Loan to Directors under Companies Act, 2013
1. Section 185(1) Prohibition
No company shall give, advance any loan, including any book debts to, or provide any security or give any guarantee in connection with any loan taken by-
a. any director of company, or of a company which is its holding Company or any partner or relative of any such director, or
b. If such director or relative is part
2. Persons to whom directors are interested Section 185(2)
A Company may give any loan including the loan represented by book debts, or provide any security or give any guarantee in connection with any loan taken by any person in whom the directors of the Company is interested but subjects to some conditions;
Any persons to whom directors are interested-
a. Pvt. Company of which any director is a director or member; or
b. Body corporate at a GM of which min 20% of total voting power may be exercised or controlled by any such director, or by 2 or more such directors, together, or
c. Body corporate, the BOD, MD, or manger accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company-
3. Conditions to be fulfilled (Section 185(2))
a. Special Resolution- In General meeting a SR shall be passed by the Company.
b. Explanatory statements
i. An explanatory statement shall disclosed the full particulars of the loan advanced, or security provided or guarantee given and
ii. reason and purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security and any other relevant fact.
c. Only for principal business activities- The loan is utilized by the borrowing company for the purpose of principal business activities.
4. Non-Applicability of Section 185(1), (2)
a. Loan given or giving to MD or WTD-
I. as a part of the condition of services extended by the company to all its employee, or
II. in accordance with any scheme approved by the members by Special Resolution;
b. A company which in the normal course of business provides the same for the due repayment of any loan and in respect of such loans an interest is charged 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; or
c. Any loan made by a holding company to its WOS, or any securities provided or guarantee given by holding company in respect of any loan made by its WOS.
d. Any security provided or guarantee given by holding company for any loan made by FI or Bank to its Subsidiary provided that the amount shall be used by the subsidiary company for its principal business activities.
5. Provisions of Contravention Section 185(4)
In case of Company-
Minimum fine- 5,00,000 Rupees
Maximum fine- 25,00,000 Rupees
In case of Officer in default
Imprisonment not less than 6 Months
Fine-
Minimum- 5,00,000 Rupees
Maximum- 25,00,000 Rupees
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