Inter-Corporate Loans Under the Companies Act 2013
Inter-corporate loans are a common way for companies to support group entities, joint ventures, and business partners without turning to external lenders. Whenever one company extends funds, guarantees, or invests in the securities of another body corporate, it falls under the broader head of inter-corporate lending.
Because these transactions move money between related and unrelated corporate entities, they carry a real risk of misuse if left unchecked. To prevent this, the Companies Act 2013 lays down a detailed framework under Section 186 that every company must follow before granting a loan, guarantee, or investment as part of overall corporate finance compliance.
This guide explains the applicable inter-corporate loan rules, the prescribed inter-corporate loan limits, available exemptions, disclosure norms, the step-by-step compliance procedure, and penalties for default so that companies can structure these transactions with confidence.
What Is an Inter-Corporate Loan?
A company can give loans and guarantees, acquire securities, or make investments in another company or body corporate with the consent of its board or shareholders.
Such loans, given by one company to another company or body corporate, are commonly called inter-corporate loans. When a company invests in the securities of another company, this is referred to as an inter-corporate investment.
Section 186 of the Companies Act 2013 (the "Act") governs both of these activities and sets out the corporate loan provisions that a company must satisfy before it can grant a loan, guarantee or security, or make an investment.
Rules Under Section 186 for Loans and Investments
Section 186(2) of the Act sets out how a company can give loans and guarantees to other companies and body corporates. It states that a company can, directly or indirectly:
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Give a loan to any other body corporate.
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Provide security or give a guarantee in connection with a loan given to any other body corporate.
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Acquire securities of other body corporates by way of purchase, subscription, or otherwise.
However, under this provision, a company can extend loans and guarantees and acquire securities only up to 60% of its paid-up share capital, securities premium account, and free reserves, or 100% of its securities premium account and free reserves, whichever is higher.
Section 186(1) of the Act further provides that a company can make investments only through not more than two layers of investment companies, except in the following cases:
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Where the company is acquiring another company incorporated outside India, and that company has investment subsidiaries beyond two layers as permitted under the laws of that country.
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Where a subsidiary company needs to obtain an investment subsidiary to meet the requirements of a law, regulation, or rule in force at the time.
Exceptions to the Inter-Corporate Loan Rules
Certain entities are excluded from these corporate loan provisions altogether. The restrictions under Section 186 of the Companies Act do not apply to:
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A banking company, housing finance company, or insurance company acting in the ordinary course of its business.
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A company established to provide infrastructure facilities or to finance industrial enterprises.
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A registered Non-Banking Finance Company (NBFC) whose principal business is the acquisition of securities.
Restrictions and Inter-Corporate Loan Limits
Section 186(2) of the Act caps the loans, guarantees, or securities a company can extend to another body corporate. A company cannot cross the prescribed limit, i.e. 60% of its paid-up share capital, securities premium account, and free reserves, or 100% of its free reserves and securities premium account, whichever is higher. These company loan rules exist to keep intra-group lending transparent and within safe, auditable boundaries.
A company can, however, exceed these limits in specific situations:
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When the transaction is previously authorized by a special resolution passed at a general meeting.
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When the loan or guarantee is given to a wholly-owned subsidiary, or securities are acquired by a holding company in its wholly-owned subsidiary.
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When the company is registered under Section 12 of the SEBI Act, 1992, and falls within a notified class of companies permitted to extend such loans and deposits above the limit.
A company that has defaulted in repaying accepted deposits, or interest on such deposits, cannot give a loan, guarantee, or security, or acquire while the default continues. This restriction is central to loan compliance, since it prevents defaulting companies from extending further loans to other entities.
Interest Rate Norms for Loans Between Companies
A company cannot lend money at a rate of interest lower than the prevailing yield of the one-, three-, five-, or ten-year government security closest to the tenure of the loan.
This requirement applies uniformly to every such transaction and is a key element of corporate finance compliance that companies must observe when structuring inter-corporate lending.
