CS S. Dhanapal
Loan to Directors and Other Entities under the New Regime
Restriction on granting of loan to its directors by a company and other entities in which directors are interested has been one of the most touching issues in the Companies Act, 2013, since 12th September 2013, when Ministry of Corporate Affairs notified 98 Sections of the Companies Act, 2013 to become effective and applicable from that date.
Section 185 of the Companies Act, 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. This section is applicable both to private and public companies. This section in general prohibits a company to grant loans or advances or provide guarantees and securities, in any manner, to its directors or other entities in which directors are interested subject to few exceptions discussed below.
Section 295 of the Companies Act, 1956 contained similar provisions, but with two important differences. One, the Section was not applicable to Private Companies. This meant that Private Company was not governed by the restrictions imposed by Section 295 and was free to grant loans to its directors. Secondly, even in case of public companies, these transactions could be undertaken with the approval of Central Government. But now the situation has changed completely.
LOANS TO DIRECTORS (SECTION 185)
Transactions which are restricted:
Entities between which the above transactions are prohibited:
A. Company, on one side, and
B. Any one or more of the following on the other side
|Company:||Fine, which shall not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs.|
|Director or other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person:||Imprisonment which may extend to 6 months
Fine which shall not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs,
(Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries, Chennai.)