Borrowing by Private Limited Companies under Companies Act, 2013

Introduction

For most privately held businesses, debt is as important a tool as equity. A private limited company, however, does not operate in a free-for-all environment when it comes to raising money. The Companies Act, 2013 — along with the MCA exemption notifications issued in 2015 and 2017 — creates a carefully layered framework that governs how a private company can borrow, from whom, how much, and with what approvals.

This article is a comprehensive practitioner’s guide covering every dimension of that framework — from the basic board power to borrow, to the nuances of the Section 180 exemption for private companies, to the rules around director loans, member deposits, inter-corporate borrowings, and ROC filings. Each concept is illustrated with a practical example so that the reader can see how the law plays out in real transactions.

One preliminary point worth emphasising: the borrowing framework for private companies is meaningfully different from that applicable to public companies. Several provisions that apply strictly to public companies — particularly Section 180 — are largely inapplicable to most private companies due to MCA exemptions. Understanding exactly where those exemptions begin and end is the core of good compliance in this area.

The Basic Power to Borrow — Section 179

The starting point for any borrowing transaction is Section 179 of the Companies Act, 2013. This section places the power to borrow money squarely with the Board of Directors. For routine borrowings — whether from a bank, an NBFC, a director, or another company — the Board can authorise the transaction through a simple Board Resolution. No shareholders need to be consulted, no general meeting is required.

The Board Resolution for a borrowing transaction typically needs to cover three things: first, it must specify the amount being borrowed and identify the lender; second, it must deal with security — whether the company is creating a hypothecation over its assets, a mortgage over its property, or offering any other form of security; and third, it must name the authorised signatories who will execute the loan agreement, security documents, and any other related papers on behalf of the company.

Practical Example

Example: ABC Pvt. Ltd. wants to take a working capital term loan of ₹3 crore from HDFC Bank, secured by hypothecation of its stock and book debts. The board meets, passes a resolution approving the borrowing of up to ₹3 crore from HDFC Bank, authorises the creation of a pari passu charge over current assets, and designates the Managing Director and Chief Financial Officer as authorised signatories to execute all related documents. The company can then proceed to finalise the loan with the bank. No shareholder meeting is needed at this stage.

The Section 180 Question — And Why It Rarely Applies to Private Companies

Section 180(1)(c) of the Act creates a special rule: if the total amount that a company intends to borrow — when added to the money already borrowed and outstanding — exceeds the aggregate of its paid-up share capital, free reserves, and securities premium, a Special Resolution from shareholders is required before borrowing can proceed.

For public companies, this provision has significant practical impact. For most private companies, however, it is effectively set aside by the MCA exemption notification GSR 464(E) dated 5 June 2015, as amended on 13 June 2017.

The MCA Exemption: When Section 180 Does Not Apply

Under the 2015 notification, Section 180 does not apply to a private company if both of the following conditions are satisfied simultaneously:

• Borrowing Threshold: The total borrowings of the company — proposed plus existing — do not exceed the lower of (a) twice the paid-up share capital, or (b) ₹50 crore.
• No Default: The company is not in default in the repayment of any existing borrowings or interest thereon at the time of the proposed borrowing.

Both conditions must be met together. If either fails, the exemption is lost and Section 180(1)(c) kicks back in — meaning a Special Resolution becomes necessary before the borrowing can go ahead.

Practical Example — Working Through the Numbers

Example: STG Pvt. Ltd. has a paid-up share capital of ₹10 crore. Its existing borrowings outstanding are ₹15 crore. It now wants to borrow an additional ₹3 crore from a scheduled bank. The total proposed borrowings after the new loan will be ₹18 crore. The threshold under the MCA exemption is the lower of 2× paid-up capital (₹20 crore) and ₹50 crore — so the applicable cap is ₹20 crore. Since ₹18 crore is below ₹20 crore and the company has no default on existing repayments, Section 180 does not apply. A simple Board Resolution is sufficient.

Contrast: If STG instead wanted to borrow ₹8 crore more, the total would reach ₹23 crore, exceeding the ₹20 crore cap. In that scenario, Section 180(1)(c) would apply and the company would need to convene a general meeting and pass a Special Resolution before proceeding with the borrowing.

Borrowing from Directors — Section 185 and the Private Company Exemption

Section 185 of the Act is one of the more frequently encountered provisions in practice — and also one of the most misunderstood. It prohibits a company from, directly or indirectly, granting any loan, giving any guarantee, or providing any security in connection with a loan to a director of the company or of its holding company, or to any person in whom a director is interested.