Disclosure Requirements for Loan Compliance
Timely and accurate disclosure is one of the most important company loan rules and forms a core part of overall corporate finance compliance for any business that regularly extends loans to group companies or business partners.
As part of ongoing loan compliance, a company must disclose the following details to its members in the financial statements:
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Full particulars of the loans granted.
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Full particulars of the investments made.
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Full particulars of the guarantee or security provided.
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The purpose for which the loan, guarantee, or security is proposed to be used by the recipient.
Procedure to Issue an Inter-Corporate Loan
A company granting a loan under these company loan rules should follow this compliance procedure:
Following this procedure closely keeps a company aligned with the Act and avoids disputes over the validity of the transaction later.
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Convene a Board of Directors meeting after issuing notices and circulating the proposal for the loan, guarantee or security within the limit prescribed under Section 186(2) of the Act.
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Pass a board resolution with the consent of all directors present, approving the transaction.
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Check whether the company has an existing loan from a public financial institution. If it does, prior approval from that institution is required before granting a further loan, unless the aggregate loan, guarantee, investment and security stays within the Section 186(2) limit and there is no default in repayment.
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Authorise a director or another person to apply for approval of the loan to the other body corporate after finalising the fund and quantum involved.
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Where the loan, guarantee or security exceeds the prescribed limit, convene a general meeting of shareholders after due notice and pass a special resolution approving the transaction.
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File a copy of the special resolution in Form MGT-14, along with the required documents and fee, with the Registrar of Companies within 30 days of passing the resolution.
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Maintain a register in Form MBP-2 recording every loan, guarantee, security or acquisition made.
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Keep the register at the company's registered office, open for inspection, with members allowed to take extracts and copies on payment of the prescribed fee.
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Disclose particulars of the loans, guarantees, securities or investments, along with their purpose, in the financial statements.
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Review the company's repayment history for deposits and interest before granting any further loan.
Penalty for Contravention of Section 186
Non-compliance with these corporate loan provisions attracts financial and personal liability. A company that contravenes Section 186 of the Companies Act is liable to a penalty of not less than Rs. 25,000, which may extend up to Rs. 5 lakh.
Every officer of the company in default is punishable with imprisonment for a term that may extend up to two years, along with a penalty of not less than Rs. 25,000 that may extend up to Rs. 1 lakh.
These penalties, and the reputational cost of default, underline why loan compliance cannot be treated as a mere formality within a company's corporate finance compliance framework.
FAQs About Companies Act 2013
Q1: What is the maximum inter-corporate loan limit under the Companies Act 2013?
A company can give loans and guarantees and acquire securities up to 60% of its paid-up share capital, securities premium account, and free reserves, or 100% of its free reserves and securities premium account, whichever is higher, unless a special resolution permits a higher amount.
Q2: Which entities are exempt from Section 186 of the Companies Act?
Banking, housing finance and insurance companies, infrastructure finance companies, and NBFCs whose principal business is acquiring securities are exempt from these provisions.
Q3: What happens if a company breaches the inter-corporate loan limits?
The company can face a penalty ranging from Rs. 25,000 to Rs. 5 lakh, and defaulting officers can face imprisonment of up to two years along with a personal penalty.
Q4: Is board approval enough for every inter-corporate loan?
No. Board approval is sufficient only within the prescribed limit. Loans, guarantees or securities beyond that limit need a special resolution passed by shareholders in a general meeting.
Conclusion: Companies Act 2013
Inter-corporate loans remain one of the most practical ways for companies within a group, or with shared business interests, to move funds without relying on external financing. But this flexibility comes with strict inter-corporate loan rules under the Companies Act 2013.
From board approvals and shareholder resolutions to disclosure norms and interest rate benchmarks, every stage of the process exists to protect shareholders and creditors while enabling legitimate inter-corporate lending.
Companies that build a consistent compliance process, backed by proper documentation and timely filings, are far better placed to use such loans as a strategic financing tool rather than a compliance risk.