Disclosure of Interest by Director under Section 184, Loan to Director under Section 185 and Loan and Investment under Section 186 of the Companies Act, 2013.

This Article aims to bring a clear vision on the Disclosure of Interest by Director under Section 184, Loan to Director under Section 185 and Loan and Investment under Section 186 of the Companies Act, 2013. The intent behind bringing the amendment in Companies Act, 2013 is to clear the ambiguities in the current provisions in order to strengthen the corporate governance and to help improve ease of doing business in the country.

SECTION 184: – DISCLOSURE OF INTEREST BY DIRECTOR UNDER COMPANIES ACT, 2013

Analysis of Section 184, 185 and 186 of Companies Act, 2013

PROVISIONS OF SECTION 184 (1):-

Every director shall at the first Board Meeting of the Board in which he participates as a director and thereafter at the first  Meeting of the Board in every Financial Year or whenever there is any change in the disclosure already made, then at the first Board Meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of the individuals which shall include the shareholding, in such manner as may be prescribed.

PROVISIONS OF SECTION 184 (2):-

Every director of the company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into –

(a) With a body corporate in which such director or such director in association with any other director, holds more than two percent shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body Corporate; or

(b) With a firm or other entity in which, such director is a partner, owner or member, as the case may be,

Shall disclose the nature of his concern or interest at the meeting of the board in which the contract or arrangement is discussed and shall not participate in such meeting: –

Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interested or at the first board meeting of the board held after he becomes so concerned or interest.

PROVISIONS OF SECTION 184 (3):-

A contract or arrangement entered into by the company without disclosure under sub section (2) or with participation by a director who is concerned or interested, in any way, directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.

PROVISIONS OF SECTION 184 (4):-

If a director of the Company contravenes the provision of the sub section (1) or sub section (2), such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Fifty thousand rupees (50,000) but which may extend to one lakh rupees, or with both.

COMPANIES (MEETING OF BOARD AND ITS POWERS) RULES, 2014:-

Disclosure by a director of his interest: Every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a notice in writing in Form MBP-1.

It shall be the duty of the director giving notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice. All notices shall be kept at the registered office and such notices shall be preserved for a period of eight years from the end of the financial year to which it relates and shall be kept in the custody of the company secretary of the company or any other person authorized by the Board for the purpose. (rule 9)

PENAL PROVISIONS: – 

If a director fails to disclose his interest in contract at a Board meeting or participates in the meeting of the Board where he has disclosed his interest shall be punishable with imprisonment or with fine or with both (sub section 4).

SECTION 185: – LOAN TO DIRECTOR UNDER COMPANIES ACT, 2013

PROVISIONS OF SECTION 185(1) 

No Company shall, directly or indirectly, advance any loan (including book debt) or give any guarantee or provide any security in connection with any loan taken by: –

Prohibits providing of loan or guarantee or security to the below mentioned individuals and firms-

  • Any Director of the Company or
  • Any Relative of such Director or
  • Any Partner of such Director or
  • Any Director of its Holding Company or
  • Any Relative of the Director of its Holding Company or
  • Any Partner of the Director of its Holding Company or
  • Any Firm in which any of the above-mentioned Director is a Partner or
  • Any Firm in which Relative of the above-mentioned Director is a Partner

PROVISIONS OF SECTION 185(2)

A Company can advance any loan (including book debt) or give any guarantee or provide any security in connection with any loan taken by any person in whom any of Director of the Company is interested subject to the conditions that: –

“Any person in whom any of Director of the Company is interested” means following list of persons: –

  • Any private company of which any such director is a director or member;
  • Anybody corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
  • Anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

And subject to conditions are:

  • Pass Special Resolution in General Meeting and
  • Loan must be utilised by the borrowing Company for its Principal business activities.

PROVISIONS OF SECTION 185(3):-

It states about exemptions from complying of sub section 1 and 2 of section 185 for following below mentioned individuals and entities subject to conditions:

  • Giving of any loan to a managing or whole-time director; or
  • Conditions: Service extended by the company to all its employees or pursuant to any scheme approved by way of special resolution.
  • Company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan; or
  • Conditions: Interest charged on such loan at a rate not less than the rate of prevailing yield of 1 year, 3 years, 5 years or 10 years Government security closest to the tenor of the loan.
  • Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
  • Conditions: Loan must be utilised by the subsidiary Company for its principal business activities.
  • 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
  • Conditions: Loan must be utilised by the subsidiary Company for its principal business activities.

PROVISIONS OF SECTION 185(4): PENAL PROVISIONS

It states about the punishment and penal provisions for the contravention of any of the provisions of the section 185:

  • For Company: – Fine: Minimum- INR 5 Lakhs and Maximum- INR 25 Lakhs
  • For Every officer of the Company who is in default: Imprisonment for a term which may extend to six months or Fine:  Minimum- INR 5 Lakh and Maximum- INR 25 Lakhs
  • For Borrower (Person who has taken loan): Imprisonment for a term which may extend to six months or Fine:  Minimum- INR 5 Lakhs and Maximum- INR 25 Lakhs or Both (Fine & Imprisonment).