For public companies, this prohibition is stringent and carries few exceptions. For private companies, the same 2015 MCA exemption notification that softens Section 180 also substantially relaxes Section 185 — but only when three specific conditions are all met at the same time.

The Three-Condition MCA Exemption for Section 185

1. No body corporate holds shares: No other body corporate — company, LLP, or similar entity — holds shares in the borrowing company. In other words, all the shareholders must be individuals, not corporate entities.

2. Borrowing threshold: The company’s total borrowings (from all sources) do not exceed the lower of twice the paid-up share capital or ₹50 crore.

3. No default: The company has not defaulted in repayment of any existing borrowings or payment of interest due.

If three all conditions are satisfied, the private company can freely lend money to its directors or to entities in which its directors have an interest. This is a significant practical relief because a large number of owner-managed private companies routinely transfer funds between the company and the promoter’s other businesses.

Practical Example — Director Loan Permitted

Example: ABC Trading Pvt. Ltd. is a family-owned company with two individual shareholders — Mr. X and his wife Mrs. Y. Mr. X is also a director. Total borrowings of the company are ₹25 crore against a paid-up capital of ₹20 crore (threshold: lower of ₹40 crore or ₹50 crore = ₹40 crore). No borrowing defaults exist. The company wants to extend a short-term loan of ₹50 lakh to a partnership firm in which Mr. X holds a stake. Since all three conditions of the exemption are met — no corporate shareholder, borrowings within limit, no default — Section 185 does not apply and the loan is permissible with a Board Resolution.

Practical Example — When the Exemption Fails

Example: Now assume ABC Trading Pvt. Ltd. has a third shareholder — a venture capital firm that holds 15% of the equity. The moment a body corporate holds shares, the first condition of the exemption is violated. Section 185 now applies in full. The company cannot lend to its director Mr. X or to entities in which he is interested, regardless of the loan amount or the company’s financial health.

Deposit Rules — Borrowing from Insiders Under the Companies (Acceptance of Deposits) Rules, 2014

The law relating to “deposits” under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 (“Deposit Rules”) plays a crucial role in determining whether money raised by a company attracts additional regulatory compliance. While businesses routinely raise funds from promoters, directors, shareholders, banks, and related parties, not every receipt of money is treated as a “deposit” under law. The distinction is important because once a transaction falls within the definition of a deposit, the company becomes subject to extensive compliance requirements, restrictions, and filing obligations.

At a practical level, the Deposit Rules broadly distinguish between:

• commercial borrowings and institutional finance, which are generally excluded from deposits; and
• monies received from individuals, which require closer examination under the statutory framework.

Institutional and Inter-Corporate Borrowings

Certain categories of borrowings are specifically excluded from the definition of deposits under Rule 2(1)(c) of the Deposit Rules. Accordingly, amounts received from:

• banks,
• public financial institutions,
• scheduled commercial banks,
• NBFCs,
• other companies (inter-corporate loans),

are not treated as deposits.

This exclusion is commercially significant because companies frequently rely on group companies, banking channels, and institutional lenders for operational and expansion funding. Such borrowings do not trigger the deposit acceptance provisions under Sections 73 to 76 of the Companies Act, 2013.

For example, if a private company receives a loan from its holding company, sister concern, or an NBFC, the transaction is treated as an exempt borrowing and not as a deposit.

Loans from Directors

One of the most widely used exemptions under the Deposit Rules relates to monies received from directors.

Under Rule 2(1)(c)(viii), any amount received from a director of the company is excluded from the definition of deposits, provided the director furnishes a written declaration at the time of giving the money confirming that:

• the amount is not being given out of borrowed funds; and
• the funds are being advanced from the director’s own sources.

There is no monetary ceiling prescribed under the Deposit Rules for such director funding. Consequently, directors may infuse substantial funds into the company without the transaction being treated as a deposit, so long as the prescribed declaration is properly obtained and maintained in the company’s records.

Illustration

Suppose Mr. A , a director of a private company, advances ₹2 crore from his personal savings to support the company’s working capital requirements. If he provides the prescribed declaration confirming that the amount has not been borrowed from any third party, the company may accept the funds without attracting the deposit provisions.

This exemption has substantial practical importance for promoter-driven and closely held companies where temporary funding support is frequently arranged through directors.

