1. LOANS TO DIRECTORS
Section 185 of the Companies Act 2013 and Amendments proposed vide Companies Bill 2013

2. Need to regulate - Rationale:
To prevent:
- Siphoning off of Public funds lent by FIs and Banks
- Public issue proceeds
- Misuse by transferring funds to private businesses owned by the Director
- Providing corporate guarantees and securities to financial institutions to secure personal gains for the Director

3. Position vis-a-vis Companies Act 1956 :
Section 295 vs. Section 185
- Only applicable on Public Limited Companies and their subsidiaries under the previous Act.
Exemptions were given to:
- Independent Private Limited Companies
- Banking Companies
- Loans from a holding company to its subsidiary
- Guarantee or Security provided by a holding company in respect to any loan made to its subsidiary
- Government Companies

4. Section 185 - Prohibition on loans to directors
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:

5. Section 185 - Prohibition on loans to directors
Directly or Indirectly:
- Even if such loan is routed through one or several intermediaries but the end beneficiary is the Director himself or a person in whom the director is interested, it will be a violation of Section 185.

6. Section 185 - Prohibition on loans to directors
Loan represented by a book debt:
- Includes Credit Sales
short term advances
- The facility of using the Company products and paying later would also fall in this category

7. Section 185 - Prohibition on loans to directors
Person in whom director is interested
(a) any director of the lending company, or its holding company or any partner or relative of such director;
(b) any firm in which director or relative is a partner;
(c) any private company of which director is a director or member;
(d) any body corporate at a general meeting of which not less than 25% 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.

8. Section 185 - Prohibition on loans to directors
Exceptions:
Subsection (1) does not 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) NBFCs; upon charging an interest not less than the bank rate declared by the RBI.

9. Section 185 - Prohibition on loans to directors
Further Exemption – Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014
Any loan made by a holding company to its WOS
OR  
any guarantee given or security provided by a holding company in respect of any loan made to its WOS is exempted;
Any guarantee given or security provided by a holding company in respect of loan made by any bank or FI to its subsidiary company is exempted.
Provided that such loans made are utilised by the subsidiary company for its principle business activities.

10. Section 185 - Prohibition on loans to directors
Further exemption - For Private Limited Companies through MCA Notification dated
Chapter Xll, section 185 Shall not apply to a private company -
(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or FIs or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower;
and
(c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

11. Section 185 - Prohibition on loans to directors
Consequences of Default:
- The company shall be punishable with fine - Rs. 5 lakhs to Rs. 25 lakhs
- The director or the other person shall be punishable with imprisonment which may extend to six months or with fine - Rs. 5 lakhs to Rs. 25 lakhs or with both.

12. Section 185 - Prohibition on loans to directors
Elements of Loan
- An amount – in cash or kind
- Given to a borrower
- An agreement (express or implied) to repay
- Recognition of liability by the borrower to return it with/without interest.
Loan includes Deposit – A non exempt company can not make inter-corporate deposits in a Company in which director is interested.

13. Section 185 - Prohibition on loans to directors
Unlawful Loans
- Supply of goods or property on credit
Loan by subsidiary to holding company
Loans to be examined on case to case basis
- Salary advance to relative of a director
- Book Debt or Advance in the nature of loan

14. Section 185 - Prohibition on loans to directors
   
SS-1: Annexure ‘A’(Ref. Para 1.3.8)
Granting loans or giving guarantee or providing security in respect of loans – Matter to be considered only at a duly convened Board Meeting.
SS-2: Annexure (Ref. Para 16.1)
Every company having more than 200 Members shall transact the following business only by means of postal ballot:
Giving loans or extending guarantee or providing security in excess of the limit specified

15. Section 185 - Prohibition on loans to directors
Proposed amendment to the Companies Act, 2013 through Companies Bill 2016 – Laid before the Lok Sabha in March 2016 and pending approval

16. Section 185 - Prohibition on loans to directors
Section 185 (Existing)
Section 185 (Proposed)
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:
(1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by:
(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(b) any firm in which any such director or relative is a partner.

17. Section 185 - Prohibition on loans to directors
Section 185 (Existing)
Section 185 (Proposed)
No comparable provision
(2) A company may do so in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that— (a) a SR is passed by the company in GM: Provided that the explanatory statement shall disclose the prescribed particulars; and (b) the loans are utilised by the borrowing company for its principal business activities.

18. Section 185 - Prohibition on loans to directors
Section 185 (Existing)
Section 185 (Proposed)
any other person in whom director is interested” -
(a) any director of the lending company, 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;
(a) any private company of which any such director is a director or member;

19. Section 185 - Prohibition on loans to directors
Section 185 (Existing)
Section 185 (Proposed)
Contd…
(d) any body corporate at a GM of which not less than 25% 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.
No Change

20. Section 185 - Prohibition on loans to directors
Section 185 (Existing)
Section 185 (Proposed)
Exceptions to Applicability:
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended to all employees; or
(ii) pursuant to a scheme approved by SR; or
(b) NBFCs; upon charging an interest not less than the bank rate declared by the RBI.
No change
(b)NBFC; upon charging an interest not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or

21. Section 185 - Prohibition on loans to directors
Section 185 (Existing)
Section 185 (Proposed)
Contd….
Contd….
(c) any loan made by a holding company to its WOS or any guarantee given or security provided by a holding company in respect of any loan made to its WOS; or
(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or FIs to its subsidiary company: Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

22. Section 185 - Prohibition on loans to directors
THANK YOU
CS Shailesh Dayal
Ph: