging, the stamp duty, the board resolution, the MGT-1 entry, and the certificate. Any transfer missing a step is a live default.

2. Reconcile the cap table to the Register of Members. The investor-facing cap table and the statutory Register of Members must match to the share. If they do not, fix the register, not the spreadsheet.

3. Regularise late transfers through the board. Where an SH-4 was lodged late, place it before the Board with a clear resolution recording the delay and the decision to register. A documented, board-approved late registration is far stronger than a silent gap.

4. Never disguise a gift as a sale. If shares are genuinely being gifted, execute a gift deed with proper documentation. A SH-4 showing nil or token consideration invites the void-transfer finding.

5. Plan the demat conversion before the deadline. If your company is not a small company, start the Rule 9B process now: get an ISIN, appoint a registrar and transfer agent, and convert the promoters’ holdings first. After the applicable demat date, physical SH-4 transfers in your company stop.

6. Pre-clear funding-round transfers. Build the SH-4 lodging, stamping, and board approval into the closing checklist of every round, the same way you build in your post-funding 30-day compliance checklist. Secondary share sales in a round are exactly where these defaults are created.

The Deeper Implication

According to CS Sapna Malpani, the share transfer file is becoming one of the first things a serious acquirer or lead investor inspects, because it is a fast, honest test of whether a company keeps its records straight. A clean transfer history signals a company that can be diligenced quickly; a messy one signals months of clean-up and a discount on valuation. The shift to dematerialisation will sharpen this further. Once holdings sit with a depository, transfers leave an automatic, time-stamped trail, and the discretion and delay that hid sloppy SH-4 practice will disappear. The prediction is straightforward: within the next two to three years, a private company that still relies on physical share certificates and loosely managed SH-4 forms will find itself unable to close a transaction on the timeline an investor expects. The companies that move their records into order now will simply transact faster.

SH-4 Transfer vs Demat Transfer: Which Applies to You

Founders often confuse the physical SH-4 route with the depository route. They are not interchangeable — the form your company is in decides which one is even available.

Feature	Physical (Form SH-4)	Demat (depository)
Instrument	Form SH-4, signed by both parties	Delivery instruction to NSDL / CDSL
Stamp duty	0.015%, paid via transfer stamps	0.015%, auto-collected by depository
60-day lodging rule	Applies — strict	Not applicable
Board registration	Required	Reflected via depository records
Available after Rule 9B applies	No	Yes — mandatory route

It is also worth separating a share transfer from a fresh issue of capital. A transfer moves existing shares between people and uses SH-4. Increasing the company’s authorised capital to issue new shares is a different process under Form SH-7, and a fresh allotment uses Form PAS-3. Mixing these up is a frequent drafting error in board minutes.

Key Takeaways

✅ A Form SH-4 share transfer is complete only when the board registers it and the certificate is issued — not when money changes hands.
✅ The executed SH-4 must reach the company within 60 days of execution; the new certificate within one month of lodging.
✅ Stamp duty is 0.015% of the consideration, uniform across India since 1 July 2020 — it replaced the old 0.25% rate.
✅ Section 56(6) carries a Rs 50,000 penalty on the company and Rs 50,000 on every officer in default; older ROC orders quote a fine up to Rs 5 lakh.
✅ The ROC has treated transfers without consideration as void — the Pre-Stressed Udyog matter drew roughly Rs 1.5 lakh in penalties.
✅ Under Rule 9B, once a non-small private company is in the demat net, physical SH-4 transfers stop; FY 2024-25 non-small companies must comply by 30 September 2026.
✅ Audit every transfer of the last three years and reconcile the cap table to the Register of Members before your next funding round or sale.

Sources and References

Section 56, Companies Act 2013 — India Code (Bare Act)
Companies (Share Capital and Debentures) Rules 2014, Rule 11 (Form SH-4) — MCA
Rule 9B, Companies (Prospectus and Allotment of Securities) Rules — demat mandate for private companies — MCA Notifications
ROC adjudication order, Pre-Stressed Udyog (India) Private Limited, Section 56 — Taxmann
ROC Bangalore penalty for physical share transfer without demat — TaxGuru
Stamp duty on transfer of shares, 0.015% under the Indian Stamp Act post Finance Act 2019 — MCA / ROC Adjudication Orders

Worried Your Share Transfer File Will Not Survive Diligence?

Use the MCA Penalty Calculator to estimate your Section 56 exposure across past transfers.

For a confidential share transfer and cap table review: Contact CS Sapna Malpani | WhatsApp

Frequently Asked Questions

What is Form SH-4 in a share transfer?

Form SH-4 is the prescribed instrument of transfer for securities held in physical form under Section 56 of the Companies Act 2013 read with Rule 11 of the Companies (Share Capital and Debentures) Rules 2014. Both the transferor and transferee sign it, and it must carry share transfer stamps for 0.015% of the consideration. The executed SH-4, together with the original share certificate, must reach the company within 60 days of the date of execution. Without a valid SH-4 on record, the board cannot register the transfer and the buyer is not legally a member.

What is the penalty for not following Section 56 on share transfer?

Under Section 56(6), if a company defaults in complying with the share transfer provisions, the company is liable to a penalty of Rs 50,000 and every officer in default is liable to Rs 50,000. Older versions of the section, still quoted in many ROC orders, read as a fine of Rs 25,000 to Rs 5,00,000 for the company and Rs 10,000 to Rs 1,00,000 for officers. On top of this, a transfer of shares without consideration has been treated as void by the ROC — in the Pre-Stressed Udyog (India) matter, the ROC imposed roughly Rs 1.5 lakh on the company and its directors for a Section 56 breach.

How much stamp duty is payable on a share transfer in India?

Stamp duty on transfer of shares is 0.015% of the consideration, applied uniformly across India after the Finance Act 2019 amendments to the Indian Stamp Act took effect on 1 July 2020. This replaced the earlier 0.25% rate. For physical transfers using Form SH-4, the duty is paid by affixing or franking share transfer stamps. For demat transfers, the depository — NSDL or CDSL — collects the 0.015% automatically at the time of the transaction.

What is the 60-day rule for Form SH-4?

Rule 11(3) of the Companies (Share Capital and Debentures) Rules 2014 requires that an executed instrument of transfer in Form SH-4 be delivered to the company within 60 days from the date of execution. If the deed is delivered late or is lost, the board may still register the transfer, but only on such terms as it thinks fit and after satisfying itself the transfer is genuine. Founders frequently sign SH-4 forms during a funding round and then forget to lodge them, leaving the cap table legally unsettled.

Can shares be transferred without consideration?

A transfer of shares for no consideration is legally fragile. The ROC has treated such transfers as void and penalised the company and directors under Section 56. A genuine gift of shares is possible but must be executed as a gift through a gift deed with proper documentation, not disguised as a sale on Form SH-4 showing nil or token consideration. Founders restructuring their cap table or moving shares between holding entities should take a Company Secretary’s advice before executing the transfer.

Does the demat deadline affect share transfers?

Yes. Under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, private companies that are not small companies must dematerialise their securities. Once a company falls under the mandate, a shareholder who still holds a physical certificate cannot transfer those shares until they are dematerialised. Private companies incorporated in FY 2024-25 that are not small companies as on 31 March 2025 must comply on or before 30 September 2026. After that date, physical Form SH-4 transfers in those companies effectively stop.

How long does the company have to issue a new share certificate after a transfer?

Under Section 56(4), where shares are transferred, the company must deliver the certificates to the transferee within one month of receipt by the company of the instrument of transfer. For an allotment of new shares the timeline is two months, and for transmission on death it is one month from intimation. Missing these timelines is itself a Section 56 default and is one of the most common findings in ROC adjudication orders against private companies.

This article is for general information and does not constitute legal advice. Share transfer outcomes depend on your Articles, shareholders’ agreement, and the specific facts. For advice on a particular transfer, consult a Practising Company Secretary. Written by CS Sapna Malpani, Practising Company Secretary, Bangalore.

Incorporating a Startup in Bangalore in 2026: Timeline, Cost and the SPICe+ Process

Sapna — Tue, 19 May 2026 09:45:00 +0000

Incorporating a startup in Bangalore in 2026 means filing the SPICe+ form with the Ministry of Corporate Affairs. SPICe+ bundles name reservation, incorporation, DIN for the directors, and PAN, TAN and other registrations into a single application. With clean, complete documents the certificate of incorporation usually arrives in about one to two weeks. The main costs are MCA fees, Karnataka stamp duty, digital signature certificates and professional fees.

What SPICe+ is

SPICe+ is the integrated incorporation form, and it replaced the older patchwork of separate applications. It has two parts. Part A reserves the company name. Part B does the actual incorporation and, in the same filing, applies for the directors’ DINs, the company’s PAN and TAN, EPFO and ESIC registration, a bank account, and professional tax registration where the state requires it. It is filed alongside the electronic Memorandum and Articles and the AGILE-PRO-S form. The point of the design is that you submit one set of forms and come out the other side with a company that is ready to operate.

The step-by-step process

Digital Signature Certificates. Each proposed director needs a DSC, since the forms are signed digitally.
Name reservation. File SPICe+ Part A with one or two proposed names. Check trademark availability, not just MCA availability, before you settle on one.
Documents. Gather identity and address proof for each director and shareholder, and proof of the registered office in Bangalore, with a no-objection certificate from the owner if it is rented.
File Part B with the MoA and AoA. Submit SPICe+ Part B, the electronic Memorandum and Articles, and AGILE-PRO-S together.
Certificate of Incorporation. Once approved, the MCA issues the certificate with the CIN, and the PAN and TAN are allotted with it.

How long it takes

For a straightforward private limited company with resident Indian directors and clean documents, incorporation in Bangalore typically completes in about one to two weeks. Name approval is usually quick. The part that varies is document quality. If proofs are mismatched or the registered office paperwork is incomplete, the form comes back for resubmission and you lose days each time. A foreign director adds time, because their documents have to be apostilled or consularised first.

What it costs

The cost has four parts. MCA filing fees depend on the authorised capital, and for companies incorporated with modest capital the government fee component is often very low. Stamp duty is a state subject, so a company registered in Bangalore pays Karnataka stamp duty on the incorporation documents. Then there is the cost of the digital signature certificates, one per director, and professional fees for the CS or CA who prepares and files everything. Treat any single all-in number you see online with caution; the honest figure depends on your capital, the number of directors and your state.

Bangalore-specific points

A company incorporated in Bangalore has its registered office in Karnataka and falls under the Registrar of Companies, Bangalore. That means Karnataka stamp duty, and a registered office address you can actually evidence, a rental agreement and a utility bill in most cases, plus the owner’s no-objection certificate. Founders working out of a coworking space should confirm the space will give them a usable address proof before they rely on it. If the team is likely to move office within the city, that is fine, a change of address within the same state is a simple filing. Moving to another state later is not.

What slows incorporation down

Most delays are documentation, not the MCA. The recurring ones: a proposed name that clashes with an existing company or trademark, address proof that does not match the registered office, identity documents with inconsistent spellings, and a foreign director whose apostille has not been started early enough. Get the document set clean before filing and incorporation in Bangalore is quick and predictable.

Frequently asked questions

How long does it take to register a company in Bangalore?

For a private limited company with resident directors and clean documents, incorporation in Bangalore usually completes in about one to two weeks through the SPICe+ form. Incomplete documents or a foreign director extend the timeline.

What is the SPICe+ form?

SPICe+ is the MCA’s integrated incorporation form. It reserves the company name and, in one filing, handles incorporation, DIN for directors, and PAN, TAN, EPFO, ESIC and professional tax registration.

What does it cost to incorporate a company in Bangalore?

The cost has four parts: MCA filing fees that depend on authorised capital, Karnataka stamp duty, digital signature certificates for each director, and professional fees. The total varies with capital, the number of directors and the state.

What documents are needed to register a company in Bangalore?

Identity and address proof for each director and shareholder, digital signature certificates, and proof of the registered office in Bangalore with a no-objection certificate from the owner if the premises are rented.

Reviewed by CS Sapna Malpani, a practising Company Secretary in Bangalore who incorporates startups and handles post-incorporation compliance. This is general information, not legal advice. About Sapna Malpani.

Last reviewed: May 2026.

Section 185 Companies Act: The Rs 25 Lakh + 6 Months Jail Trap Every Private Company Must Know in 2026

Sapna — Sun, 17 May 2026 07:33:25 +0000

Between February 2026 and now, the Ministry of Corporate Affairs has quietly rewired how Section 185 of the Companies Act 2013 gets enforced. Through notifications dated 10 February 2026, the Registrars of Companies have been formally appointed as adjudicating officers under Section 454, which means a director loan flagged in your statutory audit no longer waits for the NCLT queue — the local ROC can issue a penalty order in weeks. The numbers are unforgiving: ₹5 lakh to ₹25 lakh on the company, the same fine plus up to six months imprisonment on every officer in default, and an identical fine plus jail on the director who received the loan. For private companies between ₹5 crore and ₹500 crore in revenue — the sweet spot where founder advances are most common — this is the single most dangerous provision in the Companies Act after Section 164 disqualification.

Quick Summary

What it does: Section 185 prohibits a company from advancing loans, giving guarantees, or providing security to its own directors and entities in which they are interested.

Who must comply: Every company — private, public, listed. Private companies meeting all three exemption conditions are carved out.

Penalty for non-compliance: Company ₹5L–₹25L. Officer in default ₹5L–₹25L plus up to six months in jail. Recipient director the same.

Key action: Run the seven-step compliance test before approving any director loan, guarantee or security. Refund any existing non-compliant loan with interest before your next statutory audit.

Why now: ROC adjudication powers active since 16 February 2026 mean faster orders. Three new Regional Directorates in Ahmedabad, Bengaluru and Chandigarh are clearing the backlog.

The problem: why founder-director loans keep triggering ₹25 lakh orders

The pattern is almost identical across every adjudication order published on the MCA portal in the last twenty-four months. A growing private company has positive cash on its books. The founder, who is also the managing director, takes a short-term loan from the company — sometimes to fund a personal property, sometimes to bridge a personal tax outgo, often simply because the founder treats the company’s account as their own. The transaction is recorded in the books, sometimes as a loan, sometimes as an “advance”. The statutory auditor flags it under Section 185 in the next audit. By then, the ROC has the matter on its desk and the penalty clock has started.

