Section 180(1)(c): how much the board can borrow
The board of a public company needs a special resolution before borrowing if the money to be borrowed, together with money already borrowed, will exceed the aggregate of paid-up share capital, free reserves and securities premium. Temporary loans from the company's bankers in the ordinary course of business are left out; s.180(1)(c) defines them as loans repayable on demand or within six months, other than loans for financing capital expenditure. Private companies are exempt under the June 2015 exemption notification. The resolution is filed in MGT-14 within 30 days.
Section 186(2): loans, guarantees, security and investments
A company cannot, without a special resolution, give loans, guarantees or security, or acquire securities of any body corporate, beyond the higher of (a) 60% of paid-up capital, free reserves and securities premium, or (b) 100% of free reserves and securities premium. The test is aggregate: everything outstanding plus the proposed transaction. Unlike s.180, s.186 applies to private companies too.
| Situation | Special resolution? |
|---|---|
| Within the s.186(2) limit | No; unanimous board resolution |
| Above the limit | Yes, before the transaction (s.186(3)) |
| Loan, guarantee or security to a WOS or JV | No (s.186(3) proviso); disclose in financial statements |
| Acquiring securities of a WOS | No (s.186(3) proviso) |
| Bank, insurer, HFC, financing or infrastructure company in ordinary course | s.186 does not apply except s.186(1) (s.186(11)) |
Free reserves
Free reserves under s.2(43) are reserves available for dividend as per the latest audited balance sheet. They exclude unrealised gains, notional gains, revaluation of assets and changes in carrying amount on fair-value measurement. A debit balance in profit and loss reduces free reserves.
Common questions
Does a private company need a special resolution under s.180?
No. Notification G.S.R. 464(E) of 5 June 2015 exempts private companies from s.180. The board can borrow under s.179(3)(d), subject to the articles and lenders' covenants.
Do loans to a wholly owned subsidiary count in the s.186 limit?
They do not need a special resolution under the s.186(3) proviso, and most practitioners leave them out when testing the limit for other transactions. The board resolution and the disclosure in the financial statements are still required.
Is a cash credit limit a temporary loan for s.180(1)(c)?
A working capital loan from the company's bankers repayable on demand or within six months, in the ordinary course of business, is a temporary loan and is left out. A loan for capital expenditure is not, even if short term.