From Members (Shareholders)

A private company may accept deposits from its members up to an amount not exceeding 100% of its paid-up share capital, free reserves, and securities premium account. For many small and mid-sized private companies, this provides a meaningful source of short-term funding from the promoter group without the complexity of formal bank credit. The company must comply with DPT Rules for such member deposits, including maintaining a deposit register and issuing deposit receipts.

From Relatives of Directors

Under the 2015 exemption notification, private companies may also accept loans from relatives of directors — a category that was previously more restricted. This is a practically useful exemption for promoter-family-driven businesses where funds are routinely pooled across family members. The relative must give an appropriate written declaration confirming the source of funds, similar in spirit to the director’s declaration.

Bank and NBFC Borrowings — No Statutory Cap

Among all funding sources, borrowings from banks and NBFCs enjoy the greatest flexibility under the Companies Act framework.

Importantly, the Companies Act, 2013 does not prescribe any statutory ceiling on the amount a private company may borrow from banks or NBFCs. The commonly referenced thresholds of:

• ₹50 crore, or
• twice the paid-up share capital,

do not operate as borrowing caps. These thresholds are relevant only for determining eligibility under certain private company exemption notifications.

In practice, compliance relating to institutional borrowings primarily involves corporate approvals and charge registration formalities.

Compliance for bank and NBFC borrowings under the Companies Act focuses on four key steps:

1. Board Resolution: A specific Board Resolution must be passed before or at the time of borrowing, authorising the loan, designating signatories, and approving the security to be created.

2. Security Documents: The company executes the loan agreement, deed of hypothecation, mortgage deed, or whatever security arrangement is agreed with the lender.

3. ROC Charge Filing — Form CHG-1: Where any security is created, the company must file Form CHG-1 with the Registrar of Companies within 30 days of the creation of the charge. This is a critical compliance step.

4. Personal Guarantees: In most bank and NBFC credit facilities, the lender requires the promoter-directors to furnish personal guarantees. This is a lender requirement, not a Companies Act requirement, but it is ubiquitous in practice.

ROC Filings — Forms CHG-1 and CHG-4

Section 77 of the Companies Act, 2013 makes it mandatory for every company to register a charge created on its assets with the ROC. The charge registration creates a public record that protects future lenders and creditors from being misled about encumbrances on company assets.

Form CHG-1 — Creation of Charge

Form CHG-1 must be filed within 30 days of the creation of a charge. A “charge” includes any security created over company assets in favour of a lender — this covers hypothecation of movable assets such as stock, book debts, plant and machinery; mortgage of immovable property; assignment of receivables or insurance policies; and in many cases, pledge arrangements. The 30-day window is strict, and late filings attract escalating additional fees.

A charge that is not registered within the prescribed period is unenforceable against a liquidator or any other creditor of the company, even if perfectly valid between the company and the lender. This makes CHG-1 filing not just a regulatory formality but a commercially critical step.

Form CHG-4 — Satisfaction of Charge

When the secured loan is fully repaid and the lender issues a no-objection or release letter, the company must file Form CHG-4 to record the satisfaction of the charge with the ROC. This updates the public record and ensures that the company’s MCA profile does not continue to show an encumbrance that no longer exists. Delays in filing CHG-4 can create complications in future financings, as due diligence searches may throw up an apparently subsisting charge.

Practical Borrowing Compliance Checklist

Before any borrowing transaction is finalised, the Company Secretary or compliance officer should run through the following decision matrix to determine what approvals and filings are required:

In practice, several recurring errors are seen in how private companies handle their borrowing compliance. Being aware of these can save a company from audit qualifications, ROC notices, and penalty proceedings.

Conclusion

The borrowing framework for private companies under the Companies Act, 2013 is intended to balance commercial flexibility with creditor and stakeholder protection. While the law provides substantial relaxations to private companies, those relaxations are conditional and transaction-specific.

In practical corporate advisory work, the most effective compliance approach is not to assume that exemptions apply broadly, but instead to verify eligibility independently for every borrowing transaction. Particular attention should be paid to:

• applicability of private company exemptions,
• Deposit Rule exclusions,
• Board and shareholder approval requirements,
• execution and registration of charges, and
• maintenance of statutory declarations and records.

Most compliance failures in this area do not arise from complex legal interpretation, but from routine procedural oversights — delayed filings, incomplete documentation, or continued reliance on exemptions that no longer apply. For that reason, periodic review of borrowing positions, exemption conditions, and statutory filings should form part of regular corporate governance practice for every private company.