Section 185 provides for loans to Directors etc. (Corresponds to Section 295 and 296 of the 1956 Act) and Section 186 provides for loans and investment by company (Corresponds to Section 372A of the 1956 Act).
These Sections did not provide for cases where any loans and/or advances (generally interest free) granted by companies to its employees (other than Directors) in the ordinary course of business, which is usual and most common across all industries. Now, issue of concern is whether provisions of Section 186 of the Companies Act, 2013 apply to loans and/or advances granted by the company to its employees.
In this regard, number of references were made to the Ministry of Corporate Affairs (‘MCA’) seeking clarification on the applicability of provisions of Section 186 of the Companies Act, 2013 relating to grant of loans and/or advances by companies to their employees.
The issue was under consideration and MCA has issued General Circular No. 04/2015 dated 10 March 2015 clarifying that loans and/or advances made by the companies to their employees, other than the Managing Director or Whole Time Directors (which is governed by Section 185) are not governed by the requirements of Section 186 of the Companies Act, 2013.
This clarification will, however, be applicable if such loans and/or advances to employees and are also in accordance with the remuneration policy, in cases where such policy is to be formulated. Accordingly, companies may consider formulating policies for granting loans and/or advances to employees and also provide for the same in the offer document/ appointment letter.
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General Circular No. 04/2015,
Dated: 10/03/2015
Subject : Clarification with regard to section 185 and 186 of the Companies Act, 2013 — loans and advances to employees – reg.
This Ministry has received a number of references seeking clarification on the applicability of provisions of section 186 of the Companies Act, 2013 relating to grant of loans and advances by Companies to their employees.
2. The issue has been examined and it is hereby clarified that loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013 This clarification will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.
3. This issues with the approval of the Secretary.
No. 1/32/2013-CLV
Yours faithfully,
(KMS Narayanan)
Assistant Director
Hi,
Thanks for the important information.
My question is whether section 186 will be applicable to loan given to employee welfare trust.
Thanks in advance.
Important