Section 185 of the Companies Act, 2013 which has been notified on 12th September 2013 replaces the old section 295 of the Companies Act, 1956 which provides for loans to directors.
This section now applies to all companies including private companies also. Hitherto private companies were exempted from the provisions of the old section 295. So companies cannot give any loans to directors or to persons in whom the director is interested.
“Person in whom the director is interested” would mean
(i) any other director of the lending company, or of the holding company of the lending company;
(ii) any partner or relative of such director; – definition of relative is spouse, lateral ascendants upto two levels i.e. father & grandfather, mother & grandmother and father includes step father, lateral descendants on the son’s side upto two levels i.e son and son’s children, daughter (including step daughter), her husband and siblings.
(iii) any private company of which director is a director or member
(iv) any body corporate at a general meeting of which such director exercises control of at least 25% of its voting power either singly or with other director(s) – which means basically the shareholding of such body corporate because presently in India voting power derives from shareholdings
(v) any body 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 director(s) of the lending company.
There are exemptions such as loans to managing director in accordance with the terms of his appointment, loans to employees in accordance with the conditions of service applicable to all employees of the company or where a scheme is framed and which scheme is approved by the members by way of special resolution.
The penalties and fines are very hefty as can be seen in section 185(2) as given below. So all companies including private companies to take care and ensure strict compliance with the provisions of section 185 of the Companies Act, 2013.
185. (1) Save as otherwise provided in this Act, no company shall, 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:
Provided that nothing contained in this sub-section shall apply to—
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) 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.
Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twentyfive per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(e) 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.
(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh
rupees, and the director or the 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, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.