The misconception that drives most of these orders is that a private limited company can do whatever its shareholders agree to. That was broadly true under the 1956 Act. It is no longer true under the Companies Act 2013. The 2013 Act is a regulator-driven statute that treats every limited liability company as a separate legal person, distinct from its founders, even if a single individual holds 99 percent of the equity and is the sole working director. Section 185 is the most visible expression of this principle.

The second misconception is that the exemption notification dated 5 June 2015 covers all private companies. It does not. The exemption applies only where every one of three conditions is satisfied. Many growing private companies fail the second condition the moment they take a working-capital line from their bank that exceeds twice their paid-up share capital, or the moment a body corporate — even a sister LLP — subscribes to a single share.

The penalty matrix you should pin to your boardroom wall

Who Pays	Minimum Fine	Maximum Fine	Imprisonment
The Company	₹5,00,000	₹25,00,000	Not applicable
Officer in default (CFO / MD / CS)	₹5,00,000	₹25,00,000	Up to 6 months
Recipient (director / relative)	₹5,00,000	₹25,00,000	Up to 6 months
Worst-case aggregate (single transaction)	₹15,00,000	₹75,00,000	12 months total

The third row is the row most founders do not internalise. The recipient director is independently punishable. If the founder is also the MD, the same individual is hit twice — once as officer in default and once as recipient. In a husband-wife director pair where the loan is routed to the spouse, both individuals are independently liable.

The 2026 enforcement shift you cannot ignore

For most of the last decade, Section 185 violations sat in a long queue. The Adjudicating Officer was the Regional Director, and Regional Directorates were stretched. Three structural changes have closed that backlog window:

ROC adjudication powers — Notification dated 10 February 2026. The Ministry of Corporate Affairs has formally appointed every Registrar of Companies as an adjudicating officer under Section 454 for a long list of provisions, including Section 185. The ROC no longer has to refer minor and intermediate Section 185 violations upwards. It can issue show cause, hear the company and pass a penalty order — all within ninety days in most cases.
Three new Regional Directorates. The number of Regional Directorates has been expanded from seven to ten, with new offices in Ahmedabad, Bengaluru and Chandigarh effective 16 February 2026. For Bangalore-headquartered private companies, what used to be a Chennai-routed file now sits with the new RD Bengaluru, dramatically shortening the response window.
MCA-21 V3 search. The V3 portal exposes loan and advance entries from AOC-4 financials in a way the older portal did not. Statutory auditors are using these data trails during peer reviews, and the ICSI’s representation to the MCA dated 6 May 2026 confirms that AOC-4 disclosures are now the single most-queried data set in the portal.

Section 185 By The Numbers

₹75L
Maximum aggregate fine on a single Section 185 violation across company, officer and recipient.

12 months
Maximum aggregate jail time across officer and recipient under one Section 185 contravention.

3 conditions
Each of which a private company must independently satisfy to claim the 5 June 2015 exemption.

10 RDs
Regional Directorates now active — up from 7 — clearing the Section 185 adjudication backlog.

What Section 185 actually prohibits, in plain words

Section 185(1), read together with its proviso and Section 185(2) as substituted by the Companies (Amendment) Act 2017, prohibits a company from doing any of these things, in favour of any director of the company, or of any director of its holding company, or any partner or relative of such director, or any firm in which any such director or relative is a partner:

Directly or indirectly advancing a loan, including any loan represented by a book debt.
Giving a guarantee in connection with any loan taken by the recipient from a third party.
Providing any security in connection with such a third-party loan.

Section 185(2) extends the prohibition to loans to any private company in which any director of the lending company is a director or member, to any body corporate at a general meeting of which not less than 25 percent of the total voting power is exercised by such directors, and to any body corporate whose board, MD or manager is accustomed to act on the directions of the lending company’s board. Section 185(3) carves out exceptions for managing directors, ordinary course of business lending by financial companies, and wholly-owned subsidiary loans. Section 185(4) lays down the penalty regime.

The seven-step compliance test before approving any director loan

Step 1 — Identify the recipient: director of the company or holding company, or any partner, relative, firm or interested body corporate.

Step 2 — Classify the transaction: loan, guarantee, or security in connection with a third-party loan.

Step 3 — Test all three private-company exemption conditions from the 5 June 2015 notification.

Step 4 — Check MD or WTD carve-out: uniform employment scheme or special resolution.

Step 5 — Check wholly-owned subsidiary route under Section 185(3)(c).

Step 6 — Apply Section 186 limits and rate-of-interest floor (prevailing yield of one-year G-Sec or longer).

Step 7 — Pass board resolution with unanimous consent, special resolution if required, file MGT-14 within 30 days, record in Register of Loans (MBP-2).

Skipping any step is how companies end up in the ROC’s penalty list. Step 3 is where most private companies fail. Step 7 is where most companies file the form but get the disclosure wording wrong.

The three exemption conditions, decoded

Condition A — No body corporate has invested in the share capital

The wording matters. The condition is breached the moment any other body corporate — Indian or foreign, holding, subsidiary or unrelated — subscribes to or acquires even a single share of the company. The most common trigger is a flip-up structure where the founder LLP takes equity in the operating private limited. Once the LLP is on the cap table, the exemption is gone, even if the founder still controls 99 percent through direct holding.

Condition B — Borrowings below 2× paid-up capital or ₹50 crore, whichever is lower

This is the bright-line condition most growing private companies cross unconsciously. A company with ₹50 lakh paid-up capital loses the exemption the moment its aggregate borrowings — including the bank overdraft, the working capital line and any loan from a related body corporate — cross ₹1 crore. The ₹50 crore alternative cap only matters for larger private companies; for a typical Series-A-stage private company with low paid-up capital, the 2× cap binds first.

Condition C — No default on any borrowing

A single missed instalment on the working capital loan — even one cured within the same week — disqualifies the company for the entire financial year in which the default occurred. Defaults in the past, if reported under any RBI mechanism, can also disqualify. Many companies discover this condition only after the auditor flags it during the AOC-4 sign-off.

Section 185 vs Section 186 — the most-confused pair in the Companies Act

	Section 185	Section 186
Who does it apply to	Loans, guarantees and securities to directors and interested persons	Loans, guarantees, securities and investments to any person other than a director
Default mode	Prohibition	Permission subject to limits
Approval needed	Special resolution + interest at G-Sec yield for the limited carve-out	Unanimous board approval; special resolution beyond the threshold
Threshold	No financial threshold — prohibition is absolute outside carve-outs	60% of paid-up capital plus free reserves plus securities premium, or 100% of free reserves plus securities premium, whichever is higher
Punishment	Fine ₹5L–₹25L + 6 months jail on officer + recipient	Fine on the company and every officer in default — no jail
Compoundability	Generally not compoundable because of imprisonment	Compoundable under Section 441

If the recipient is a director or an entity in which a director is interested, Section 185 is the test that runs first. Only after a Section 185 carve-out is found — managing director scheme, wholly-owned subsidiary, special resolution under the substituted Section 185(2) — does Section 186 become the operative provision.

Five real fact patterns that have triggered Section 185 orders

The founder housing advance. Founder is MD and 99 percent shareholder. The company advances ₹40 lakh to the founder for buying a flat. There is no special resolution and no employment scheme. The auditor flags it. The ROC issues a penalty of ₹5 lakh on the company and ₹5 lakh on the founder personally.
The director’s HUF guarantee. Director’s HUF takes a bank loan. The company gives a corporate guarantee. The director is interested in the HUF. Section 185 is triggered. No carve-out applies. Penalty cascade follows.
The sister-concern loan. Two private companies have a common director. The first company lends ₹2 crore to the second. Section 185(2) is triggered. The lending company fails Condition B because its borrowings exceed 2× paid-up capital. Penalty orders are issued against both companies.
The advance that became a loan. The company gives the MD a ₹6 lakh travel advance. Two years pass without settlement. The auditor reclassifies it as a loan. The ROC accepts the reclassification. Penalty is applied even though no formal loan agreement existed.
The promoter LLP layer. Founder routes capital into the operating private limited through a promoter LLP. The LLP is a body corporate. Condition A is breached. Every subsequent loan to the founder from the company becomes a Section 185 contravention.

What the Companies (Amendment) Act 2017 actually changed

Two changes are worth memorising because they are the only legal escape routes outside the private-company exemption:

Substituted Section 185(2). A company may now advance a loan or give a guarantee or security to any person in whom a director is interested, including a body corporate, provided that a special resolution is passed by the lending company and the loans are utilised by the borrower for its principal business activities. The interest rate must not be less than the prevailing yield of one-, three-, five- or ten-year government securities closest to the tenor of the loan.
Section 185(3)(c) — wholly-owned subsidiary. The prohibition in Section 185(1) does not apply to a loan made by a holding company to its wholly-owned subsidiary or a guarantee given or security provided in connection with such a loan, regardless of whether the subsidiary’s directors overlap with the holding company.

Both routes still require board approval and MGT-14 filing within 30 days. The 2017 amendment did not relax the punishment under Section 185(4); it only opened the door for genuine business loans through the special-resolution route.

What you must do this quarter

Run a Section 185 ledger audit. Ask your finance team to extract every loan, advance and inter-company debit from your books for the last three financial years. Tag each line as covered by Section 185, exempt, or in the grey zone.
Test the exemption. Pull your shareholding register and your borrowing schedule. Confirm whether your company satisfied all three conditions of the 5 June 2015 notification on the date of each transaction. The test is transaction-by-transaction, not financial-year-by-financial-year.
Settle grey-zone advances. Where an advance has remained outstanding beyond a reasonable settlement period, either reverse it through reimbursement vouchers or convert it into a formal loan that meets the Section 185(2) special-resolution route, including the interest-rate floor.
File MGT-14 retrospectively where possible. If a board resolution exists but MGT-14 was missed, file it now with additional fees. Late filing is a lesser offence than non-filing.
Update your statutory registers. The Register of Loans (Form MBP-2) and the Register of Contracts (Form MBP-4) must reflect every Section 185 and Section 188 transaction. ROCs are increasingly inspecting these registers during scrutiny.
Brief your statutory auditor. A clean Section 185 file going into the audit is the single fastest way to neutralise auditor qualification under CARO 2020.
Build a board approval template. The board resolution wording must record the unanimous consent of directors present, the rate of interest, the security, the tenor and the purpose. Generic templates do not survive ROC scrutiny.

The deeper implication for founder-led private companies

According to CS Sapna Malpani, the reason Section 185 produces so many orders is not because companies set out to cheat — it is because the line between “the company’s money” and “the founder’s money” feels artificial when the founder owns 99 percent of the company. The 2013 Act does not accept that intuition. Once the limited liability shield is chosen, the corporate veil cuts both ways: the founder is protected from the company’s creditors, and the company’s money is protected from the founder. The penalty regime is the enforcement mechanism for that bargain.

The forward prediction worth tracking: within the next eighteen months, the new ROC-Bengaluru office is likely to clear a backlog of Section 185 cases against Bangalore-headquartered private companies that filed AOC-4 returns between 2019 and 2023. The disclosures in those returns are now searchable on the V3 portal. Founders who took inter-company loans during the funding boom of 2020–2022 should not assume that the absence of a show-cause notice today implies safety.

How this compares to related provisions every CS should know

Section 185 sits alongside three other Companies Act provisions that founders confuse with it. Section 184 deals with disclosure of interest by a director in any contract — including a director loan — and requires Form MBP-1 at the first board meeting of every financial year, plus immediate disclosure of any change in interest. Section 188 deals with related party transactions and requires board and shareholder approval for transactions beyond prescribed thresholds. Section 189 requires maintenance of a register of contracts in which directors are interested. A director loan typically triggers all four sections simultaneously: Section 184 (disclose interest), Section 185 (prohibition or carve-out), Section 188 (related party approval if outside the ordinary course) and Section 189 (record in the register). A clean compliance file addresses all four together.

Key Takeaways

* Section 185 is a criminal-penalty provision, not a civil one. Imprisonment up to six months applies to the officer in default and to the recipient.
* Aggregate maximum exposure on a single contravention is ₹75 lakh in fines plus 12 months of jail time across officer and recipient.
* The private-company exemption under the 5 June 2015 notification requires all three conditions to be satisfied — body corporate investor, borrowing limit, no default.
* ROC adjudication powers since 16 February 2026 mean penalty orders issue faster — typically within 90 days of show cause.
* Three new Regional Directorates in Bengaluru, Ahmedabad and Chandigarh are clearing the backlog of Section 185 cases.
* Wholly-owned subsidiary loans are permitted under Section 185(3)(c); special-resolution loans under substituted Section 185(2) require interest at G-Sec yield.
* Unsettled advances older than a reasonable period are routinely reclassified as loans by statutory auditors. Settle or convert before audit.
* A clean Section 185 file neutralises CARO 2020 qualification and protects MGT-7 and AOC-4 from auditor adverse remarks.

Frequently Asked Questions

What is Section 185 of the Companies Act 2013

Section 185 prohibits a company from advancing any loan, providing any guarantee, or offering any security in connection with a loan, to its own directors or to any person in whom such directors are interested. The provision applies to all companies — private, public, and listed — though private companies meeting three specific conditions are exempt under the 5 June 2015 notification. Contravention attracts a fine of ₹5 lakh to ₹25 lakh on the company, plus the same fine plus up to six months imprisonment on every officer in default and on the recipient director.

Is a private limited company exempt from Section 185

Only if it satisfies all three conditions in the MCA exemption notification dated 5 June 2015: no other body corporate has invested in its share capital, its borrowing from banks, financial institutions and bodies corporate is less than twice its paid-up share capital or ₹50 crore (whichever is lower), and it has not defaulted on any borrowing. The moment any one of these conditions fails — including a single missed working-capital instalment — the exemption is lost and Section 185 applies in full.

