The summary of the provision related to Loan to Directors as per section 185 of the Companies Act, 2013 is given below:
A. Compliance required:
| Section | 185(1) | 185(2) |
| Facility | Provide Loan, Give Guarantee or Provide Security | Provide Loan, Give Guarantee or Provide Security |
| Lender | Any Other Company | Any Other Company |
| Borrower | a) Its director
b) Director of its Holding Company c) Relatives of (a) or (b) d) Partners of (a) or (b) e) Firm in which (a), (b), (c) or (d) are partner |
a) Pvt Ltd in which its Director is Director
b) Pvt Ltd in which its Director is Member c) Other Body Corporate in which its one or more director hold 25% or more voting power d) Other Body Corporate which is accustomed to act in accordance with direction of Lending Company’s Board of Director, or any director(s) of Lending Company |
| Allowability | not allowed | allowed subject to condition |
| Conditions | a) Special resolution, with explainatory note giving prescribed details and
b) Loan used by Borrowing Company for its Principal Business Activities |
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| Section | 185(3)(a) | 185(3)(b) |
| Facility | Provide Loan, Give Guarantee or Provide Security | Provide Loan, Give Guarantee or Provide Security |
| Lender | Any Other Company | Company whose ordinary course of business is to give Loan, Guarantee, Security |
| Borrower | a) Managing Director
b) Whole time Director |
a) Its director
b) Director of its Holding Company c) Relatives of (a) or (b) d) Partners of (a) or (b) e) Firm in which (a), (b), (c) or (d) are partner |
| Allowability | allowed subject to condition | allowed subject to condition |
| Conditions | a) as a part of the conditions of service extended by the company to all its employees or b) pursuant to any scheme approved by the members by a special resolution |
a) interest is charged at a rate not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan |
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| Section | 185(3)(c) | 185(3)(d) |
| Facility | Provide Loan, Give Guarantee or Provide Security | Give Guarantee or provide security in respect of loan by bank or FI of subsidiary |
| Lender | Holding Company | Holding Company |
| Borrower | a) Wholly owned subsidiary company | a) Subsidiary Company |
| Allowability | allowed subject to condition | allowed subject to condition |
| Conditions | a) Loan used by Borrowing Company for its Principal Business Activities | a) Loan used by Borrowing Company for its Principal Business Activities |
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| Section | Exemption Notification# | Exemption Notification# |
| Facility | Provide Loan, Give Guarantee or Provide Security | Provide Loan, Give Guarantee or Provide Security |
| Lender | Government Company | Private Limited Company |
| Borrower | a) Its director
b) Director of its Holding Company c) Relatives of (a) or (b) d) Partners of (a) or (b) e) Firm in which (a), (b), (c) or (d) are partner |
a) Its director
b) Director of its Holding Company c) Relatives of (a) or (b) d) Partners of (a) or (b) e) Firm in which (a), (b), (c) or (d) are partner |
| Allowability | allowed subject to condition | allowed subject to condition |
| Conditions | a) prior approval by ministry or department of Central or State Government and
b) Not made default in filing annual returns |
a) there is no body corporate as shareholder in lending company
b) Loan from bank or Financial Institutions is less than twice of Paid-up capital c) Loan from bank or Financial Institutions is less than Rs. 50 crores and d) Not made default in filing annual returns |
#Notification No. G.S.R 463(E) dt. 5 June 2015 as amended by G.S.R. 582(E) dated 13th June 2017
B. The penalty in case of contravention:
| Section | 185(4)(i) | 185(4)(ii) | 185(4)(iii) |
| Persons punishable | Lending Company | Officer who is in default | Director or borrower |
| Monetary | Rs. 5lakhs -Rs. 25 Lakhs | Rs. 5lakhs -Rs. 25 Lakhs | Rs. 5lakhs -Rs. 25 Lakhs |
| Imprisionment | – | may extend to 6 months | may extend to 6 months |
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