SECTION 186: – LOAN AND INVESTMENT BY COMPANY  UNDER COMPANIES ACT, 2013

PROVISIONS OF SECTION 186: –

States that a Company shall make investment through not more than two layers of investment companies: –

‘Layer’ in relation to a holding Company means its subsidiary or subsidiaries [explanation (d) of Section 2(87) of the Act];

‘Investment Company’ means a Company whose principal business is

  • Acquisition or purchase of shares;
  • Acquisition or purchase of debentures;
  • Acquisition or purchase of other securities;

PROVISIONS OF SECTION 186 (1) SHALL NOT AFFECT IN THE FOLLOWING CASES: –

  • If a Company acquires any Company which is incorporated outside India and such Company has Investment Subsidiary beyond two layers as per the law of such country.
  • A subsidiary Company from having any investment subsidiary for the purpose of meeting the requirement under any law or under any rule or regulation framed under any law for the time being in force.

Non-Applicability: Section 186 (except Sub Section 1) of the Companies Act, 2013 does not apply to the following:

  • Banking Company, Insurance Company, Housing Finance Company, etc.,
  • Any Company whose main business of acquisition of shares or securities etc.,
  • A Company acquiring Shares on Right Issue basis under section 62(1)(a);
  • Where a loan or guarantee is given or where a security has been provided by a company to its wholly-owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly-owned subsidiary company, the requirement of sub-section (3) of section 186 shall not apply.

LOAN/GUARANTEE/SECURITY/INVESTMENTS UNDER SEC-186(2):-

Section 186(2) of the Act states that no Company shall directly or indirectly:

  • give any loan to any person or other body corporate;
  • give any guarantee or provide security in connection with a loan to any other body corporate or person;
  • and acquire by way of subscription, purchase or otherwise, the securities of any other body corporate;

exceeding 60% of its paid-up share capital plus free reserves plus securities premium account

or

100% of its free reserves plus securities premium account, whichever is more.

Free reserves mean such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend Provided that: –

1. Any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

2. Any change in carrying an amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;

Body Corporate means a Company incorporated outside India but does not include

1. A cooperative society registered under any law relating to cooperative societies;

2. Any other body corporate not being a company as defined in this Act, which the Central Government may, by notification, specify in this behalf.

Individual doesn’t include any individual who is in the employment of the Company.

REQUIREMENTS UNDER SECTION 186 OF COMPANIES ACT, 2013: –

APPROVAL FROM MEMBERS: –

Though the Section 186(2) makes restriction as above, Section 186(3), empowers a Company to give loan, guarantee or provide any security or acquisition beyond the limit but subject to prior approval of members by a special resolution passed at a general meeting.

APPROVAL OF BOARD AND PUBLIC FINANCIAL INSTITUTION: –

Pursuant to provisions of Section 186(5) of the Act, every Company shall take consent of all the directors present at the board meeting before making any investment, giving loans and guarantee and providing security. In case of Company has already taken loan etc., from any Public Financial Institutions, then it is mandatory to take prior approval from such Public Financial Institution.

Provided that prior approval of Public Financial Institution shall not be required where the aggregate loan, investment, guarantee and security proposed is within the limits as specified under section 186(2) and there is no default in repayment of loan or interest thereon to the Public Financials Institution as per the terms and conditions placed thereon.

DISCLOSURE OF PARTICULARS OF LOAN, GUARANTEE GIVEN AND SECURITY PROVIDED: –

Pursuant to provisions of Section 186(4) of the Act, the Company must disclose in the Financial Statement the full particulars of the loan given, investment made, guarantee given and security provided and utilization of the same.

The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security. Such disclosure has to be in the Board’s Report also.

COMPANIES REGISTERED UNDER THE SECURITIES EXCHANGE BOARD OF INDIA (SEBI): –

Section 186(6) of the Act provides that those Companies which are registered under Section 12 of SEBI Act, 1992 and other prescribed Companies can take inter-corporate loans or deposits exceeding the prescribed limit. The intention of government is clear if the Company is registered under SEBI, this section is not applicable for the part of limit but, simultaneously, prescribed a condition that:

Provided that such companies shall furnish details of loans or deposits in their Financial Statements.

REGISTER TO BE MAINTAINED: –

Section 186(10) of the Act mandates every Company to maintain a register which shall contain particulars of loan or guarantee given or security provided or investment made. This register shall be opened for inspection and copies may be furnished to members who demand the same on payment of prescribed fee.

INTEREST ON LOAN: –

No company can give loans at a rate of interest lower than the prevailing yield of one year, three years, five years or ten-years Government Security closest to the tenor of the loan.

PENALTY IMPOSED FOR CONTRAVENTION OF SECTION 186: PENAL PROVISIONS

On Company: Every Company which contravenes the provisions of this Section shall be liable to a penalty which shall not be less than Rs. 25000/- but which may extend to Rs. 5 Lakh.

On Officers: Every officer of the Company who is in default shall be punishable with imprisonment for a term which may extend to two years and fine which shall not be less than INR. 25000 but which may extend to INR. 1 Lakh.

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One Comment

  1. Padmanabh says:

    Section 185 of the Companies Act, 2013 is about Loan to Directors. Please inform (1) the provisions of the Companies Act, 2013 about Loans from Director to the Company and also (2) about the Rules to be complied in relation to Loan from a Director to the Company.

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