Can a company give a loan to its managing director

Yes, but only where the loan to the managing director or whole-time director forms part of conditions of service extended to all employees (a uniform housing or vehicle scheme, for example), or where the loan is given pursuant to a scheme approved by the members through a special resolution. Outside these two routes, a loan to the managing director triggers Section 185 and the full penalty regime.

What is the difference between Section 185 and Section 186

Section 185 deals exclusively with loans, guarantees and securities given to directors and entities in which directors are interested — it is a prohibition with limited exceptions. Section 186 deals with loans, guarantees, securities and investments given to any person other than a director — it is a permission subject to limits, board approval and shareholder approval. Section 185 carries criminal consequences including imprisonment; Section 186 contraventions are civil and result in fines only. The Section 185 test runs first; only if cleared does Section 186 apply.

Can a holding company give a loan to its wholly-owned subsidiary

Yes. Section 185(3)(c), inserted by the Companies (Amendment) Act 2017, explicitly permits a company to advance a loan, give a guarantee or provide security to its wholly-owned subsidiary, even where the subsidiary’s directors overlap with the holding company. The transaction must still comply with Section 186 limits and board approval, and the subsidiary must use the funds for its principal business activities.

Does Section 185 apply to advances given to directors for company business

A bona fide advance for company expenditure — travel, hotel, vendor advances — does not amount to a loan under Section 185, provided it is properly accounted, supported by vouchers and reconciled. The risk arises when an advance remains unsettled for an unreasonable period or gets reclassified as a loan by the auditor.

Can Section 185 violations be compounded

Section 185 contraventions are not directly compoundable because the offence carries imprisonment as a possible punishment, and compounding under Section 441 is generally limited to fine-only offences. The practical route is either a Special Court closure on refund of the loan with interest, or post-facto ratification through a special resolution where the underlying transaction itself qualifies for the substituted Section 185(2) route.

What is the latest ROC adjudication position on Section 185

Following notifications dated 10 February 2026, every Registrar of Companies is now an adjudicating officer under Section 454 for a wide list of provisions including Section 185. This shortens the gap between show cause and order — typically to 90 days. Three new Regional Directorates in Bengaluru, Ahmedabad and Chandigarh, effective 16 February 2026, have added capacity to clear the backlog. Companies with historical Section 185 grey areas should expect faster scrutiny.

Sources and references

Need a Section 185 Review for Your Company

Use the MCA Penalty Calculator to estimate your Section 185 exposure across company, officer and recipient.

For a confidential Section 185 ledger audit, exemption test and remediation plan, reach out: Contact CS Sapna Malpani | WhatsApp

More compliance guides on the blog

Disclaimer: This article is for general information for Indian private companies, startups and IPO-bound entities. It is not legal advice. Section 185 outcomes depend on transaction-specific facts and the prevailing position of the Registrar of Companies. Consult a Practising Company Secretary or counsel before acting.

FLA Return 2026 Due Date 15 July: ₹2 Lakh + ₹5,000/Day FEMA Penalty Guide for Startups

Sapna — Sat, 16 May 2026 09:16:56 +0000

Published 16 May 2026 by CS Sapna Malpani, Practising Company Secretary, Bangalore. Last updated 16 May 2026.

Sixty days. That is all the time a Series A startup with a single foreign angel cheque, or a private company that took FDI five years ago and forgot about it, has left to file the FLA Return 2026 with the Reserve Bank of India. Miss the 15 July deadline and the entity stares at a ₹7,500 Late Submission Fee, a FEMA penalty of up to ₹2 Lakh and ₹5,000 for every additional day of default, and a compounding exposure of up to three times the amount of foreign investment involved. For a startup that raised ₹50 crore at Series B, that is a number with eight digits.

This guide walks through who must file, what the FLAIR portal asks for, the exact registration steps, the penalty matrix, the eight most common filing errors, and the two-week working backwards plan to land before 15 July without surprises.

Quick Summary

Deadline: 15 July 2026 (provisional return); 30 September 2026 (revised return with audited figures, if needed)

Who must comply: Indian companies, LLPs, AIFs, partnership firms, and PPP entities holding outstanding FDI or ODI as on 31 March 2026

Where to file: FLAIR portal at flair.rbi.org.in (online only)

Penalty for non-compliance: ₹7,500 LSF + FEMA penalty up to ₹2 Lakh + ₹5,000 per continuing day + compounding up to 3x the amount involved

Key action: Register on FLAIR by 30 June 2026 so credentials arrive in time. Compile the data sheet from your trial balance and FC-GPR records. File the provisional return by 15 July.

The Problem: Why the FLA Return Quietly Sinks Compliance Records

The Foreign Liabilities and Assets Annual Return is mandated under the Foreign Exchange Management Act 1999. Section 13 of FEMA treats every non-filing or inaccurate filing as a contravention, and the RBI’s regional offices have been pulling up dormant FDI recipients with letters that quote prior-year defaults and demand compounding applications.

The trap is structural. Founders treat FDI reporting as a one-time event: file FC-GPR within 30 days of allotment and forget. The FLA Return is not transactional, it is a stock report. As long as a single share of paid-up capital is held by a non-resident on 31 March, the FLA Return is due that July. Even if the company has had no fresh investment, no FC-GPR filing, and no movement in the cap table for years, the return is still mandatory. The ICAI auditors’ standard checklist often skips this point because the FLA Return is not a Companies Act 2013 filing and does not surface in MCA-V3 alerts. It surfaces only when the RBI sends a show-cause.

The author has seen Series A companies receive RBI compounding orders quoting four to six years of consecutive non-filing, with compounding fees ranging from ₹50,000 to several lakh depending on the FDI quantum. None of these came with a prior reminder. The trigger is usually a fresh round, an FC-TRS for a secondary exit, or an audit query during IPO due diligence — at which point the entire prior compliance history must be cleaned up under time pressure.

Countdown to 15 July 2026: The Filing Timeline

31 March 2026 — Reference date. Position of foreign liabilities and assets is frozen.

16 May 2026 (today) — 60 days to go. Ideal window to begin FLAIR registration if first-time filer.

30 June 2026 — Recommended cut-off for FLAIR registration and data compilation.

15 July 2026 — STATUTORY DEADLINE. Provisional FLA Return due.

16 July 2026 onwards — Late Submission Fee of ₹7,500 begins; FEMA contravention triggered.

30 September 2026 — Revised FLA Return due if audited figures differ from provisional submission.

Who Must File? The Five Tests

An entity must file the FLA Return 2026 if it satisfies any one of the following tests as on 31 March 2026:

Test	Trigger	Filing Required?
1. FDI received in FY 2025-26	Any fresh FC-GPR allotment to a non-resident	✅ Yes
2. Outstanding FDI from earlier years	Non-resident still holds shares on 31 March 2026	✅ Yes
3. ODI made in FY 2025-26	Investment in a foreign JV, WOS, or step-down subsidiary	✅ Yes
4. Outstanding ODI on the books	Equity or debt in a foreign entity carried in books on 31 March 2026	✅ Yes
5. Only share application money, refunded	No outstanding FDI/ODI balance on 31 March 2026	❌ Exempt

The list of eligible entities goes beyond companies. Limited Liability Partnerships registered under the LLP Act 2008, SEBI-registered Alternative Investment Funds, partnership firms, and Public-Private Partnership vehicles all fall within scope. AIFs in particular must email flareturn@rbi.org.in to obtain the latest filing template because the FLAIR portal does not have a dedicated AIF flow.

The biggest gaps in the field are these. ESOP shares issued to non-resident employees count as foreign investment. Share Allotment to a non-resident via private placement, rights issue, or sweat equity all triggers FLA. Foreign promoter holdings carried over from incorporation count. Pre-existing convertible notes that have converted to equity count from the date of conversion. Shares issued to OCIs and PIOs on a repatriable basis count; on a non-repatriable basis they do not.

The Penalty Matrix: What ₹7,500 Becomes If You Wait

Default	Provision	Penalty	Imposed By
Late filing (post 15 July)	RBI A.P. (DIR Series) Circular framework	₹7,500 per return (Late Submission Fee)	RBI Regional Office
Non-filing	Section 13, FEMA 1999	Up to ₹2 Lakh + ₹5,000 per continuing day	Adjudicating Authority, RBI
Quantifiable contravention	Section 13(1), FEMA	Up to 3x the amount involved	Compounding Authority, RBI
Wilful non-compliance	Section 13(1A) onwards, FEMA	Up to 3x amount + civil imprisonment	Adjudication + ED
False/misleading data	Section 13 + Section 11, FEMA	Compounding without statutory upper limit	RBI Regional Office

The ₹7,500 LSF looks small. The reason every Practising Company Secretary in Bangalore treats this filing as a sacred cow is that the LSF is only the entry charge. Once the regional office flags a non-filer, a routine compounding application can crystallise into a penalty calculated on the entire stock of FDI on the books. A startup that took ₹40 crore at Series A four years ago and has not filed for any of those years can face a compounding fee that runs from ₹1 Lakh to ₹15 Lakh per year, depending on the regional office’s discretion. Repeat defaulters lose the “good-faith” benefit at compounding hearings.

⚡ FLA Return 2026 By The Numbers

60
Days left to 15 July deadline

₹7,500
Late Submission Fee per return

3x
Maximum compounding multiple under FEMA

₹5,000
Penalty per day of continuing default

0
Statutory upper limit on RBI compounding

15 July
Annual deadline, never extended in history

The FLAIR Portal: Registration Flow

Step 1: Visit flair.rbi.org.in

↓

Step 2: Download Verification Letter + Authority Letter templates

↓

Step 3: Print, sign by authorised signatory, scan to PDF

↓

Step 4: Upload along with CIN/LLPIN, PAN, registered email

↓

Step 5: RBI emails User ID + default password (1-2 working days)

↓

✓ Ready to file the online FLA Form

One practical caution: the RBI mailbox sometimes drops registration emails into spam, and corporate email policies block PDFs from .rbi.org.in domains. Whitelist flair@rbi.org.in and flareturn@rbi.org.in inside the authorised signatory’s mailbox before submitting the registration. First-time filers should plan to complete registration by 30 June 2026 to absorb any back-and-forth on letter formatting.

A separate point on Digital Signature Certificates. The FLAIR portal historically did not require a Class 3 DSC for the FLA Form itself — login credentials with OTP were sufficient. Some RBI regional desks have started asking for DSC-signed authority letters in 2026, so prepare a Class 3 DSC in advance even if the online form does not insist on it.

What You Must Do Now: The 7-Step Filing Plan

Step 1: Run the applicability test. Pull the cap table as on 31 March 2026 and confirm whether any non-resident holds equity, preference shares, or convertible instruments. Check the books for any ODI exposure. If either is true, you must file.

Step 2: Register on FLAIR (first-time filers). Visit flair.rbi.org.in, download the Verification and Authority Letter templates, complete and sign them, and submit the registration. Budget two to three working days for credentials to arrive.

Step 3: Compile the data sheet. Pull the following from your trial balance: paid-up equity capital, preference share capital, share premium, reserves and surplus, foreign currency convertible bonds, external commercial borrowings, trade credits, and any portfolio investment in foreign equity or debt. Tag each line by resident vs non-resident counterparty using your FC-GPR and FC-TRS history.

Step 4: Reconcile with FC-GPR / FC-TRS records. Cross-check the non-resident shareholding number against historical FC-GPR allotments and any FC-TRS transfers. Even a one-share variance will surface as an inconsistency check on the FLAIR portal.

Step 5: Fill Sections I through V on FLAIR. Section I captures identification data. Section II is the equity and participating preference profile. Section III is non-participating preference, debentures, and ECB. Section IV is portfolio investment data. Section V covers ODI. Save the draft at every stage; the portal logs out after 20 minutes of idle time.

Step 6: Submit and download the acknowledgement. The PDF acknowledgement is your proof of FEMA compliance. File it in the secretarial folder along with the year’s FC-GPR and AGM records. Do not rely on the portal — RBI does not re-issue acknowledgements.

Step 7: Diarise the 30 September revised filing. If you filed with provisional numbers, you have until 30 September 2026 to revise. Skipping the revision is itself a FEMA contravention even if the provisional figures were broadly accurate.

The Eight Filing Mistakes That Generate RBI Show-Causes

These are the recurring errors from compounding orders the author has reviewed across the Bangalore and Chennai regional offices over the last four FY cycles.

One, treating share application money as outstanding FDI. It is not, until shares are allotted. Two, reporting allotments at face value rather than at the FEMA-compliant valuation as on 31 March. Three, missing ESOPs exercised by non-resident employees. Four, excluding promoter foreign holding because “the promoter is Indian-origin”. The test is residency, not origin. Five, double-counting OCB or NRE-PIS holdings under both Section II and Section IV. Six, omitting ECB or trade credit on the liabilities side. Seven, using mid-year valuations instead of the 31 March position. Eight, failing to file the revised return after audit. Each of these has triggered RBI letters that have ended in compounding applications.

The Deeper Implication: Why 2026 Is a Watershed Year

According to CS Sapna Malpani, the RBI’s enforcement bandwidth on FEMA reporting has expanded sharply since the FLAIR portal went live in 2019. The portal now generates automated mismatch reports comparing FC-GPR data with FLA submissions for any given entity, and regional offices are working through historical non-filers in alphabetical batches. Bangalore-based startups have been a particular focus in the last twelve months because of the volume of cross-border venture capital activity in Karnataka.

There is a related angle to watch. The Companies (Amendment) Bill 2026 introduces a tighter beneficial ownership regime that interacts with FEMA reporting through Section 90 of the Companies Act 2013 and Rule 4 of the SBO Rules. RBI and MCA have begun cross-validating BEN-2 declarations against FLA Return data. An FDI-funded startup that has filed BEN-2 declaring foreign beneficial ownership but has not filed FLA Returns for the corresponding years will face questions on both sides. The author’s expectation is that this cross-validation will sharpen in the second half of 2026.

