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

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.

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

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:

1. Loans granted to any person or body corporate
2. Guarantees given on behalf of any person or body corporate
3. Securities created in connection with a loan to any person or body corporate
4. 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:

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:

1. “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.
2. 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

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:

1. Banking companies, insurance companies, housing finance companies, and certain NBFCs in the ordinary course of their business
2. 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
3. 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:

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

Sources and References

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

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.