What Is an Inter-Corporate Loan or Investment?
An inter-corporate loan or investment is any loan, guarantee, security, or securities acquisition that one company makes in favour of another body corporate. In India, this activity is governed by section 186 of the Companies Act, 2013, which caps how much a company can lend, guarantee, or invest without shareholder approval, sets a floor on the interest rate it can charge, and requires the transaction to be logged in a statutory register.
The rule matters most inside group structures. A holding company funding a subsidiary, one sister company lending working capital to another, or an Indian company guaranteeing a group entity’s bank loan all fall within section 186 — the section does not carve out related companies as a class, only specific transaction types, specific classes of lender listed in its exemptions, and a proviso that removes the special-resolution step for a wholly owned subsidiary or a joint venture.
Legal Basis — Section 186 of the Companies Act, 2013
Section 186 sits in Chapter XII of the Act (Meetings of Board and Its Powers) and applies to every company giving a loan to "any person or other body corporate," giving a guarantee or security "in connection with a loan to any other body corporate or person," or acquiring "the securities of any other body corporate" — whether by subscription, purchase, or otherwise.
The Layering Restriction — Section 186(1)
Unless otherwise prescribed, a company must route its investments through no more than two layers of investment companies. Two exceptions apply: a company acquiring a foreign company that already has more than two layers under that country’s own law, and a subsidiary that needs an extra investment layer to satisfy a separate law or regulation.
The Loan and Investment Limit — Section 186(2)
A company cannot, directly or indirectly, give a loan, give a guarantee or security for a loan, or acquire securities of another body corporate beyond 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account — whichever figure is higher. This is not a per-transaction cap: section 186(3) treats it as a running total, testing "the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board" against the same ceiling.
When a Special Resolution Is Required — Section 186(3)
Once the proposed loan, guarantee, security, or acquisition pushes the running total past the section 186(2) ceiling, the company needs a special resolution passed at a general meeting before it can proceed — an ordinary board resolution is no longer enough.
The first proviso to section 186(3), substituted into the section by the Companies (Amendment) Act, 2017 with effect from 7 May 2018, lifts that step for group funding: where a loan or guarantee is given or a security provided by a company "to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section shall not apply." The second proviso keeps the disclosure duty alive: the company must still disclose the details of that loan, guarantee, security, or acquisition in the financial statement under section 186(4).
Board Approval and Public Financial Institution Consent — Section 186(5)
Below the ceiling, the transaction still needs a board resolution passed "with the consent of all the directors present at the meeting." If the company has a term loan outstanding to a public financial institution, that institution’s prior approval is also required — unless the running total (including the proposed transaction) stays within the section 186(2) limit and the company is not in default on repaying that institution.
The Minimum Interest Rate — Section 186(7)
A loan under section 186 cannot carry an interest rate "lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan." A company cannot lend to a group entity interest-free or below the comparable government-security yield, even where both companies are wholly owned by the same parent.
Default Bar — Section 186(8)
A company that is in default on repaying deposits it accepted, or on paying interest on those deposits, cannot give a loan, guarantee, or security, or make an acquisition, under section 186 until that default is cleared.
The Register — Section 186(9)
Every company giving a loan or guarantee, providing security, or making an acquisition under section 186 must keep a register containing the particulars, and maintained in the manner, prescribed for the purpose. Section 186(10) then requires that register to be kept at the registered office and to be open to inspection there, and entitles any member to take extracts from it and to be furnished copies on payment of the prescribed fee.
Exemptions — Section 186(11)
Section 186(11) disapplies the whole section, except the layering rule in 186(1), to two groups. The first is any loan, guarantee, security, or investment by a banking company, an insurance company, or a housing finance company in the ordinary course of its business, or by "a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities." The second group is expressed as applying to investments only, not to loans or guarantees: an investment made by an investment company, an investment in shares allotted under section 62(1)(a) or in shares allotted in a rights issue made by a body corporate, and an investment made in respect of investment or lending activities by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 whose principal business is the acquisition of securities.
Note the limits of the wholly-owned-subsidiary proviso to section 186(3). It removes the special-resolution step and nothing else. The company must still disclose the loan, guarantee, security, or acquisition to its members in the financial statement under section 186(4), and the interest-rate floor in section 186(7) is not on the section 186(11) exemption list, so it continues to apply to a loan made to a wholly owned subsidiary.
Penalty for Contravention — Section 186(13)
A company that contravenes section 186 is punishable with a fine of not less than ₹25,000, extending up to ₹5,00,000. Every officer of the company who is in default is punishable with imprisonment for a term that may extend to two years, and with a fine of not less than ₹25,000, extending up to ₹1,00,000.
Why This Matters for a Foreign Company or Investor
Foreign groups routinely move cash between Indian entities — a holding company funding a newly incorporated Indian subsidiary, one Indian subsidiary lending surplus cash to a sister subsidiary, or an Indian entity standing guarantee for another group company’s working-capital facility. Every one of those transactions sits inside section 186, and the practical consequences are:
- The lending company’s holding company structure and the paid-up capital, free reserves, and securities premium on its own balance sheet — not the borrower’s — set the ceiling for how much it can lend or invest without a special resolution.
- A wholly owned Indian subsidiary’s "special resolution" is passed by its sole shareholder, typically the foreign parent, so the approval step is procedurally simple even when it is legally required — except where the wholly-owned-subsidiary proviso to section 186(3) already removes the requirement.
