In accordance with provisions of sub-section (1) of section 185, Save as otherwise provided in this Act, a Company shall not, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

Key Considerations:

• Effective Date- Section notified by MCA on 12.09.2013. Hence effective from 12.09.2013

• No Company (except private companies satisfying the prescribed criteria and in exempted situations) shall, directly or indirectly advance any loan, give guarantee or provide security in connection with a loan to a Director or to any other person in whom director is interested. (Section 185(1))

• To any other person in whom director is interested means- Company shall not provide loan to the following category of person:

• Director of lending Company, Director of its holding Company, Partner or Relative of any such director.
• Firm in which any director or relative is a partner
• Private Company of which any such director is a director or member
• Body Corporate at a general meeting of which not less than 25% of the total voting power is exercised or controlled by any such director, or by two or more such directors together.
• Any Body Corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

• Exemptions:- Company may advance loan, give guarantee or provide security in connection with a loan in following situations:

1. Private company which satisfies all the following criteria may advance loan, give guarantee or provide security in connection with a loan to a Director or to any other person in whom director is interested:

1. In whose share capital no other body corporate has invested any money;
2. If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
3. Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under section 185. (MCA notification dated 5^th June 2015)

2. Loan given to Managing Director and Whole Time Directors-

1. Loan given as a part of Conditions of service extended to all employees by the company; or
2. Loan is pursuant to any scheme approved by special resolution at the Shareholders meeting.

3. A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

4. Loan given by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company, if the loan is utilised by the subsidiary company for its principal business activities Rule 10 of Companies (Meetings of Board and its Powers) Rules, 2014]

5. Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company, if the loan is utilised by the subsidiary company for its principal business activities [Rule 10 of Companies (Meetings of Board and its Powers) Rules, 2014]

For exempted situations:The following procedure is to be followed for advancing loan/giving guarantee or providing security in connection with a loan to director or person in whom director is interested under Section 185 and Rule No. 10 of the Companies (Meetings of Board and its Powers) Rules, 2014-

1. Issue not less than 7 days notice and agenda of Board meeting, or a shorter notice and agenda in case of urgent business, in writing to every director of the company at his address registered with the company and call a Board Meeting to consider the proposal for advancing loan/giving guarantee or providing security in connection with a loan to director or person in whom director is interested.

2. Hold a meeting of the Board of Directors-

1. To pass the necessary Board Resolution for approving the advancing loan/giving guarantee or providing security in connection with a loan to director or person in whom director is interested.
2. To authorize Company Secretary or any Director to sign and file the relevant form, if applicable with Registrar of Companies and to do such acts, deeds and things as may be necessary to give effect to the Boards decision.

3. Prepare and circulate draft minutes within 15 days from the date of the conclusion of the Board Meeting, by hand/speed post/registered post/courier/e-mail to all the Directors for their comments. Also follow the procedure prescribed for preparing, circulation, signing and compiling of Board Minutes.(Secretarial Standards-1 )

4. In case of a public company, file a certified copy of the Board resolution approving the advancing loan/giving guarantee or providing security in connection with a loan to director or person in whom director is interested with the Registrar in Form No. MGT.14 under Section 117 of the Act along with fee as provided in the Companies (Registration offices and fees) Rules, 2014 within 30 days of passing the Board Resolution. [Section 117(3)(g) read with Section 179(3)(f)].

5. Make necessary entries regarding advancing loan/giving guarantee or providing security in connection with a loan to director or person in whom director is interested in the Register of Loans, Guarantee, Security and Acquisition made by the Company within seven days of making such loan or giving guarantee or providing security. (Rule 5(4) of Companies (Share Capital and Debentures) Rules, 2014

Notes

1. Loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013. This clarjfication will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated. [ General Circular No. 04/2015]