FLA vs FC-GPR vs FC-TRS: The Quick Comparison

Criterion	FLA Return	FC-GPR	FC-TRS
Nature	Annual stock position	Transaction (issue)	Transaction (transfer)
Trigger	Outstanding FDI/ODI on 31 March	Issue of capital instruments to non-resident	Transfer between resident and non-resident
Deadline	15 July each year	Within 30 days of allotment	Within 60 days of transfer
Portal	FLAIR	FIRMS / SMF	FIRMS / SMF
DSC Required	Login + OTP (DSC recommended for letters)	Yes	Yes
LSF	₹7,500	Per A.P. (DIR Series) Circular framework	Per A.P. (DIR Series) Circular framework

The mental model: FC-GPR and FC-TRS are event-driven and one-time per transaction. FLA Return is position-driven and recurring every year as long as a foreign balance exists. Most compliance lapses arise when teams switch from a transactional mindset to a stock mindset and forget the latter.

📋 Key Takeaways

✅ The FLA Return 2026 deadline is 15 July 2026. Sixty days remain from today.
✅ Every entity with outstanding FDI or ODI on 31 March 2026 must file, including LLPs, AIFs, and dormant FDI recipients.
✅ Late filing attracts a ₹7,500 Late Submission Fee per return.
✅ Non-filing escalates to a FEMA penalty of up to ₹2 Lakh + ₹5,000 per day of continuing default.
✅ Compounding under Section 13 of FEMA can reach 3x the amount of foreign investment involved with no statutory upper limit.
✅ Provisional filing on 15 July is permitted; the revised return with audited figures must be filed by 30 September 2026.
✅ First-time filers should complete FLAIR registration by 30 June 2026 to absorb credentials and letter-formatting delays.
✅ Reconcile non-resident shareholding against FC-GPR and FC-TRS history before submission to avoid portal-level inconsistency flags.
✅ Cross-validation with BEN-2 and SBO filings has begun in 2026, so non-filing now triggers compounding exposure on multiple statutes.

Sources and References

Reserve Bank of India — FLA FAQs: rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=1171
FLAIR Portal (filing portal): flair.rbi.org.in
RBI — FEMA Compounding Orders: rbi.org.in/Scripts/BS_FemaCompOrders.aspx
RBI Notifications and Master Directions: rbi.org.in/Scripts/NotificationUser.aspx
Foreign Exchange Management Act 1999, Section 13 (penalties): indiacode.nic.in (FEMA 1999)
TaxGuru analysis on FLA Return under FEMA: taxguru.in/rbi/annual-fla-return-foreign-liabilities-assets-fema.html
TaxGuru — 31 FAQs on FLA Return filing: taxguru.in/rbi/31-faqs-filling-foreign-liability-asset-fla-return-india.html
Related: FDI Reporting Guide for Indian Startups (FC-GPR companion read)
Related: FEMA Penalties and How to Avoid Them
Related: Complete Compliance Checklist for Fundraising in India

Sixty Days Left. Don’t Let ₹7,500 Become ₹15 Lakh.

Estimate your FEMA exposure with the MCA & FEMA Penalty Calculator, or check whether your startup is filing-ready with the Fundraising Readiness Scorecard.

For a confidential FLA compliance review and FLAIR registration support, get in touch directly: Contact CS Sapna Malpani | WhatsApp +91 96208 03375

Frequently Asked Questions

What is the FLA Return 2026 due date?

The FLA Return 2026 due date is 15 July 2026. It captures foreign liabilities and assets as on 31 March 2026 and must be filed on the FLAIR portal at flair.rbi.org.in. Provisional figures are allowed if audited financials are not ready by 15 July; a revised return with audited numbers must then be filed by 30 September 2026. RBI has not extended the 15 July deadline in any year since the FLAIR portal went live, so treat it as a hard date.

Who is required to file the FLA Return?

Indian companies, LLPs, SEBI-registered Alternative Investment Funds, partnership firms, and Public-Private Partnership entities that have either received Foreign Direct Investment or made Overseas Direct Investment in the current or any prior financial year and continue to hold an outstanding FDI or ODI balance as on 31 March 2026 must file. Filing applies even if no fresh investment transaction occurred during the year and even if the company has been dormant for FDI purposes.

What is the penalty for late filing of FLA Return?

Late filing of the FLA Return attracts a Late Submission Fee of ₹7,500 per return. Non-filing is a FEMA contravention under Section 13 of FEMA 1999, with a penalty of up to ₹2 Lakh plus ₹5,000 per day of continuing default. The RBI can compound the contravention at up to three times the amount of foreign investment involved, with no statutory upper limit on the compounding order. Repeat defaulters lose the good-faith benefit during compounding hearings.

Is the FLA Return applicable to a startup that received foreign investment only once?

Yes. A startup that received FDI even once must file the FLA Return every year for as long as the foreign shareholding remains outstanding on its balance sheet as on 31 March. The requirement does not lapse simply because the investment was made in an earlier year or because no fresh foreign capital was raised in the current year. ESOPs exercised by non-resident employees and conversions of convertible notes held by non-residents also trigger continuing FLA applicability.

Can FLA Return be filed with provisional financial statements?

Yes. RBI permits filing with unaudited or provisional figures if audited financial statements are not finalised by 15 July. The entity must then file a revised return based on audited numbers by 30 September of the same year. Provisional filing is the safer route for entities whose statutory audit typically completes in September; missing 15 July is treated as non-filing even if audited numbers are subsequently submitted within the year.

Does an entity that received only share application money need to file FLA?

No. An entity that has received only share application money from non-residents and has no outstanding FDI or ODI balance as on 31 March is exempt. Entities that have issued shares on a non-repatriable basis to non-residents are also exempt because such issuances are not classified as FDI under the FDI Rules. Document the exemption position internally so that the basis is available if RBI subsequently asks.

What documents do I need to register on the FLAIR portal?

FLAIR registration requires the entity CIN or LLPIN, PAN, a valid corporate email address, a signed Verification Letter, and a signed Authority Letter. Both letter templates are available on the FLAIR portal as Word files. They must be completed, signed by an authorised signatory, scanned to PDF, and uploaded. After successful registration, RBI emails a User ID and a default password to the registered email within one to two working days.

What is the difference between FLA Return and FC-GPR or FC-TRS?

FC-GPR reports the issue of capital instruments between a resident and a non-resident within 30 days of allotment. FC-TRS reports the transfer of capital instruments between a resident and a non-resident within 60 days to obtain record. Both are transaction-based one-time filings on the FIRMS Single Master Form portal. The FLA Return is an annual position-based report capturing the outstanding stock of foreign liabilities and assets on the balance sheet date and is filed only on the FLAIR portal. A single year may require all three filings, but the triggers are different.

This article is for information purposes only and does not constitute legal or compliance advice. For entity-specific guidance, consult a Practising Company Secretary. Author: CS Sapna Malpani, Practising Company Secretary, Bangalore. Last updated: 16 May 2026.

Section 186 Companies Act 2013: The 60% Inter-Corporate Loan Rule Every Founder Gets Wrong (₹5 Lakh Penalty Guide 2026)

Sapna — Fri, 15 May 2026 17:43:48 +0000

By CS Sapna Malpani · Practising Company Secretary, Bangalore · 15 May 2026 · 12 minute read

In April 2025, the ROC Hyderabad slapped an adjudication penalty on a mid-sized private company and its directors for failing to mention the particulars of a ₹4.2 crore loan to a subsidiary in the Board’s Report. The amount that should have been a one-line disclosure became a public order, a permanent dent on the directors’ compliance record, and a quiet warning to every founder running a multi-entity startup: Section 186 of the Companies Act 2013 is no longer a sleeping section. It is the most enforced inter-corporate compliance provision in India today, and a startling number of Indian companies are violating it without realising.

Quick Summary

What is it: Section 186 caps inter-corporate loans, guarantees, securities and investments at 60% of (paid-up capital + free reserves + securities premium) OR 100% of (free reserves + securities premium), whichever is higher.

Who must comply: Every company (private and public) giving a loan, guarantee, security, or investment to any other body corporate.

Penalty for non-compliance: ₹25,000 to ₹5,00,000 on the company + officer imprisonment up to 2 years and ₹25,000 to ₹1,00,000 fine under Section 186(13). Additional ₹3,00,000 + ₹50,000 civil penalty under Section 134(8) for non-disclosure in Board’s Report.

Key action: Pass a unanimous board resolution before every inter-corporate loan. Pass a special resolution and file MGT-14 if the aggregate exceeds the limit. Disclose every loan in the Board’s Report.

Time to act: Before your FY 2025-26 Board’s Report is signed and Form AOC-4 is filed.

The Problem: Why Section 186 Is Quietly Sinking Indian Startups

Walk into any funded startup in Bangalore, Mumbai or Gurgaon and you will find the same picture. The flagship operating company has multiple subsidiaries: one for technology, one for a marketplace, one for a special licence, one for a foreign acquisition. The parent moves money around like petty cash. ₹50 lakh to fund the subsidiary’s payroll. A corporate guarantee for the subsidiary’s office lease. An investment in a sister company because the auditor said it was needed.

Each of these movements is a Section 186 transaction. Each one needs a board resolution, a calculation of the headroom available under the 60% rule, and a disclosure in the Board’s Report. In ten years of practice, I have seen this section violated more than any other in the Companies Act 2013 — and I have seen the consequences play out painfully when a Series B investor’s due diligence team finds the gap.

The hard truth is this: a single uncorrected Section 186 violation has blocked at least three Bangalore fundraises in the last 18 months that I am personally aware of. Founders had to issue indemnities, redo board resolutions retroactively (often impossible), and in two cases the deal closed at a lower valuation because the investor priced in the regulatory risk.

This guide is the deep-dive every founder, director and CFO should bookmark. It is built from the bare provision in India Code, the latest ROC adjudication orders, and the Cyril Amarchand Mangaldas analysis of the section. By the end of it, you will know exactly what to do before, during and after any inter-corporate transaction.

The Penalty Matrix at a Glance

Offence under Section 186	Provision	Company Penalty	Officer Penalty
Loan / guarantee / security / investment beyond 60% / 100% limit without special resolution	Section 186(13)	₹25,000 to ₹5,00,000	Up to 2 years jail + ₹25,000 to ₹1,00,000
Non-unanimous board resolution for loan within limit	Section 186(5)	Same as 186(13)	Same as 186(13)
Loan given at rate below government security yield	Section 186(7)	Same as 186(13)	Same as 186(13)
Investment through more than 2 layers of investment companies	Section 186(1)	Same as 186(13)	Same as 186(13)
Non-disclosure of loan / investment in Board’s Report	Section 134(3)(g) read with 134(8)	₹3,00,000	₹50,000 each
Failure to file MGT-14 for special resolution	Section 117(2)	₹10,000 + ₹100/day up to ₹2,00,000	₹10,000 + ₹100/day up to ₹50,000

A single inter-corporate loan above the limit, without a special resolution, with no MGT-14, and missed from the Board’s Report can therefore trigger penalties exceeding ₹10,00,000 across overlapping provisions — plus the very real risk of imprisonment for the officer in default.

What Section 186 Actually Says

Section 186 of the Companies Act 2013 is titled “Loan and investment by company“. It governs four kinds of transactions a company may enter into with any other body corporate or person:

Loans granted to any person or body corporate
Guarantees given on behalf of any person or body corporate
Securities created in connection with a loan to any person or body corporate
Investments by way of subscription, purchase or otherwise in the securities of any body corporate

The section sits between Section 185 (loans to directors and connected persons) and Section 187 (investments to be held in company’s own name). All three together form what practitioners call the “capital movement triad” — the legal architecture for how money moves out of a company and into another entity.

The objective of Section 186 is twofold. First, it prevents diversion of company funds into unrelated ventures without shareholder approval. Second, it ensures that the lending company itself does not become a captive financier for promoters and group entities at the cost of minority shareholders and creditors. The 60% / 100% rule is the mathematical expression of this protective philosophy.

The 60% / 100% Calculation Rule, Explained Step by Step

Under Section 186(2), a company cannot, directly or indirectly, do any of the following without a prior special resolution if the aggregate of existing and proposed exposure exceeds the prescribed limit:

Give any loan to any person or other body corporate
Give any guarantee or provide security in connection with a loan to any other body corporate or person
Acquire by way of subscription, purchase or otherwise, the securities of any other body corporate

The prescribed limit is the higher of two amounts:

The Section 186(2) Limit Formula

Limit = Higher of:

(a) 60% of [Paid-up share capital + Free reserves + Securities premium account], OR

(b) 100% of [Free reserves + Securities premium account]

Aggregate is calculated across all existing loans, guarantees, securities and investments — not transaction by transaction.

Worked example. Consider a Bangalore-based private company with:

Paid-up share capital: ₹10 crore
Free reserves: ₹6 crore
Securities premium account: ₹4 crore

Under formula (a): 60% of (10 + 6 + 4) = 60% of ₹20 crore = ₹12 crore

Under formula (b): 100% of (6 + 4) = ₹10 crore

Limit = Higher of the two = ₹12 crore.

Until aggregate exposure reaches ₹12 crore across all loans, guarantees, securities and investments combined, the board can sanction with a unanimous board resolution. The moment a proposed transaction takes the aggregate beyond ₹12 crore, the company needs a prior special resolution in a general meeting plus a Form MGT-14 filing under Section 117.

Two operational nuances that catch companies out:

“Free reserves” excludes revaluation reserve and unrealised gains. Refer to the definition in Section 2(43) read with Rule 6 of the Companies (Specification of Definitions Details) Rules, 2014. Many CFOs include the wrong reserves and overstate their headroom.
The aggregate is cumulative and continuous. A guarantee given two years ago, still alive on the balance sheet, counts toward today’s limit. Companies that drop expired guarantees from their internal register often miscalculate available room.

The Compliance Flowchart Every Founder Should Pin to Their Wall

Step 1: Identify the proposed transaction (loan / guarantee / security / investment)

↓

Step 2: Compute aggregate exposure including existing items

↓

Step 3: Compute the Section 186(2) limit (60% / 100% test)

↓

Step 4: Is aggregate ≤ limit?

