Section 199 — Investments in associated companies and undertaking
At a glance
- A company may invest in an associated company or associated undertaking only after members' approval by special resolution - s.199(1)
- The notice of the meeting must disclose detailed information about the investment (financials, terms, purpose, source of funds) - Regulation 3
- Directors must certify that due diligence was carried out before recommending the investment - Regulation 3(3)
- A special resolution approving investment is valid for 12 months unless the members specify otherwise - Regulation 6
- Certain classes of companies (banks, DFIs, NBFCs, wholly-owned subsidiaries, private companies not subsidiaries of a public company, etc.) are exempted from the approval requirement - S.R.O. 1239(I)/2017
- A register of investments in associated companies/undertakings must be maintained permanently at the registered office - Regulation 7
- Investment decisions under this section are closely linked to the separate related-party-transaction approval and record-keeping requirements under Sections 208 and 209
Statute text
(1) A
company shall not make any investment in any of its associated companies or
associated undertakings except under the authority of a special resolution which
shall indicate the nature, period, amount of investment and terms and conditions
attached thereto.
Explanation: The term ‘investment’ shall include equity, loans, advances,
guarantees, by whatever name called, except for the amount due as normal trade
credit, where the terms and conditions of trade transaction(s) carried out on arms -
length and in accordance with the trade policy of the company.
(2) The company shall not invest in its associated company or
associated undertaking by way of loans or advances except in accordance with an
agreement in writing and such agreement shall inter-alia include the terms and
conditions specifying the nature, purpose, period of the loan, rate of return, fees or
commission, repayment schedule for principal and return, penalty clause in case of
default or late repayments and security, if any, for the loan in accordance with the
approval of the members in the general meeting:
Provided that the return on such investment shall not be less than the
borrowing cost of the investing company or the rate as may be specified by the
Commission whichever is higher and shall be recovered on regular basis in
accordance with the terms of the agreement, failing which the directors shall be
personally liable to make the payment:
Provided further that the directors of the investing company shall certify
that the investment is made after due diligence and financial health of the borrowing
company is such that it has the ability to repay the loan as per the agreement.
(3) The Commission may—
(a) by notification in the official Gazette, specify the class of companies
or undertakings to which the restriction provided in sub-section (1)
shall not apply; and
(b) through regulations, specify such disclosure requirements,
conditions and restrictions on the nature, period, amount of
investment and terms and conditions attached thereto, and other
ancillary matters.
(4) An increase in the amount or any change in the nature of investment
or the terms and conditions attached thereto shall be made only under the authority
of a special resolution.
(5) Every company shall maintain and keep at its registered office a
register of investments in associated companies and undertakings containing such
particulars as may be specified.
(6) Any contravention or default in complying with requirements of this
section shall be an offence liable to a penalty of level 3 on the standard scale and in
addition, shall jointly and severally reimburse to the company any loss sustained
by the company in consequence of an investment which was made without
complying with the requirements of this section.
Related law
Practical compliance checklist
- Confirm whether your company falls under an S.R.O. 1239(I)/2017 exemption before assuming Section 199 approval is required.
- Prepare the full disclosure statement for the notice of general meeting - counterparty financials, purpose, funding source, and (for equity investments) pricing and shareholding detail.
- Obtain the directors' due-diligence certification before the investment is recommended to members.
- Pass the special resolution and note its 12-month validity - a lapsed approval needs fresh members' approval, not a renewal filing.
- Make the due-diligence report available for inspection at the general meeting.
- Enter the investment in the permanent Register of Investments in Associated Companies/Undertakings (Regulation 7 form) as soon as it is made.
- Check separately whether the same transaction is also a related-party transaction under Section 208 - if so, follow the board-approval and register requirements of the Related Party Transactions Regulations, 2018 as well.
Plain-language explainer
If your company wants to invest in - or lend to - a related company (an "associated company" or "associated undertaking"), you generally need your shareholders' explicit sign-off first, through a special resolution, with full disclosure of the numbers and the relationship. That approval only lasts 12 months, and every such investment has to be logged in a permanent register. Some companies (banks, NBFCs, wholly-owned subsidiaries, and a few others) are exempted from needing that approval for routine investments. Because the counterparty is usually also a "related party," the same transaction often triggers a second, separate set of rules - board approval and its own register - under Sections 208 and 209.
Professional notes
Section 199’s approval requirement is implemented through the Companies (Investment in Associated Companies or Associated Undertakings) Regulations, 2017 (S.R.O. 1240(I)/2017), which sets the disclosure content, due-diligence certification, 12-month validity of the resolution, and the permanent register. The exemption list is a separate instrument, S.R.O. 1239(I)/2017, issued under clause (a) of sub-section (3) of Section 199 – it supersedes the older S.R.O. 704(I)/2011. Note that Section 199 (investment approval) and Sections 208-209 (related party transactions and directors’ interests) are distinct legal requirements that frequently apply to the same transaction simultaneously – an investment in an associated company is almost always also a related-party transaction, so both compliance tracks should be checked together rather than treating a Section 199 approval as sufficient on its own.
SECP updates linked to this section
The circulars, S.R.O.s, and notifications that shaped this section over time.
Supersedes S.R.O. 704(I)/2011. Exempts specified classes of companies - licensed banks, DFIs, NBFCs (for ordinary-course/non-equity investments), asset management/Modaraba companies investing in schemes they manage, wholly-owned subsidiaries invested in by their holding company, private companies that are not subsidiaries of a public company, and a few others - from the Section 199(1) approval restriction, to the extent specified for each class.
Sets the minimum disclosures required in the notice of general meeting for an investment decision (counterparty financials, terms, funding source, director interests), requires directors to certify due diligence, caps a members' approval at 12 months, sets valuation and rate-of-return conditions for equity/loan investments, and requires a permanent Register of Investments in Associated Companies/Undertakings. Contravention is punishable by a penalty of up to Rs. 5 million plus Rs. 100,000 per day for a continuing default. Repeals the 2012 regulations of the same name.