Analysis of Sub-section 1 of Section 186 of Companies Act, 2013

Sub-section 1 of Section 186 says that a Company shall not make investment (or here they may use the word investments to give real meaning) through not more than 2 layers of Investment Companies.

Say for example, Company A has invested into Company B and Company B has invested into Company C.

Now, as per restrictions of sub-section 1, Company C can't invest further into any Company.

But, this sub-section uses the word Investment Company, So it's nowhere a restriction for a Company which is into trading or any other business.

Further, to support our reasoning, please look at the explanation provided below sub-section 13,

Where it is prescribed that

For the purposes of this section: the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities;

Further, Companies Amendment Act, 2017 which was made effective from 7th May 2018 has added another criteria to the above mentioned explanation:

a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or 

if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.

Therefore, as per the Companies Act, 2013, there is a new category of Company has been specified i.e. Investment Company.

As per the provisions of the Act, a Company shall be regarded as an Investment Company, if it meets any of the following criteria:

1. The principal business of the Company is the acquisition of shares, debentures or other securities. 

2. If the Company's assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets.

3. If The Company's income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income. 

If we analyse the above mentioned criteria,

1. For having principal business of acquisition of shares etc. The Company has to have the same in their objects clauses in MoA.

2. Say, for example the Company is not having the relevant provisions in their MoA but they can still undertake the investment work therefore MCA has introduced another provisions through Amendment, which says that the Companies will be deemed to be principally engaged in the acquisition work on the basis of their assets size or income proportionate from Investment business. 

Now, coming back to our sub-section 1 of section 186, it also prescribes proviso.

As per the provisio, the rule mentioned in sub-section 1 shall not affect a Company in the following cases:

(i) The company from acquiring any other foreign Company,  if such other company has investment subsidiaries beyond two layers as per the laws of such country;

(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law/rule / regulation.

Strategies:

MRV Limited is having inter corporate deposits in some of its group companies, which are re-payable on demand. The interest liability on said IDs are booked by the said companies at the financial year end and TDS is deposited accordingly. There is no due date for the payment of principal amount and interest. Same is paid on the basis of fund availability with the company.