↓

YES → Unanimous BR + MBP-2 register entry

NO → Prior SR + Form MGT-14 within 30 days

↓

Step 5: Check interest rate ≥ Govt Security yield (closest tenor)

↓

Step 6: Disclose in Board’s Report under Section 134(3)(g)

↓

✓ Section 186 Compliance Complete

The Two-Layer Rule: Section 186(1)

Section 186(1) imposes a separate structural restriction. A company cannot make any investment through more than two layers of investment companies. The objective is to prevent the use of multi-layered holding structures to obscure ultimate ownership and movement of funds — a problem that the Sahara case and several other earlier scandals had brought to light.

What counts as an “investment company”? Rule 2(1)(c) of the Companies (Restriction on Number of Layers) Rules, 2017 defines an investment company as a company whose principal business is acquisition of shares, debentures or other securities. The first investee operating company does not count as a “layer”. The second and subsequent levels of pure-play holding structures do count.

Two important exemptions, introduced by the Companies (Amendment) Act, 2017:

Foreign acquisition: A company may acquire any other foreign company that has investment subsidiaries beyond two layers, as per the laws of the foreign country
Compliance requirement: A subsidiary may have any other investment subsidiary for the purposes of meeting the requirements of any law or rule for the time being in force

For Indian startups with ESOP trusts, EMI subsidiaries, IFSC GIFT City entities, or foreign acquisitions, this is a live design question. The structure must be audited by a Practising Company Secretary before incorporation, not after.

The Interest Rate Floor: Section 186(7)

Section 186(7) requires that no loan be given at a rate of interest lower than the prevailing yield of one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan. This is the provision most often violated by group lending in startup holding structures.

For example, if a holding company gives a three-year loan of ₹2 crore to its sister operating company at 6% per annum, but the current three-year G-Sec yield is 7.1%, the loan violates Section 186(7). The fact that the loan is to a group entity is irrelevant — the floor applies universally except where a specific exemption (such as the wholly-owned subsidiary carve-out for principal business activity) is available.

The current G-Sec yields can be checked on the RBI website or the CCIL daily yield curve. For ongoing loans, the rate at the time of grant of the loan is what matters; subsequent yield changes do not retroactively make the loan compliant or non-compliant.

The Exemptions: Who Is Outside Section 186

Section 186(11) carves out three principal categories of companies and transactions from the limits prescribed in Section 186(2) and (3) — though disclosure and interest-rate requirements continue to apply:

Banking companies, insurance companies, housing finance companies, and certain NBFCs in the ordinary course of their business
Loans, guarantees and securities given by a holding company to its wholly-owned subsidiary, joint venture, or in respect of a loan made by any other person to its wholly-owned subsidiary — provided the funds are used for the subsidiary’s principal business activity
Acquisition by a holding company by way of subscription, purchase or otherwise, of the securities of its wholly-owned subsidiary

The wholly-owned subsidiary exemption is the one most relevant to startups. But it is conditional. The funds must be used for the principal business activity of the subsidiary. If a holding company lends to its WOS and the WOS in turn parks the money in a fixed deposit or lends it onward to a third party, the exemption falls away and Section 186 applies retrospectively from the date of the original loan. Practising Company Secretaries see this issue come up repeatedly in funded startup audits.

Section 185 vs Section 186: Stop Confusing These Two

This is the single most common conceptual error in private company compliance. Section 185 and Section 186 govern different kinds of transactions, but founders treat them as interchangeable. Here is the clean distinction:

	Section 185	Section 186
Subject	Loan to directors and connected entities	Loan / investment to any body corporate
Default position	Prohibited (with carve-outs)	Permitted within limit
Approval needed	Special resolution + lender’s compliance	Unanimous BR within limit; SR beyond limit
Quantitative limit	None (qualitative test)	60% / 100% test
Interest rate floor	G-Sec yield	G-Sec yield
Disclosure	Register of contracts (MBP-4)	Register of loans (MBP-2) + Board’s Report
Penalty (company)	₹5 lakh to ₹25 lakh	₹25,000 to ₹5 lakh
Penalty (officer)	6 months jail or ₹5 lakh to ₹25 lakh	2 years jail + ₹25,000 to ₹1 lakh

Some transactions touch both sections. A loan from a private company to its subsidiary in which the holding company’s director is a director (and that director holds more than 2% in the subsidiary) is a Section 185 transaction in form and a Section 186 transaction in substance. Both compliances must be done. Skipping either gets the company on the wrong side of an enforcement action that is virtually un-fixable retrospectively.

For the Section 185 deep-dive, see our companion guide on Section 185: loans to directors.

What You Must Do Now: A Step-by-Step Compliance Plan

For every existing or proposed inter-corporate transaction, run the following sequence. This is the same sequence I use with founder clients and the same sequence due diligence teams use to flag gaps.

Step 1: Build the Section 186 Register

Open Form MBP-2 (Register of Loans, Guarantees, Securities and Acquisitions made by the company) and populate it with every existing loan, guarantee, security and investment. Include the date, amount, purpose, terms, security, and interest rate. The register must be maintained at the registered office and produced for inspection.

Step 2: Compute the 60% / 100% Limit

Take the latest audited balance sheet. Compute the limit as: Higher of [60% × (Paid-up + Free reserves + Securities premium)] or [100% × (Free reserves + Securities premium)]. Document the calculation in a board note. Update after every quarterly book closure.

Step 3: Compare Aggregate Exposure to Limit

Sum up all live loans, guarantees, securities and investments. If aggregate is within the limit, a unanimous board resolution is sufficient for new transactions. If aggregate exceeds (or the new transaction will cause it to exceed) the limit, a prior special resolution and Form MGT-14 filing are mandatory.

Step 4: Confirm Interest Rate Compliance

For every loan, confirm the interest rate is not lower than the prevailing G-Sec yield for the closest tenor. Document the G-Sec yield reference (date and source) in the board resolution. Build a quarterly rate-reset clause for floating-rate loans if applicable.

Step 5: Pass the Board Resolution Correctly

Section 186(5) requires a unanimous board resolution. This is distinct from an ordinary majority. Every director present at the meeting must consent. A single dissent invalidates the approval. Capture the unanimous consent explicitly in the minutes.

Step 6: File MGT-14 if a Special Resolution Was Passed

Form MGT-14 must be filed within 30 days of passing the special resolution under Section 117. Late filing attracts ₹100 per day penalty. Do not delay this filing — the penalty is mechanical and the ROC will issue an adjudication notice automatically.

Step 7: Disclose in the Board’s Report

Section 134(3)(g) requires every Board’s Report to specify particulars of every loan, guarantee, security and investment made under Section 186. Include date, amount, purpose, recipient, interest rate, and security. This is the single most-cited Section 186 violation in ROC adjudication orders since 2024.

Step 8: Annual Review and Reporting

At every financial year-end, reconcile the Section 186 register with the audited balance sheet. Confirm all live transactions are within the limit. Identify any expired or matured transactions to clean up the aggregate. Prepare a one-page note for the auditor’s compliance certificate.

The Deeper Implication: Why ROCs Are Focusing on Section 186 in 2026

The expansion of ROC adjudication powers under Section 454 in February 2026, combined with the addition of three new Regional Directors at Bengaluru, Ahmedabad and Chandigarh, has meaningfully changed the enforcement landscape. The ROC no longer has to refer matters to NCLT for minor defaults. Adjudication is now an in-house procedure with a 60-day timeline and a published order.

According to CS Sapna Malpani, “Section 186 is the new Section 117. Just as the ROC built a body of MGT-14 adjudication orders between 2022 and 2025, the next 24 months will see a sustained focus on Section 186 disclosures — particularly the Board’s Report omissions under Section 134(3)(g). Companies that have not built a Section 186 register and a quarterly compliance check will find themselves in an adjudication queue.”

The prediction for 2026-27 is straightforward. Expect a wave of adjudication orders against private companies whose Board’s Reports for FY 2024-25 are silent on Section 186 transactions that the balance sheet plainly reflects. The MCA’s data analytics are now mature enough to spot this mismatch automatically.

Key Takeaways

Section 186 in One Glance

✓ Limit: Higher of 60% of (paid-up + free reserves + securities premium) OR 100% of (free reserves + securities premium)
✓ Unanimous board resolution mandatory for every Section 186 transaction
✓ Special resolution + MGT-14 needed when aggregate exceeds the limit
✓ Interest rate floor: yield of closest-tenor Government Security
✓ Maximum two layers of investment companies under Section 186(1)
✓ Wholly-owned subsidiary loans exempt from limits if used for principal business activity
✓ Penalty under Section 186(13): Company ₹25K-₹5L; Officer 2 years jail + ₹25K-₹1L
✓ Separate penalty under Section 134(8): ₹3L company + ₹50K officer for non-disclosure in Board’s Report
✓ Maintain Form MBP-2 register and reconcile quarterly with the balance sheet

Sources and References

Companies Act, 2013, Section 186 — India Code
Companies Act, 2013, Section 134(3)(g) and Section 134(8) — India Code
Companies (Meetings of Board and its Powers) Rules, 2014 — MCA
Companies (Restriction on Number of Layers) Rules, 2017 — MCA
Cyril Amarchand Mangaldas: “Key issues under Section 186 for a corporate lawyer” — corporate.cyrilamarchandblogs.com
ICSI Guidance Note on Loans and Investments — ICSI
MCA ROC Adjudication Orders Database — MCA
ICSI Secretarial Standards SS-1 (Board Meetings) — ICSI

Need Help With Section 186 Compliance?

Use the MCA Penalty Calculator to estimate your exposure on existing inter-corporate transactions.

Build your Section 186 register and quarterly check-list with the Compliance Cost Estimator.

For a confidential review of your inter-corporate loan structure: Contact CS Sapna Malpani | WhatsApp 9620803375

Frequently Asked Questions

What is the limit for inter-corporate loans under Section 186 of the Companies Act 2013?

Under Section 186(2), a company cannot give a loan, guarantee, security or make an investment exceeding 60% of (paid-up share capital + free reserves + securities premium account) OR 100% of (free reserves + securities premium account), whichever is higher. Beyond this limit, a prior special resolution in a general meeting is mandatory. The aggregate is calculated across all existing loans, guarantees and investments — not transaction by transaction. The single biggest miscalculation founders make is failing to add up old, still-live guarantees when computing their current headroom.

What is the difference between Section 185 and Section 186 of the Companies Act?

Section 185 governs loans, guarantees and securities provided by a company to its directors, KMPs and any entity in which they are interested. Section 186 governs loans, guarantees, securities and investments by a company to or in any other body corporate. Section 185 has near-absolute prohibitions with limited exceptions and qualitative tests; Section 186 has quantitative limits (the 60% / 100% test) and procedural safeguards. The same transaction may attract both sections — for example, a loan to a subsidiary in which a director holds more than 2% requires compliance with both. Many startup founders skip one of the two checks and pay the price during due diligence.

What is the penalty for violating Section 186?

Under Section 186(13), the company is liable to a fine of not less than ₹25,000 extending up to ₹5,00,000. Every officer in default faces imprisonment up to 2 years and a fine ranging from ₹25,000 to ₹1,00,000. Separately, non-disclosure of Section 186 transactions in the Board’s Report under Section 134(3)(g) attracts a civil penalty of ₹3,00,000 on the company and ₹50,000 on each officer in default under Section 134(8). Both penalties can be levied for the same lapse — the disclosure failure does not subsume the substantive violation, and the substantive violation does not subsume the disclosure failure.

Is a special resolution required for every inter-corporate loan under Section 186?

No. A unanimous board resolution is sufficient when the aggregate of loans, investments, guarantees and securities is within the prescribed limit (60% / 100% test). A special resolution is required only when the aggregate exceeds the limit. The special resolution must be filed with the ROC in Form MGT-14 within 30 days under Section 117. Companies often forget the MGT-14 filing and incur a separate ₹25,000 + ₹100 per day penalty. The MGT-14 filing is a frequent source of adjudication orders, particularly because the form auto-fails when the resolution text does not match the prescribed format.

Does Section 186 apply to loans given by a holding company to its wholly-owned subsidiary?

Section 186(11) carves out specific exemptions. Loans, guarantees and securities provided by a holding company to its wholly-owned subsidiary, or by a holding company in respect of any loan made to its wholly-owned subsidiary, are exempt from the quantitative limits in Section 186(2) and (3) — provided the loan is used by the subsidiary for its principal business activity. However, the disclosure requirements under Section 186(4) and the interest rate floor under Section 186(7) continue to apply. If the WOS uses the loan for any purpose other than its principal business, the exemption is lost and the quantitative limit applies retrospectively.

What interest rate must a company charge on inter-corporate loans?

Under Section 186(7), no loan shall be given at a rate of interest lower than the prevailing yield of one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan. Interest-free loans are not permitted unless covered by a specific exemption such as the wholly-owned subsidiary carve-out for principal business activity. Charging a below-market rate or zero interest is a common Section 186 violation flagged in secretarial audits, particularly for inter-group lending in startup holding structures. The applicable G-Sec yield is the rate at the time of grant of the loan; subsequent yield changes do not retroactively make the loan compliant or non-compliant.

How many layers of investment companies are permitted under Section 186(1)?

A company cannot make investments through more than two layers of investment companies under Section 186(1). Exemptions apply for acquisitions of foreign companies with more than two layers as per the host country’s laws, and for subsidiaries that have any other investment subsidiary for compliance with applicable law. The 2017 amendment introduced these carve-outs, but the basic two-layer cap continues to be enforced by ROCs in adjudication orders. For Indian startups with ESOP trusts, EMI subsidiaries, IFSC GIFT City entities, or foreign acquisitions, the holding structure must be audited by a Practising Company Secretary before incorporation.

Where is Section 186 compliance disclosed in the Board’s Report?

Section 134(3)(g) requires every Board’s Report to include particulars of loans, guarantees, and investments under Section 186. The disclosure must specify the date of the loan or investment, the amount, the purpose, and the rate of interest. ROC adjudication orders in 2024-25 have repeatedly penalised companies for omitting these particulars in the Board’s Report, with separate civil penalties under Section 134(8) of ₹3,00,000 on the company and ₹50,000 per officer in default. A one-line generic disclosure is insufficient — each transaction must be tabulated.

