All About Loan to Directors, Section 185 of the Companies Act.

All About Loan to Directors

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 any other person in whom the director is 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.

“Person in whom the director is interested” would mean

any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
any firm in which any such director or relative is a partner;
any private company of which any such director is a director or member;
anybody corporate at a general meeting of which not less than 25% of its voting power may be exercised or controlled by any such director or by two or more directors together; or
anybody corporate the Board of Directors, managing director or manager of which is accustomed to act in accordance with the instructions or directions of the Board of Directors or any director or directors of the lending company.

Non-applicability of Section 185 of the Companies Act, 2013

Giving of loan to Managing Director or Whole-time Director, pursuant to conditions of services extended by the Company to all other employees or, any scheme specially approved by members Special Resolution (SR).
Loan given by the Company in the Ordinary Course of Business but the amount of interest on such loan shall be at least the rate of interest prescribed by RBI.
Loan given to Wholly-owned Subsidiary Company (WOS), or guarantee given to WOS against the loan taken by it.
Guarantee is given by the Holding company against the loan taken by its Subsidiary Company from bank or financial institutions.

Note: Provided the loan made under point 3 and 4 above must be utilized for the furtherance of its principle business activities.

Private company is exempted from the provision of Section 185 of Companies Act, 2013, but subject to fulfillment following conditions:

No body corporate should have invested in the Share Capital of the Company.
The borrowing of such company from bank and financial institutions or any other body corporates is not equal to or more than twice of its paid-up share capital or INR 50 Crore, whichever is less, and
No default has been made in the repayment of such borrowings which are subsisting at the time of making transaction under this section.