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Clarification with regard to Section 185 and 186 of Companies Act, 2013

The Ministry of Corporate Affairs (MCA) has issued General Circular No. 04/2015, Dated: 10/03/2015 on the clarification of Loans and Advances to employees under Section 185 and 186 of the Companies Act, 2013 (“CA, 2013”). This alert has covered all the significant updates on the loans and investments made by the Indian Company which will upgrade the knowledge of each individual.

CS Priyanka Gera

Executive Summary

The Ministry of Corporate Affairs (MCA) has issued General Circular No. 04/2015, Dated: 10/03/2015 on the clarification of Loans and Advances to employees under Section 185 and 186 of the Companies Act, 2013 (“CA, 2013”). This alert has covered all the significant updates on the loans and investments made by the Indian Company which will upgrade the knowledge of each individual.

Background

A. Section 185 of the CA, 2013 which contains provisions dealing with granting of loans & advances and providing of guarantees and securities by a company to its directors and other entities in which directors are interested got notified with effect from 12.09.2013.

Transactions which are prohibited, directly or indirectly:

  • Advancing of any loan, including any loan represented by a book debt, and
  • Giving of any guarantee or providing of any security in connection with any loan.

Exceptions to above prohibition:

  • Giving of any loan to a managing or whole-time director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution
  • A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

B. In 2014, MCA vide General Circular No 03/2014, Dated: 14/2/2014 , has clarified on the applicability of Section 185 of the Companies Act, 2013 vis-à-vis Section 372A of the Companies Act, 1956 that any guarantee given or security Provided by q holding company in respect of loons mode by o bonk or financial institution to its subsidiary company, exemption as provided in clause (d) of sub­section (8) of section 372A of the Companies Act, 1956 shall be applicable till section 186 of the Companies Act, 2013 is notified. This clarification will, however, be applicable to cases where loans so obtained are exclusively utilized by the subsidiary for its principal business activities.

C. Subsequently, in June 2014, MCA has clarified vide  General Circular No. 15/2014 dated June 09, 2014 on the maintenance of register of  loans/guarantee/security/making acquisition in new format as prescribed in Form MBP2 under Section 186 (9) of the CA, 2013.

D. Section 186 of the CA, 2013, has restricted the Indian Companies to 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 sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.

E. Recently, MCA has clarified on the applicability of Section 185 and 186 of the CA, 2013 vide General Circular No. 04/2015, Dated: 10/03/2015 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,

Key Highlights

Section 186 has been mentioned that no Company shall directly or indirectly give loan to ANY PERSONS exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more. Through the recent circular by MCA, it has been clarified that in the definition of “any person”, the Managing Director (MD) or Whole-time Director (WTD) shall not be included. Therefore, the threshold mentioned under the said Section will not be considered while giving loans to M D/WTD.

Conclusion

The MCA has clarified that the provision of Loan to directors or loan and investments by the Indian Companies shall not be applicable to the MD or WTD of the Company.

Rest of the provisions of Section 185 and 186 of the CA, 2013 read with the Companies (Meetings of Board and its Powers) Rules, 2014 shall be applicable in the same manner as may be prescribed.

(Author can be reached at pri.gera05@gmail.com)

Read Other Articles from CS Priyanka Gera

Categories: Company Law

View Comments (20)

  • I wants clarification regarding the applicability of section 185/186 of Company Act, 2013. I am in DSA. We have financed Company A against security and corporate guarantee of Company B. Directors of Company A are also directors of Company B.

    So please clarify whether we can accept security and corporate guarantee of company B.

    Please also clarify if same corporate guarantee and security is existing before Company Act 2013, then whether we may continue the same.

  • Hi I want one clarification that if a MD is provided with a accommodation which is in his name and the deposit is given by company which is continued since 2008 and renewed year after year is falling under sec 185 or not as it is not a new deposit

  • A company is granted secured loan from bank The Security is a Residential Property of a different Company where the existing directors are also directors in that company in 100% stake. Does this violates sec 185/186 of Company Act 2013?

  • While calculating the available limit under section 186 (2) of companies Act 2013, whether loan given to Wholly owned subsidiaries is to be considered or not??
    Whether Section 186 applies of wholly owned subsidiaries also or nok

  • while reckoning the limit u/s 186, whether the whole amount of guarantee given need to be considered or only to the extent of o/s loan as against such guarantee given needs to be considered??

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