Last updated: 15 May 2026 by CS Sapna Malpani. This article is general information, not legal advice. Section 186 has overlapping interactions with Section 185, Section 188, FEMA, and the LODR Regulations for listed companies. Consult a Practising Company Secretary before structuring any inter-corporate transaction.

SEBI LODR HVDLE 2026: Rs 5,000 Cr Threshold Cuts Compliance Universe by 64% — Mid-Tier Bond Issuer Action Guide

Sapna — Thu, 14 May 2026 08:00:00 +0000

SEBI LODR HVDLE 2026: How the Rs 5,000 Cr Threshold Cuts the Compliance Universe by 64% — And What Mid-Tier Bond Issuers Must Do Now

By CS Sapna Malpani, Practising Company Secretary, Bangalore | Last updated: 14 May 2026 | ~13 min read

On 20 January 2026, SEBI did something that bond-market lawyers had been petitioning for since the original 2023 framework rolled out. Through Notification SEBI/NRO-GN/2026/295 — the SEBI (LODR) (Amendment) Regulations, 2026 — it lifted the High Value Debt Listed Entity (HVDLE) classification threshold from Rs 1,000 crore to Rs 5,000 crore of outstanding listed non-convertible debt. By SEBI’s own consultation paper estimates, that single change cuts the HVDLE universe by approximately 64%. Around 53% of the entities exiting are NBFCs, HFCs, ARCs and insurance companies — already regulated by the RBI or IRDAI — for whom a parallel LODR governance overlay had been the textbook definition of regulatory duplication.

If you run finance at a private NBFC with Rs 1,500 crore of outstanding NCDs, or sit on the board of a pre-IPO REIT-adjacent platform that crossed Rs 1,000 crore last year, this single amendment changes your compliance scope, your committee-charter language, your secretarial calendar and the cost-base of your next bond issuance. This guide walks through every operative change, the substituted Regulation 62K, the 30-day investor service rule, the new 3-month committee vacancy clock, and a clean off-ramp playbook for entities exiting the HVDLE net — plus a stay-and-comply playbook for those above the new line.

Quick Summary

Notification: SEBI/NRO-GN/2026/295 — SEBI (LODR) (Amendment) Regulations, 2026

Effective date: 20 January 2026 (date of Gazette publication, immediate effect)

Headline change: HVDLE threshold raised from Rs 1,000 Cr to Rs 5,000 Cr outstanding listed NCDs (substituted Regulation 15(1A)).

Universe impact: ~64% of HVDLEs exit the bespoke chapter; ~53% are RBI/IRDAI-regulated.

Key technical move: Regulation 62K substituted — HVDLEs now follow Regulation 23 (except 23(8) and 23(9)) for related party transactions, near-parity with equity-listed entities.

Other moves: Annual Secretarial Compliance Report for HVDLEs omitted; 30-day mandatory window for credit of securities on investor service requests (demat only); 3-month hard cap for filling Board Committee vacancies.

Time to act: Immediate — classification reassessment and Board-level resolution should already be on your Audit Committee agenda for FY 2026-27.

The Problem — Why This Matters Right Now

From 2024 to early 2026, the HVDLE chapter (Chapter VA of the LODR Regulations) operated as an awkward halfway house. Entities with Rs 1,000 crore or more of listed NCDs — whose equity was often unlisted, often privately held by sponsors, sometimes part of a global parent’s India platform — were required to constitute an Audit Committee, a Nomination and Remuneration Committee, a Stakeholders Relationship Committee, and (depending on size) a Risk Management Committee. They had to procure independent directors, run quarterly audit committee meetings, publish related party transactions disclosures, and file an annual Secretarial Compliance Report — much of which mirrored equity-listed obligations without the corresponding equity-market dynamics of public float, takeover code, insider trading regime or stock-exchange surveillance.

For an NBFC with say Rs 1,400 crore of NCDs outstanding, sponsored by a Singapore-headquartered private equity firm, the LODR Chapter VA overlay produced roughly Rs 35–50 lakh per year of incremental compliance cost (independent director sitting fees, secretarial audit, RPT policy refresh, audit committee meetings travel and KMP coordination), on top of RBI’s NBFC governance norms — Master Direction on NBFCs (Scale Based Regulation), Fair Practices Code, Internal Audit, IT Governance Master Direction, all of which already produced an audit committee, board-level RPT review, and an annual statutory audit.

SEBI’s January 2026 amendment is an attempt to remove that duplication for mid-sized issuers without diluting governance for the largest ones. The 64% reduction in HVDLE count is significant. It is also a real cost-of-capital story: NCD spreads for issuers in the Rs 1,000–5,000 crore band typically compressed 3–8 bps in the 90 days following the notification as the implicit “LODR compliance friction” priced into mid-tier paper began to unwind.

By the Numbers

The HVDLE 2026 Restructure In Five Numbers

Rs 5,000 Cr
New HVDLE threshold (up from Rs 1,000 Cr)

~64%
Estimated reduction in HVDLE universe

53%
Share of HVDLEs that were NBFCs / HFCs / ARCs / insurance companies

30 days
New hard window for credit of securities on investor service requests

3 months
Maximum period for filling Board Committee vacancies

Rs 1 Cr
Maximum SEBI monetary penalty per violation under Section 15HB

Diagram 1 — Threshold Comparison: Before vs After

Parameter	Pre-Amendment (till 19 Jan 2026)	Post-Amendment (from 20 Jan 2026)
HVDLE classification trigger	Outstanding listed NCDs ≥ Rs 1,000 Cr	Outstanding listed NCDs ≥ Rs 5,000 Cr
Reference regulation	Regulation 15(1A) — original	Regulation 15(1A) — substituted
Universe size	Baseline (~190+ entities)	~64% reduction (~70 entities)
RPT reference framework	Older Regulation 62K (lighter-touch RPT)	Substituted 62K → Regulation 23 (except 23(8), 23(9))
Annual Secretarial Compliance Report (HVDLE-specific)	Mandatory	Omitted
Demat credit on service requests	Practice-based (varied)	30 days mandatory, demat only
Board Committee vacancy timeline	“Reasonable period”	3 months hard cap

What Changed — A Line-By-Line Walk-Through

1. Substituted Regulation 15(1A) — The Headline Move

The earlier Regulation 15(1A) defined a HVDLE by reference to outstanding listed non-convertible debt securities of Rs 1,000 crore or more, on the basis of the latest audited financial statements. The substituted Regulation 15(1A) replaces the figure with Rs 5,000 crore and clarifies that the assessment is made on a roll-forward basis, with the entity required to intimate change of classification within the timelines prescribed under Regulation 30. SEBI’s consultation paper (Page 1 of 70, January 2026 board meeting paper) noted that the original Rs 1,000 crore figure had been set in 2021 when the market for corporate bonds was at a different scale and that current outstanding listed debt issuance has grown substantially, requiring recalibration.

2. Substituted Regulation 62K — The Hidden Hammer

This is the change most LODR commentary buries. Regulation 62K was rewritten to require HVDLEs to comply with Regulation 23 of the LODR Regulations — the equity-listed RPT framework — except sub-regulations (8) and (9). The carve-outs are deliberate: sub-regulation (8) deals with public-shareholder voting thresholds, and sub-regulation (9) with periodic disclosure on the exchange website which is structured for equity-listed shareholders. Everything else is in: Audit Committee approval is mandatory, prior shareholder approval for material RPTs kicks in (with adapted thresholds for the debt context — typically 10% of consolidated turnover or such other threshold as the Board may prescribe), half-yearly disclosure in the format prescribed for equity-listed entities, and arms-length, ordinary-course tests apply.

For HVDLEs remaining above the Rs 5,000 crore line, this is the single biggest practical change. RPT policies that were written for the older Regulation 62K need to be redrafted by 30 June 2026 (so the FY 2026-27 first-half RPT disclosure falls within the new framework). Audit committee charters need updating. Promoter-related party contracts that historically sailed through under the older lighter-touch test need to be re-papered.

3. Omission of HVDLE Annual Secretarial Compliance Report

The annual Secretarial Compliance Report that HVDLEs were required to file with stock exchanges has been omitted. Note carefully: this is the HVDLE-specific report, not the Secretarial Audit Report under Section 204 of the Companies Act, 2013. Entities that have an equity-listed parent and continue under Regulation 24A will still file the equity-side compliance report. For pure-play HVDLEs without equity listing, this is a real saving — typically Rs 1.5–3 lakh in secretarial professional fees per annum, plus the management time of the compliance cycle.

4. The 30-Day Investor Service Window — Demat Only

SEBI’s amendment includes a structural push on dematerialisation. Following an investor service request — subdivision, split, consolidation, exchange, issuance of duplicate securities — the credit of securities must be effected only in dematerialised form, and must be completed within thirty days from the receipt of the request along with all requisite documents. Physical share certificates are increasingly being squeezed out. Issuers that still process physical service requests need to update their Investor Service Standard Operating Procedure (SOP) immediately and notify their Registrar and Transfer Agent (RTA) of the new window.

5. The 3-Month Committee Vacancy Clock

Vacancies in the Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee or Risk Management Committee arising from a Board of Directors vacancy must be filled within 3 months from the date the vacancy arose. The earlier “reasonable period” language was a frequent enforcement risk — boards waited 5, 6, 8 months. The 3-month hard cap aligns HVDLE practice with equity-listed entities and creates a clean audit trail for stock-exchange review.

Diagram 2 — Substituted Regulation 62K: Before vs After RPT Framework

RPT Compliance Step	Pre-Amendment Reg 62K (Light Touch)	Post-Amendment Reg 62K (Reg 23 Aligned)
Audit Committee approval	Mandatory but lighter materiality threshold	Mandatory; full Reg 23 framework applies
Material RPT shareholder approval	Required only on board-defined thresholds	Required at 10% of consolidated turnover or Reg 23 materiality (adapted for debt)
RPT disclosure frequency	Annual (in Annual Report)	Half-yearly to stock exchange (within 15 days of relevant half-year end)
Arms-length and ordinary-course test	Implicit reference	Explicit Reg 23 test applies
Public-shareholder voting (Reg 23(8))	Not applicable	Carved out — does not apply
Exchange-side periodic disclosure (Reg 23(9))	Not applicable	Carved out — does not apply

Who Wins, Who Stays — The Universe Map

The 64% reduction in HVDLE count is concentrated in three buckets. First, mid-sized NBFCs and HFCs that had crossed the Rs 1,000 crore listed-debt mark but sat well below Rs 5,000 crore. Many of these had been chafing under the RPT and committee burden — particularly Section 178 NRC obligations — when their RBI Scale Based Regulation governance already prescribed similar safeguards. Second, mid-tier insurance companies and ARCs in similar shape, regulated by IRDAI and RBI respectively. Third, a smaller set of private companies that had raised listed NCDs to fund infrastructure projects or platform plays — for example, Singapore or Mauritius-headquartered private equity platforms with India-side issuance vehicles.

Above the new line, the universe is roughly 70 entities — the largest NBFCs, the systemically important HFCs, the AAA-rated public sector financiers, a handful of conglomerate finance arms, REIT and InvIT debt issuers above scale, and selected infrastructure SPVs. These remain in the HVDLE chapter and inherit the Regulation 62K → Regulation 23 alignment as a structural step-up in RPT governance.

Pre-IPO entities, take note

For IPO-bound companies that have a parallel listed-debt issuance — a pattern common among NBFC issuers preparing for an equity listing alongside their existing bond book — the dynamics flip. If your debt book is above Rs 5,000 crore, you continue as HVDLE today and convert to a fully equity-listed regime at IPO. If below Rs 5,000 crore, your LODR exposure is now confined to the equity transition only — meaning your DRHP-to-listing compliance project is materially simpler, the secretarial audit scope narrower, and the pre-listing governance gap analysis tighter.

Step-by-Step — What You Must Do Now

Step 1 — Pull outstanding listed NCD value (face value, including current and non-current) as of 20 January 2026 and each subsequent quarter end

↓

Step 2 — Determine classification: below Rs 5,000 Cr (exit) or at/above (stay)

↓

Step 3 — Place assessment before Audit Committee and Board; record the classification call by resolution

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Step 4A (Exit) — Intimate stock exchanges under Regulation 30; map down-classification compliance off-ramp; retain documentary trail of historical HVDLE filings (statute of limitations)

Step 4B (Stay) — Update RPT policy to align with Regulation 23 (except 23(8) and (9)); refresh Audit Committee, NRC, SRC, RMC charters with the 3-month vacancy rule; align RPT half-yearly disclosure format

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Step 5 — Update Investor Service SOP for the 30-day demat-only credit rule; brief your RTA

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Step 6 — File next quarter’s compliance with corrected scope; lock the new framework into the secretarial calendar for FY 2026-27

The Deeper Implication

According to CS Sapna Malpani, the SEBI LODR Amendment 2026 should be read as the third leg of a three-part 2024–2026 SEBI bond-market policy. First, the dematerialisation push that culminated in the January 2026 amendment to Regulation 8 and the 30-day investor service rule. Second, the recalibration of the HVDLE threshold to focus governance bandwidth on the largest issuers. Third, the alignment of RPT governance between HVDLE and equity-listed entities via the substituted Regulation 62K — which signals that for the very largest debt issuers, SEBI sees no meaningful regulatory daylight between an equity-listed and a debt-listed governance regime.

Looking forward, the most plausible next step is SEBI moving to a similar “size-based” calibration on the disclosure side — separating periodic disclosures by issuance size rather than instrument type. Issuers above Rs 5,000 crore should expect tighter alignment with equity-listed disclosure obligations over the next 12–18 months; mid-sized issuers that exit today should not assume the lighter regime is permanent if their debt book scales toward the threshold over time.

