Understanding Section 185 of Companies Act, 2013 – Loan to directors

Introduction: The Companies Act of 2013 outlines strict provisions and restrictions on loans provided by companies to their directors and closely related parties. In this article, we will dissect the intricate details of Section 185 of the Companies Act, shedding light on how these rules apply to various types of companies – public, government, private, and Nidhi companies.

Public Companies

Public Company cannot advance Loan, give Guarantee or provide Security in respect of loan to;
- Directors of Company
- Directors of Holding Company
- Partner of Such Directors
- Relative of Such Directors
- Firm in which such directors or relatives are(is) partner
Public Company can provide Loan, Guarantee or Security
Public company may advance Loan, give Guarantee or provide Security in respect of loan to any person in which such director is interested subject to;
- Special Resolution passed at General Meeting for such
- Loans are utilized for principal business activity by borrowing company
Interested Director Means:
- Private Company in which such director is member/director
- Body Corporate in which director holds more than equal to 25% voting power
- Body Corporate which is accustomed to act as per direction of such Director
Public Company can give loans to Managing Director or Whole Time director;
- As part of condition of service extended to all employees
- Pursuant to scheme approved by Special Resolution
- Interest rate of such loan shall not be less than rate prevailing on Govt. Securities of tenor closer to (1 year, 3 years, 5 years or 10 years)
Public Company can give loan to its wholly owned subsidiary without any restriction subject to utilization of loan fund in Principal Business Activity
Public Banks and Public Finance Institution can give such loans to subsidiary without any restriction subject to utilization of loan fund in Principal Business Activity

Government Company

Such Provisions are not applicable to Government Company
Provided that such Govt. Company shall obtain a approval of concerned Ministry
And such Government Company do not default in Filing Annual Returns and Financial Statement

Private Company

Provisions of this section is not applicable to Private Companies
Provided that no other body corporate have invested in share capital of such private company
Provided that, Borrowings from Banks or Public Financial Institutions or Body corporate is lower of
- 200% of Paid Up Share Capital
- ₹50 Crores
Provided that, such private company have not defaulted repayment of such loans
And such Private Company do not default in Filing Annual Returns and Financial Statements

Nidhi Company

Provisions of this section is not applicable to Private Companies
Provided that loan is given to director or relative in capacity as members
And such Nidhi company has disclosed such loans in Annual Accounts.

Conclusion: Section 185 of the Companies Act, 2013, plays a pivotal role in regulating loans to directors and close related parties, with different provisions for public, government, private, and Nidhi companies. Understanding these regulations is crucial for companies to ensure compliance with the law while managing their financial affairs. This article provides an in-depth analysis of the various provisions and exceptions, serving as a valuable resource for businesses and stakeholders in navigating the legal landscape of corporate finance.

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Name: Kush Shah

Qualification: Student - CA/CS/CMA

Company: TaxChela

Location: Surat, Gujarat, India

Member Since: 11 May 2021 | Total Posts: 8

I am a CA Finalist and a Commerce Graduate. Apart from academics, I love playing keyboard, I am a state level medalist in Swimming Sport, I am Managing Partner at SCGF and I am Founder of Taxchela. My interest in sports has also helped me in understanding team dynamics. View Full Profile