Loan to directors – Sec 185

Earlier Provision :No Company can directly or indirectly advance any loan (including loan represented as a book debt) to or give guarantee or provide any security in connection to any loan taken by the following person:

  1. Director of a company or its holding company
  2. Partner or relative of such director
  3. Any firm in which such director or relative of director is a partner

New Provisions:

A company is not prohibited from doing the below:
  1. A special resolution is passed by the company in general meeting. The explanatory statement to the notice for the relevant general meeting shall disclose the following:
    • full particulars of the loans given, or guarantee given or security provided
    • the purpose for which the loan or guarantee or security is proposed to be utilised.
  2. the loans are utilised by the borrowing company for its principal business activities

Company is prohibited from doing the below:

Exceptions: Section 185 shall not apply to:

  1. The giving of any loan to a managing or whole-time director—
    1. as a part of the conditions of service extended by the company to all its employees; or
    2. pursuant to any scheme approved by the members by a special resolution; or
    1. A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan.
    2. in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.
  2. Any loan made by a holding company to its wholly owned subsidiary company
  3. Any guarantee given, or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company.

Provided that the loans made are utilised by the subsidiary company for its principal business activities.

Penalty in case of contravention of this section

Declaration :

“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”

Prepared By

Chaitra V

Reviewed By

Phalgun Iyer

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Contact :

Ankit C Shetty