Share Capital and Internal earnings are the main source of funds for most of the companies. Loans becomes major source of funding for some of the companies apart from their Share Capital. Companies borrows from various sources like bank and various other financial institution.
Giving and acceptance of loans and investments are common in case of Group Companies. Let us analyze the various provisions related to giving and acceptance of loans as per Companies Act.

Provisions related to giving and acceptance of loans by Companies

Note:The above section is not applicable to private companies It is not applicable for temporary loans taken in the ordinary course of business..

Section 185 – Loan to directors and his related person

    Company is restricted to lend loans to the following person

  • • Director of the company
  • • Director of the holding company
  • • Partner of the director, or
  • • Relative of the director

    However, Companies Act has given some relaxation with respect to lending loan to specified person if it satisfies with below condition

  • • Special Resolution has to be passed by the company in the general meeting
  • • The loans are utilized by the borrowing company for its principal business activities.

    Specified person to whom company can lend loan if it satisfies above conditions are:

  • • Any private company in which the director of lending company is a director or member.
  • • Anybody corporate having more than 25% of the total voting power in the lending company
  • • Anybody corporate which controls the Board of Directors of the lending company

    Provisions of this section will not be applicable for lending loans to following persons

  • • Giving loan to managing director or Whole-Time director as part of the company’s employee benefit policy which is applicable to all employees or in accordance with any scheme approved by the members in general meeting by way of special resolution
  • • Banking company and financial Institution
  • • Loan, security or guarantee by holding company to its wholly owned subsidiary

Section 186 – Loans and investment by the company

Section 186 of the Companies Act,2013 speaks about the Inter-Corporate Loan, maximum limit and the compliance related to the Inter-Corporate loan

Checklist for the lending company under the section 186 for Lending Company

Special Resolution: Special resolution is required to be passed if the Total loan to be made altogether with the loan already made exceeds the above limit

Board Resolution: Board resolution is required to be passed for every loan or investment made in a company at the meeting where all the directors are present.

Disclosure in Financials: Company has to disclose the full particulars of the loan made including the purpose for which the loan is utilized by the recipient.

Interest Rate: Interest Rate for the loan provided shall not be less the prevailing yield rate of government bonds.

Disclaimer:“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

Vinay Kumar N

Date: 14/02/2020