Comparison With Adjacent Rules — Don’t Confuse These Three

Framework	Applies When	Source	Governance Anchor
Equity LODR	Equity securities listed on a recognised stock exchange	LODR Reg 15–62 (Chapters III–IV)	Full Regulation 23 RPT, Reg 17–27 governance, Reg 30 disclosure
HVDLE Chapter VA (post-2026)	Listed NCDs ≥ Rs 5,000 Cr outstanding	LODR Reg 62A–62R (substituted 62K)	Regulation 23 (except 23(8), 23(9)); committee structure mirrors equity; modified disclosure
Plain-vanilla listed-NCD entity (below HVDLE)	Listed NCDs < Rs 5,000 Cr outstanding	LODR Chapter V (debt securities)	Reg 50–62: continuing disclosure, financial results, but no HVDLE-specific committees or 62K RPT alignment

📋 Key Takeaways

✅ HVDLE threshold raised from Rs 1,000 Cr to Rs 5,000 Cr of outstanding listed NCDs (substituted Regulation 15(1A)), effective 20 January 2026.
✅ ~64% reduction in HVDLE universe per SEBI’s own consultation paper — mid-sized NBFCs, HFCs, ARCs and insurers are the largest exit cohort.
✅ Substituted Regulation 62K now aligns HVDLE RPT governance with Regulation 23 (except 23(8) and 23(9)) — Audit Committee approval, half-yearly disclosure, materiality thresholds all apply.
✅ Annual Secretarial Compliance Report for HVDLEs has been omitted — typical saving Rs 1.5–3 L per annum in secretarial professional fees.
✅ 30-day mandatory window for credit of securities on investor service requests, demat-only — applies across listed entity types.
✅ 3-month hard cap for filling Board Committee vacancies — Audit, NRC, SRC, RMC.
✅ Reclassification call must be made by the Board, recorded by resolution, and intimated to stock exchanges under Regulation 30 timelines.
✅ Penalty exposure: Up to Rs 1 crore under Section 15HB of the SEBI Act for LODR non-compliance.
✅ Sapna Malpani CS advisory: All listed-debt issuers should table the classification reassessment at the next Audit Committee meeting; do not wait for AGM season.

Sources and References (Gold and Silver Tier)

Frequently Asked Questions

What is the new HVDLE threshold under SEBI LODR Amendment 2026?

The outstanding listed non-convertible debt threshold for HVDLE classification has been raised from Rs 1,000 crore to Rs 5,000 crore under substituted Regulation 15(1A), with effect from 20 January 2026 (Gazette publication date). SEBI’s own consultation paper estimates this cuts the HVDLE universe by approximately 64%. Mid-sized issuers — particularly NBFCs, HFCs, ARCs and insurance companies with NCD outstandings in the Rs 1,000–4,999 crore range — exit the HVDLE chapter while continuing under their primary sectoral regulators (RBI / IRDAI).

When did the SEBI LODR HVDLE Amendment 2026 come into effect?

The SEBI (LODR) (Amendment) Regulations, 2026 were notified vide SEBI/NRO-GN/2026/295 and came into force on the date of publication in the Official Gazette — namely 20 January 2026. There is no separate transition period; the new Rs 5,000 crore threshold applies with immediate effect. Entities that crossed the threshold on or before 20 January 2026 and are now below it should make the reclassification call at the next Board / Audit Committee meeting and intimate the stock exchanges under Regulation 30.

What does the substituted Regulation 62K require HVDLEs to do?

Substituted Regulation 62K requires HVDLEs to comply with Regulation 23 of the LODR Regulations (except sub-regulations (8) and (9)) for related party transactions. This means HVDLEs above Rs 5,000 crore now follow the full equity-listed RPT framework — Audit Committee approval, prior shareholder approval for material RPTs (with adapted thresholds for the debt context), half-yearly RPT disclosure to stock exchanges, and the arms-length / ordinary-course test. The carve-out for sub-regulations (8) and (9) excludes public-shareholder voting and equity-side exchange disclosure — both inapt for a debt-only listing.

Is the annual Secretarial Compliance Report still required for HVDLEs?

No. The HVDLE-specific annual Secretarial Compliance Report to stock exchanges has been omitted. The standalone Secretarial Audit Report under Section 204 of the Companies Act, 2013 (for prescribed companies) continues unchanged, and for entities that also have equity listing, the equity-side Regulation 24A Annual Secretarial Compliance Report continues. The omission applies specifically to the HVDLE-overlay version.

What is the 30-day investor service rule under the 2026 Amendment?

Following an investor service request — subdivision, split, consolidation, exchange or issuance of duplicate securities — the credit of securities must be effected only in dematerialised form and completed within 30 days from receipt of the request along with all requisite documents. Issuers and their Registrar and Transfer Agents (RTAs) must update their Investor Service SOP to cover this hard window; failure invites SEBI action and reputational risk in the bond market.

How long does an HVDLE have to fill a Board Committee vacancy?

Any vacancy in Board Committees — Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, or Risk Management Committee — arising out of a Board of Directors vacancy must be filled within 3 months from the date of vacancy. The earlier “reasonable period” standard has been replaced by this hard cap, aligning HVDLE practice with equity-listed entities.

Which entities make up the HVDLE universe?

Per SEBI’s consultation paper, approximately 53% of HVDLEs are Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), Asset Reconstruction Companies (ARCs), insurance companies and banks — all already regulated by RBI / IRDAI / RBI. The remaining 47% are mixed: a few corporate-bond issuers from operating companies, infrastructure SPVs, REIT-adjacent debt issuance vehicles, and selected privately-held large-scale platforms. Post-amendment, roughly 70 entities remain inside the HVDLE chapter.

What is the penalty for non-compliance with HVDLE LODR obligations?

SEBI may impose a monetary penalty of up to Rs 1 crore under Section 15HB read with Section 23E of the SEBI Act, 1992 for failure to comply with LODR Regulations. For continuing defaults, SEBI may also order disgorgement, restraints on issuance of further securities, and direct stock exchanges to levy daily compliance fines under the LODR Standard Operating Procedure (SOP) Circular. For directors and officers in default, action under Section 24 of the SEBI Act may follow.

© 2026 CS Sapna Malpani. This article is for general information only and does not constitute legal or compliance advice. For a confidential review of your company’s HVDLE classification, contact CS Sapna Malpani.

Section 184 First Board Meeting FY 2026-27: Why ROC Bangalore Just Fined 6 Directors Rs 6 Lakh for Missing MBP-1 and DIR-8

Sapna — Wed, 13 May 2026 06:45:01 +0000

Section 184 First Board Meeting FY 2026-27: Why ROC Bangalore Fined 6 Directors Rs 6 Lakh for Missing MBP-1 and DIR-8 | Sapna Malpani CS

Section 184 First Board Meeting FY 2026-27: Why ROC Bangalore Just Fined 6 Directors Rs 6 Lakh for Missing MBP-1 and DIR-8

Last updated: 13 May 2026 | By CS Sapna Malpani, Practising Company Secretary, Bangalore

On 28 March 2026, ROC Bangalore signed an adjudication order against AVK Valves India Private Limited and imposed a penalty of Rs 1,00,000 on each of the six directors, payable from their personal sources, for failing to maintain Form MBP-1 and Form DIR-8 for the financial year ending 31 March 2022. Aggregate personal exposure: Rs 6 lakh from a single year of non-compliance. The order, numbered PO/ADJ/03-2026/BL/01827, is now a template for what most private companies and funded startups have been ignoring for the better part of a decade: the first Board meeting of every financial year is a Section 184 hard deadline, and the penalty falls on directors personally, not the company.

Quick Summary

Provision: Section 184(1) read with Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014 (MBP-1) and Section 164(2) (DIR-8).

Who must comply: Every director of every company – private, public, OPC, Section 8.

Deadline for FY 2026-27: The FIRST Board meeting held on or after 1 April 2026. For most operating companies, this falls between April and June 2026.

Penalty for non-compliance: Rs 1,00,000 per director under Section 184(4) – paid from personal funds, not company funds.

Live precedent: ROC Bangalore order dated 28 March 2026 against AVK Valves India Pvt Ltd – Rs 6 lakh aggregate across 6 directors.

Action: Collect signed MBP-1 and DIR-8 from every director before your next Board meeting and file them in your statutory records.

The Problem: A Section That Most Private Companies Forget Exists

Section 184 of the Companies Act 2013 is the boring, perennial compliance line item that founders, CFOs and even some practising professionals push to the bottom of the agenda. There is no MCA portal upload. There is no ROC fee. There is no annual return form that triggers a system alert. Form MBP-1 sits inside the company’s statutory records under Rule 9 of the Companies (Meetings of Board and its Powers) Rules 2014, and Form DIR-8 sits inside the company’s Board minutes binder. Both are paper exercises that, until 2024, hardly anyone in the ROC ecosystem actively chased.

That has changed. The Companies (Adjudication of Penalties) Amendment Rules 2025 expanded the powers of Registrars to adjudicate procedural defaults directly, including those flagged by Secretarial Auditors in Form MGT-8. The AVK Valves order is built entirely on the Secretarial Auditor’s observation that MBP-1 and DIR-8 were not produced for the financial year 2021-22. There was no shareholder complaint, no whistleblower, no inspection – just a single line in the Secretarial Audit Report that the records were missing, and ROC Bangalore turned it into Rs 6 lakh of personal liability.

This matters most for two groups. First, private limited companies with revenues between Rs 5 crore and Rs 500 crore that already have a Secretarial Auditor under Section 204 of the Companies Act 2013, or because the funded company falls under Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014. Second, funded startups whose Board includes investor nominee directors with directorships across a dozen other portfolio companies – the very directors most likely to fail a comprehensive MBP-1 disclosure because they themselves have lost track of the universe of bodies corporate in which they have an interest.

The Penalty Stack: What Rs 6 Lakh Looks Like in Plain Numbers

The AVK Valves directors did not pay a graduated, day-on-day penalty. Section 184(4) was substituted by the Companies (Amendment) Act 2020 with effect from 21 December 2020, and the punitive regime is a flat penalty per director per default. Here is exactly what the order imposed and what your exposure looks like if the FY 2026-27 first Board meeting goes the same way.

Default	Provision	Director Penalty	Personal Pay?
No MBP-1 at first Board meeting of FY	Section 184(4)	Rs 1,00,000	Yes
No MBP-1 when interest changes mid-year	Section 184(4)	Rs 1,00,000	Yes
Director votes on interested contract	Section 184(4)	Rs 1,00,000	Yes
No DIR-8 at first Board meeting of FY	Section 164 (read with Rule 14)	Rs 50,000 (officer-in-default)	Yes
Continuing failure to maintain records	Section 128(5)	Rs 50,000 – Rs 5,00,000 (officer)	Yes

The AVK Valves matter ran for a single financial year of default (FY 2021-22). The company has not yet been found liable for FY 2022-23, 2023-24 or 2024-25, but ROC Bangalore has the option to open separate adjudications for each missed year. If the same pattern were applied across four financial years against six directors, the aggregate personal exposure crosses Rs 24 lakh before counting any officer-in-default or company-side penalty under Section 128 for failure to maintain statutory records.

Director-by-Director Stack: What Six Directors Paid

By The Numbers – AVK Valves Order

6
directors held liable

Rs 1 L
per director, personal pay

Rs 6 L
aggregate penalty (single year)

90 days
to pay via e-Adjudication

What Actually Happened: AVK Valves Timeline

The procedural history is the part most compliance teams should study, because it shows how a routine Secretarial Audit observation became a Rs 6 lakh personal penalty without any director receiving advance notice of catastrophic risk. The matter ran for over nine months from show-cause to final order.

FY 2021-22 (year of default) – AVK Valves directors fail to deliver MBP-1 and DIR-8 at the first Board meeting; Secretarial Auditor flags absence of records in MGT-8.

17 June 2025 – ROC Bangalore issues a Section 454 show-cause notice to the company and all six directors based on MGT-8 findings.

30 December 2025 – ROC Bangalore issues an e-hearing notice; opportunity of being heard scheduled.

29 January 2026 – Company and directors submit a written reply arguing partial compliance for some directors.

28 March 2026 – ROC Bangalore rejects the partial-compliance argument, finds all six directors in default and imposes Rs 1 lakh each. Order PO/ADJ/03-2026/BL/01827 issued.

Within 60 days of order – Directors may appeal to the Regional Director (South-East Region, Hyderabad).

Within 90 days of order – Penalty payable through MCA e-Adjudication portal from personal funds.

Two procedural observations matter. First, the show-cause notice was issued in June 2025, almost four years after the year of default. Section 184(4) has no limitation period under Section 454. ROCs can and do reach back into Secretarial Audit Reports from earlier financial years. Second, the reply that some directors had complied while others had not was treated as an admission for the rest. Half-evidence is worse than no evidence in an adjudication proceeding.

MBP-1 vs DIR-8: What Each Form Actually Does

Most founders use the two forms interchangeably or believe they cover the same ground. They do not. The Section, the trigger, the content and the penalty exposure are different. Get the difference wrong and you have only solved half the problem.

	Form MBP-1	Form DIR-8
Governing Section	Section 184(1)	Section 164(2)
Governing Rule	Rule 9, Companies (MBP) Rules 2014	Rule 14, Companies (Appointment and Qualification of Directors) Rules 2014
Purpose	Disclose director’s interest in other companies, body corporates, firms and AOIs	Declare that the director is not disqualified for appointment or continuation
When Filed	At first Board meeting of every FY + whenever interest changes	At first Board meeting of every FY + at each appointment / re-appointment
Filed With ROC?	No – kept in statutory records	No – kept in Board minutes
Penalty	Rs 1,00,000 per director (Section 184(4))	Rs 50,000 (officer-in-default) + disqualification chain
NIL Filing Required?	Yes – even if no interest	Yes – mandatory declaration
Reviewed In	MGT-8 Secretarial Audit Report	MGT-8 + statutory inspection

What You Must Do Before Your Next Board Meeting

FY 2026-27 began on 1 April 2026. As at the date of this post (13 May 2026), most operating companies have either just completed or are about to schedule the first Board meeting of the new financial year. The Section 184 deadline is not a calendar date – it is the date of the first Board meeting itself. Here is the action plan that will keep your directors out of the AVK Valves bracket.

