Section 185 of the Companies Act, 2013 lays down certain restrictions with regard to the granting of loans to Directors in order to monitor their working.
Initially, public companies were allowed to grant loans, guarantees and securities subject to Central Government approval and private companies were exempted under Section 295 of the former Companies Act, 1956. Section 185 of the Companies Act, 2013 imposed a ban on loans to directors, their relatives and partners. The main intention of Section 185 is to ensure that directors who hold a fiduciary position with respect to shareholders do not misappropriate the funds of the company for their own benefits.
Government substituted entire Section 185 by way of Companies (Amendment) Act, 2017 to promote ease of doing business. The original Section 185 specified more exhaustive list to which Companies can’t give loans, guarantee and securities. Thus, at par with the global company laws, the provision has been amended to remove the prohibition to an extent and provides for the passing of shareholders’ resolution for granting of loans, guarantees, and securities to entities in which directors are interested.
- PROHIBITED
All the Companies (Except Private Companies which fulfill the criteria of exemption notification dated 5th June 2015) are prohibited to give loans, guarantees and securities to the following persons and firm:
- Any Director of a Company
- Any Relative of a Directors
- Any Partner of a Directors
- Any Directors of a Holding Company
- Any firm in which any such director or relative of a director is a Partner
- RESTRICTED
Companies can give loans, guarantee or securities to the following entities after passing Special Resolution at a duly convened general meeting:
- Any private company of which any such director is a director or member.
- Anybody corporate in which more than 25% of the total voting power exercised or controlled by any such director, or by two or more such directors, together.
- Anybody corporate, the BOD, MD or manager, whereof is accustomed to act in accordance with the directions or instructions of the BOD, or of any director or directors, of the lending Company.
Exemptions With Regard to Loans Given to Directors
- Loans to the Managing Director or Whole Time Director: The loans to MD or WTD may be given only if the following conditions are met with:- – Where it is part of the Policy of Service of the company to grant loans to all employees. – Pursuant to any scheme which is duly approved by the members by way of a Special Resolution.
- Loans to Subsidiary Company: Where the holding company grants the loan, guarantee or security to its wholly owned subsidiary company, which uses the same for its principal activity of business only.
- Loans to Companies as part of Ordinary Business: If the rate of interest charged on such loans is not lesser than the rate prescribed by RBI at the time, loans may be given to companies in the ordinary course of business.
- Loans given by Banks and Financial Institutions to Subsidiaries: Grant of loan is permitted based on:- – Where the holding company provides the security or guarantee with respect to the loan made by the bank or any financial institution to the subsidiary company. – The loan must be utilized for the subsidiary’s principal activity of the business.
Exempted private companies
Private Companies were facing problems due to stringent provisions of Section 185 while carrying out operations. So, Government exempted private companies from entire Section 185 to ease the compliance requirement vide notification dated 5th June 2015, subject to following 3 conditions:
- There should be no investment in the concerned company from any other body corporate.
- The company should not have any borrowings from banks, financial institutions and other bodies corporate equal to or more than twice its paid-up share capital, OR Rs. 50 crores, whichever is lower and
- There should be no subsisting default at the time of making such transaction, and that the company should have the capability to pay off the loan.
Penalty Provisions
In any case where Section 185 is not complied with:-
– The Lending Company will be punishable with a fine not less than Rs. 5 lakh which can be extended to Rs 25 lakh (maximum).
– Any officer in default will be punishable with imprisonment for a term which may extend to 6 months or fine which shall not be less than Rs.5 lakh but which may extend to Rs.25 lakh.
– The recipient of the loan will be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs.5 lakhs but which may extend to Rs.25 lakhs or with both.
– Contributed by Nesara