Many a times we come across these questions whether a company can give loans to or accept loans from its directors/ shareholder/ relatives of directors. The provisions regarding the borrowing and lending are dealt with in detail in sections of the Companies Act, 2013. Let us know more about the provisions of theses sections here.

Section 185 – Loan to directors and more

Section 185 does not permit a company to directly or indirectly advance any loan to any of its directors, its holding company, any relative or partner of the director or any firm in which the director or relative is a partner. Here loan includes any loan represented by a book debt. It further prohibits giving any guarantee or provide any security in connection with any loan taken by the abovementioned parties.

Specified Conditions where Companies are permitted to give loans.

However, a company may advance loans to the directors and related parties mentioned above if it satisfies the following conditions.

• A special resolution is passed by the company in general meeting and the explanatory statement to the notice for general meeting shall disclose
  • The full particulars of loans or guarantee or security provided.
  • The purpose for which the loan or guarantee or security is proposed to be utilized by the recipient.
  • Any other relevant fact.
• The loans are utilized by the borrowing company for its principal business activities.

Non-Applicability of restrictions

The restrictions stated above shall not apply in the following cases.

• The loan is given to the managing director or whole time director of the company as part of the conditions of services extended generally to all its employees or according to a scheme approved by the members by a special resolution.
• The company is engaged in the business of lending and the interest rate is in par with the interest yield in government securities.
• The loan or guarantee or security is given by a company to its wholly owned subsidiary for its principal business activities.
• The guarantee or security is provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company for its principal business activities.

Penalty for contravention

The penalty for contravention of Sec 185 shall be as under

• Penalty to company – Fine ranging from Rs.5,00,000 to 25,00,000
• Penalty to every defaulting officer – Fine ranging from Rs.5,00,000 to 25,00,000 or with imprisonment upto 6 months.
• Penalty to the director who is the recipient of this loan – Fine ranging from Rs.5,00,000 to 25,00,000 or with imprisonment upto 6 months.

Other Exemptions

Other than the general exemptions mentioned in the Non Applicability of restrictions section, certain specific exemptions are also mentioned as follows.

• Government companies

Section 185 shall not apply to Government Companies in case those companies obtain approval of the Ministry or Department of Central Government or State Government which is in the administrative control of the company before giving any loan or guarantee or security.

• Private Companies

Section 185 shall not apply to a private company

• In whose share capital no other body corporate has invested any money.
• If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or fifty crore rupees whichever is lower
• Such company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

Similar to a government company, this exemption is not applicable to a private company if it has committed default in filing its financial statements or Annual Return.

• Nidhi Companies

Section 185 shall not apply to a Nidhi company if the loan is given to a director or his relative in their capacity as a member and such transaction is disclosed in the annual accounts by a note. However, the Nidhi company shall ensure that the interests of its shareholders are protected while giving loans or guarantee or security.

Loan from Directors and their relatives

A private company can accept loans from its directors / the relative of a director. However the director or relative of director shall furnish a declaration before the company that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s Report.

In case of a public company, it can accept loans from its directors but not the relatives of the directors subject to the following conditions.

• The director shall furnish a similar declaration as in case of a private company.
• Special resolution is required to be passed in the general meeting if the proposed borrowings together with existing borrowings exceed the sum of paid up capital and free reserves.

Loan from shareholders

Public companies are restricted to accept loans or deposits from its members if the sum of proposed borrowings and existing borrowings exceed 35% of the aggregate of paid up share capital, free reserves and securities premium of the company.

However, the private companies are exempted from this restriction if

• A private limited company is a startup for 10 years from the date of its incorporation.
• A private limited company which fulfills all of the following conditions
  • Not an associate or subsidiary of any other company
  • The borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or fifty crore rupees, whichever is less
  • Such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under Section 73

Annual Compliance for Loans or deposits accepted

All the companies are required to file form DPT-3 giving details of loans and deposits accepted from directors/ shareholders or other third parties after the end of every financial year.

Disclaimer: The points and provisions discussed here are only for information purposes and are not supposed to be relied upon as a professional advice. The Companies Act and Rules undergo frequent changes and the information contained in this section may become irrelevant at a later point of time.

Frequently asked questions

• Can a private limited company give loans to its directors?

Yes, a private limited company can extend loans or guarantee or security to its directors and the relatives subject to the following conditions.

1. Its share capital is not held by any body corporate.
2. Its borrowing from banks and financial institutions should not exceed the lower of twice the share capital or Rs.50 crore as on the date of giving loan.
3. It has not defaulted in repayment of such borrowings subsisting at the time of giving loans.

• Can a private limited company accept loan from its director?

Yes, a private limited company can accept loans from its director provided the director furnishes a declaration that the amount is not given out of borrowed funds and the company shall disclose all the details in the board report.

• Can a private limited company accept loans from its shareholder?

A private limited company can accept loans from its members or shareholders subject to the maximum cumulative limit of 35% of its share capital, free reserves and securities premium.

• Can a private limited company grant loan to its shareholders?

The Companies Act is silent upon whether a company can grant loan to its shareholders. However from a personal point of view it can be interpreted that the conditions applicable to advancing loans to the directors holds good in case of loan to shareholders as well.

• Can a public company accept loans from the relative of a director?

No. A public company cannot accept loans from the relative of a director. However, it can accept loans from a director if it satisfies the conditions mentioned.

• Can a company give loans to another company?

A company can give loans to another company within the ceiling limit of 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account whichever is more. However, these limits can be exceeded if it is pre-approved by a special resolution. The activities of banking companies and other financial institutions are not included here.