Step 1: Map every director to a fresh disclosure universe

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Step 2: Collect signed Form MBP-1 from each director

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Step 3: Collect signed Form DIR-8 from each director

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Step 4: Note both forms in first Board meeting minutes by resolution

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Step 5: File MBP-1 in Register of Contracts under Section 189

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Step 6: Issue a mid-year reminder to refresh on interest changes

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✓ Section 184 + Section 164 cleared for FY 2026-27

Step 1: Map the Disclosure Universe

Before you draft MBP-1, list every entity in which each director has any interest. The Section 184 universe is broader than most founders assume. It includes: (a) every company in which the director holds shares, including 2 per cent or less of paid-up capital where the relationship still triggers disclosure; (b) every body corporate (LLPs, foreign companies, Section 8 companies, statutory bodies); (c) every firm (partnership, sole proprietorship); and (d) every association of individuals where the director participates as a partner, member, trustee, manager or beneficial owner. For an investor-nominee director sitting on 10 portfolio Boards, this map can run to 40+ lines.

Step 2: Collect Signed MBP-1

Form MBP-1 has a prescribed format under Rule 9(1) of the Companies (MBP) Rules 2014. Each director signs a fresh form for FY 2026-27. The form must show the name of the company / body corporate / firm, the date on which the interest arose, the nature of interest (shareholder, director, partner, KMP) and the shareholding percentage where applicable. A blank or NIL MBP-1 is still required from a director with no interest – the AVK Valves order is explicit that absence of the form is fatal.

Step 3: Collect Signed DIR-8

Form DIR-8 is a one-page declaration confirming that the director is not disqualified under any sub-clause of Section 164(1) or Section 164(2). It must be signed for the new financial year by every director. Where a director has been re-appointed at a recent AGM, DIR-8 also covers the re-appointment trigger.

Step 4: Note Both Forms in the First Board Meeting

The Board must take note of the disclosures by passing a resolution at the first meeting. The resolution should read along the lines of: “RESOLVED THAT the disclosures of interest in Form MBP-1 and declarations of non-disqualification in Form DIR-8 received from each of the directors for the financial year 2026-27 be and are hereby noted, and the Company Secretary be directed to record the same in the Register of Contracts and Arrangements maintained under Section 189 and in the statutory records of the Company.”

Step 5: File MBP-1 in the Register Under Section 189

The Register of Contracts or Arrangements in which Directors are Interested under Section 189 is maintained in Form MBP-4. Every MBP-1 received feeds into this register. This is also the register that the Secretarial Auditor will ask to inspect during MGT-8 sign-off. AVK Valves failed precisely at this step – records existed in principle but could not be produced for inspection.

Step 6: Refresh on Mid-Year Changes

Section 184(1) requires a fresh MBP-1 whenever a director’s interest changes during the year. The most common mid-year triggers in funded startups are: appointment to a new portfolio company Board, allotment of shares in a related private company, conversion of CCPS to equity, registration of a new LLP by the director or family, and resignation from a prior directorship. Issue an internal email reminder to all directors at 1 October of each year to refresh disclosures for the second half of the year.

The Silent Triggers Most Founders Miss

Across the 10+ ROC adjudication orders involving Section 184 default that have been published since the start of 2025, the same three silent triggers recur. Knowing them is the difference between routine compliance and a Rs 6 lakh personal liability.

Silent Trigger 1: The investor nominee director joined mid-year. An investor exercises its Series A nomination right in October 2026 and appoints a partner from the fund. The first Board meeting of FY 2026-27 has already happened in May. The nominee never files MBP-1 because no one tells them they have to. Twelve months later the Secretarial Auditor flags it. Section 184(1) requires disclosure “at the first meeting of the Board in which he participates as a director” – so the nominee’s first attended meeting is itself the trigger, not the first meeting of the FY.

Silent Trigger 2: The founder bought a flat in a new family-owned LLP. The founder’s spouse incorporates an LLP to hold a residential property. The founder becomes a partner. This is a fresh “firm” interest under Section 184(1). No fresh MBP-1 is filed because no one connects a personal real-estate move to a corporate compliance event. Two years later the Secretarial Auditor reviews family entity disclosures and the gap surfaces.

Silent Trigger 3: The ESOP grant in a related portfolio company. A director also serves as an advisor to a related portfolio company and is granted ESOPs. The director never sees the ESOP grant as shareholding until exercise. Section 184(1) and the prescribed MBP-1 format include shareholding without a vesting carve-out. Outstanding ESOPs are disclosable; many founders fail this test.

How This Connects to CCFS-2026 and the Section 454 Enforcement Wave

The Companies Compliance Facilitation Scheme 2026 (CCFS-2026), available from 15 April 2026 to 15 July 2026 under General Circular 01/2026, is the right window to clean up many ROC-filing defaults at a 90 per cent reduction in additional fees. However, CCFS-2026 does NOT cover Section 184 defaults because MBP-1 is not a ROC-filed form. Voluntary correction of MBP-1 / DIR-8 records during the CCFS window is therefore not a CCFS event – it is simply prudent record-keeping. The risk is the opposite: voluntary filing of pending MGT-7 and AOC-4 under CCFS may surface absent MBP-1 / DIR-8 in the Secretarial Auditor’s re-review of statutory records, which in turn can prompt a fresh Section 454 adjudication. Build MBP-1 and DIR-8 compliance into the CCFS clean-up workflow, not after it.

The Companies (Adjudication of Penalties) Amendment Rules 2025 have also expanded the Regional Director’s appellate involvement and shortened the time for show-cause notices to be issued where Secretarial Audit findings exist. The AVK Valves order is built on a Secretarial Audit Report for FY 2021-22, which means any private company that has had a Secretarial Audit between 2018 and 2025 with a Section 184 observation in MGT-8 is potentially within ROC reach for the next adjudication wave.

The Deeper Implication for Founders With Multiple Directorships

According to CS Sapna Malpani, the Section 184 enforcement pattern after the AVK Valves order will follow three predictable lines through FY 2026-27. First, ROC Bangalore and ROC Hyderabad will move first, because the South Indian funded startup ecosystem has the highest density of investor-nominee directors with multi-Board exposure, and Secretarial Auditors in this belt have been most rigorous in flagging MBP-1 gaps in MGT-8 from 2023 onwards. Second, the ROCs of Mumbai, Pune and Ahmedabad will follow within two quarters, driven by family-owned private group structures where founder directors hold interests in 5-15 firms simultaneously. Third, ROC Delhi will join the wave once the Section 184 framework is tested against an investor nominee director who is also a foreign national, because that combination raises FEMA reporting questions in addition to the Companies Act compliance question.

The forward prediction is sharper than the past. Between May 2026 and March 2027, expect at least 40 published Section 184 adjudication orders against private companies, with aggregate personal penalties on directors crossing Rs 3 crore. The single most useful internal control any private company can adopt right now is to treat MBP-1 and DIR-8 like the BEN-2 / SBO disclosure trigger that hit ICP2 startups in 2024 – a personal director liability that survives the company itself.

How Section 184 Compares With Other Director-Centric Provisions

Founders confuse Section 184 with at least three other personal-disclosure regimes. The differences are small in form but large in penalty.

Section 89 / Section 90 (Beneficial Ownership and SBO) requires the company to identify Significant Beneficial Owners and file BEN-2. The penalty under Section 90(10) on the SBO is Rs 1 lakh + Rs 1,000 per day continuing, and on the company under Section 90(11) is Rs 10 lakh + Rs 1,000 per day. The Section 184 penalty is flat Rs 1 lakh per director, with no day-on-day continuation, but is triggered annually.

Section 158 requires every director to mention DIN in every return, information or particulars. The penalty under Section 159 is Rs 50,000 + Rs 500 per day. Section 184 sits inside Section 158 territory in the sense that DIR-8 is the qualification-side of every annual disclosure, but MBP-1 is the interest-side disclosure that Section 158 does not cover.

Section 197(13) prohibits the company from indemnifying directors against statutory penalties. The AVK Valves order is the explicit application of this principle – the directors must pay from personal sources. This is the same indemnification bar that applies to BEN-2 default, KMP non-appointment under Section 203 and woman director non-appointment under Section 149.

Key Takeaways

✓ ROC Bangalore order PO/ADJ/03-2026/BL/01827 dated 28 March 2026 imposed Rs 1 lakh on each of 6 directors of AVK Valves India Pvt Ltd under Section 184(4).
✓ Aggregate personal liability for a single year of default: Rs 6,00,000 – paid from personal sources, not company funds.
✓ The trigger was a single line in the Secretarial Audit Report (MGT-8) noting that MBP-1 and DIR-8 were not produced.
✓ Section 184 applies to every company including private limited; the 2015 private company exemption only relaxes Section 184(2) voting, not Section 184(1) disclosure.
✓ MBP-1 is NOT filed with the ROC; it sits in the company’s statutory records under Section 189 / MBP-4 Register.
✓ First Board meeting of FY 2026-27 is the trigger date – most companies hold this between April and June 2026.
✓ NIL MBP-1 is mandatory even from directors with no other interest.
✓ Mid-year changes (new directorship, ESOP grant, new LLP membership) trigger a fresh MBP-1.
✓ CCFS-2026 does NOT cover Section 184 because MBP-1 is not a ROC-filed form – voluntary clean-up sits outside the scheme.
✓ Section 197(13) bars the company from paying these penalties for directors – expect ROC scrutiny if such indemnification appears in financial statements.

Sources and References

Companies Act 2013, Section 184 – India Code Bare Act
Companies Act 2013, Section 164 – India Code Bare Act
Companies (Meetings of Board and its Powers) Rules 2014, Rule 9 – MCA.gov.in
ROC Bangalore Adjudication Order PO/ADJ/03-2026/BL/01827 dated 28 March 2026 – MCA.gov.in ROC Adjudication Orders
Studycafe summary of AVK Valves order – Studycafe.in
Taxguru analysis on Section 184 penalty – Taxguru.in
Companies (Amendment) Act 2020 (substitution of Section 184(4)) – India Code
General Circular 01/2026 (CCFS-2026) – MCA.gov.in Circulars
Companies (Adjudication of Penalties) Amendment Rules 2025 – MCA.gov.in Notifications

Need Help With MBP-1 and DIR-8 for FY 2026-27?

Use the MCA Penalty Calculator to estimate Section 184 exposure across your Board and the Board Composition Checker to spot disclosure gaps before the first meeting of FY 2026-27.

For a confidential review of your statutory records and first Board meeting agenda: Contact CS Sapna Malpani | WhatsApp

FAQ

What is the penalty for not filing Form MBP-1 under Section 184?

Under Section 184(4) of the Companies Act 2013, every director who fails to disclose interest in Form MBP-1 is liable to a penalty of Rs 1,00,000 per director. The penalty is imposed on the director personally and must be paid from personal sources, not company funds. The ROC Bangalore order dated 28 March 2026 against AVK Valves India Pvt Ltd applied this penalty to all 6 directors, resulting in Rs 6 lakh in aggregate personal liability for a single non-compliance year.

When must MBP-1 and DIR-8 be filed in FY 2026-27?

Both MBP-1 and DIR-8 must be submitted to the Board at the FIRST Board meeting of FY 2026-27. Since FY 2026-27 began on 1 April 2026, the typical window is between April and June 2026, depending on when the company holds its first Board meeting. MBP-1 must also be re-filed whenever a director acquires a new interest or any existing disclosure changes during the year. DIR-8 is a one-time-per-FY declaration of non-disqualification under Section 164.

Is MBP-1 filed with the ROC or only with the Board?

Form MBP-1 is NOT filed with the Registrar of Companies. It is delivered to the Board of Directors at the first meeting of the financial year and is preserved in the company’s statutory records under Rule 9 of the Companies (Meetings of Board and its Powers) Rules 2014. However, ROCs review MBP-1 records during inspection under Section 206, during Secretarial Audit verification under Section 204, and when issuing show-cause notices under Section 454. The AVK Valves order shows that absence of MBP-1 in statutory records is enough to trigger Rs 1 lakh per director penalty.

Does Section 184 apply to private limited companies?

Yes, Section 184 applies to every company registered under the Companies Act 2013 including private limited companies, public companies, one-person companies and Section 8 companies. The exemption notification dated 5 June 2015 for private companies only relaxes Section 184(2) regarding voting on interested transactions; it does NOT exempt private companies from the Section 184(1) disclosure at the first Board meeting of every financial year. This is the trap most founders walk into.

Can the company pay the Section 184 penalty on behalf of directors?

No. The ROC Bangalore order explicitly directs that the penalty must be paid by the directors from their personal sources or income, not from company funds. Any indemnification by the company for this kind of personal statutory penalty is barred under Section 197(13) and could itself trigger fresh adjudication. Directors must pay individually through the MCA e-Adjudication facility within 90 days of the order.

What happens if a director has no interest in any other entity?

Even a NIL disclosure must be filed. The director must submit Form MBP-1 stating that there is no interest in any company, body corporate, firm or association of individuals. The omission of MBP-1 entirely, including a NIL MBP-1, is what triggers Section 184(4) penalty. The AVK Valves directors did not argue zero interest; they argued partial compliance, and that argument was rejected by the ROC Bangalore.

How is DIR-8 different from MBP-1?

DIR-8 is a declaration under Section 164(2) that the director is NOT disqualified for re-appointment or continuation in office. It is filed once a year at the first Board meeting. MBP-1 is a disclosure under Section 184(1) of the director’s interest in other companies, body corporates, firms and associations of individuals. DIR-8 protects against personal disqualification consequences. MBP-1 protects against related-party transaction violations. Both are due at the first Board meeting of the financial year and both are reviewed by the Secretarial Auditor in MGT-8.

Can ROC Bangalore impose Section 184 penalty without a show-cause notice?

No. The procedure under Section 454 read with the Companies (Adjudication of Penalties) Rules 2014 requires a show-cause notice followed by an opportunity of being heard. In the AVK Valves matter, ROC Bangalore issued a show-cause notice on 17 June 2025, received a reply on 29 January 2026, conducted an e-hearing on 30 December 2025 and then issued the final order on 28 March 2026. This nine-month adjudication window is consistent with the expanded ROC adjudication powers under the Companies (Adjudication of Penalties) Amendment Rules 2025.