- The interest-rate floor in section 186(7) means group loans priced at zero or a nominal rate to keep intercompany documentation simple are not compliant, regardless of how routine the transfer feels.
- Section 186 transactions must be disclosed in the lending company’s financial statements under section 186(4) and entered in the register that section 186(9) requires — auditors and the Registrar of Companies both expect to see this trail during a statutory audit or a related-party transaction review.
Cross-Border Loans Are a Different Regime
Section 186 governs what an Indian company does with its own money when it lends to, guarantees, or invests in another body corporate — it does not by itself authorise or regulate a loan the Indian company receives from a foreign parent or group company. A cross-border loan coming into an Indian company from an overseas lender is regulated separately, as an External Commercial Borrowing under FEMA, with its own limits, tenor, and reporting rules. Foreign investors structuring intercompany funding into India should treat the two regimes as distinct compliance tracks rather than reading section 186 as covering inbound group loans.
Loans to Directors Are a Separate Section
A loan, guarantee, or security given to a director, or to a person or entity in which a director is interested, is not governed by section 186 at all — it falls under the separate and stricter regime in section 185 of the Companies Act, 2013. Do not apply the section 186(2) limits or the wholly-owned-subsidiary proviso to section 186(3) to a director-linked transaction; check section 185 and its own rules instead.
Worked Example
An Indian private company has paid-up share capital of ₹2 crore, free reserves of ₹8 crore, and a securities premium account of ₹1 crore.
- 60% test: 60% of (₹2 crore + ₹8 crore + ₹1 crore) = 60% of ₹11 crore = ₹6.6 crore.
- 100% test: 100% of (₹8 crore + ₹1 crore) = ₹9 crore.
- Governing limit: the higher of the two, ₹9 crore, is the ceiling under section 186(2).
If the company has already lent ₹3 crore to one group entity and now wants to guarantee a ₹7 crore bank facility for another, the running total is ₹10 crore — above the ₹9 crore ceiling — so a special resolution is required before the guarantee is given, unless the beneficiary is a wholly owned subsidiary or joint venture covered by the first proviso to section 186(3). Either way, the interest or consideration involved must still respect the section 186(7) floor, the transaction must be disclosed under section 186(4), and it must be entered in the register required by section 186(9).
Checklist Before Making an Inter-Corporate Loan
- Calculate the section 186(2) ceiling: 60% of paid-up capital + free reserves + securities premium, or 100% of free reserves + securities premium, whichever is higher.
- Add up every existing loan, guarantee, security, and investment to all bodies corporate, plus the new transaction, and compare that running total to the ceiling.
- If within the ceiling: pass a board resolution with the consent of every director present, and get public-financial-institution consent if a term loan is outstanding to one (unless the section 186(5) proviso applies).
- If beyond the ceiling: pass a special resolution at a general meeting — unless the transaction is a loan, guarantee, or security to a wholly owned subsidiary or joint venture, or an acquisition of a wholly owned subsidiary’s securities, covered by the first proviso to section 186(3).
- Price any loan at or above the matching-tenor government-security yield required by section 186(7).
- Confirm the company is not in default on repaying deposits or deposit interest (section 186(8)).
- Disclose the transaction in the financial statements (section 186(4)) and record it in the register required by section 186(9).
- If the transaction is a loan or guarantee to a director, or to a person or entity in which a director is interested, stop — that is section 185, not section 186.
- If the loan is coming from a foreign lender rather than going out from the Indian company, check the External Commercial Borrowing framework instead.
Frequently Asked Questions
Does section 186 apply to a loan between two Indian subsidiaries of the same foreign parent?
Yes. Section 186 applies to a loan, guarantee, security, or securities acquisition a company gives to "any person or other body corporate," with no general exception for companies under common ownership. The only carve-out that removes a step is the first proviso to section 186(3), and it applies solely where one of the two companies is a wholly owned subsidiary of the other, or the transaction is with a joint venture — not to sister companies with a shared parent.
What happens if a company exceeds the section 186(2) limit without passing a special resolution?
The company contravenes section 186 and is punishable with a fine of ₹25,000 to ₹5,00,000. Every officer of the company in default is separately punishable with imprisonment for up to two years and a fine of ₹25,000 to ₹1,00,000, under section 186(13).
Is a loan to a wholly owned subsidiary exempt from the minimum interest-rate rule?
No. The first proviso to section 186(3) removes only the special-resolution requirement for a loan, guarantee, or security to a wholly owned subsidiary or joint venture. The interest-rate floor in section 186(7) is not among the exemptions listed in section 186(11), so it continues to apply to a loan made to a wholly owned subsidiary.
Does section 186 cover a loan the Indian company receives from its foreign parent?
No. Section 186 regulates loans, guarantees, security, and investments the company itself gives to another body corporate — not money it borrows. A loan an Indian company receives from an overseas group company is regulated instead as an External Commercial Borrowing under FEMA, a separate framework with its own approval route and reporting requirements.
How is the section 186(2) limit calculated if the company has already made other inter-corporate loans?
Cumulatively. Section 186(3) tests "the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate" together with the newly proposed transaction against the same 60%/100% ceiling — not the new transaction in isolation.
See also: Related Party Transaction, Holding Company, and Downstream Investment.