Introduction:

Sections 185 and 186 of the companies act 2013 lays down the provisions on how the company can utilize its funds to provide loans. The purpose of introducing these provisions is to safeguard the interest of stakeholders. Since there is huge money of from the public at large involved in the company, therefore it becomes necessary for regulating authorities to introduce such sections to safeguard the interest of all those investors who have invested their funds in the company. Such investors include banks, financial institutions, governments and people at large (shareholders, debenture holders or bondholders).

While running the business in the format of body corporate, the basic questions that arise in mind are what are how a company can avail the funds, how the company can provide loans to its directors and others, how much a company can give loan or how much a company can invest in different ways. All these questions are dealt with herewith.

First, Can the company provide a loan to its directors?

Section 185 of the Companies act 2013 clearly states that a company cannot provide loans to its directors. A company cannot directly or directly provide any advances or provide any guarantee provide security to its directors or to any other persons in whom directors are interested.

The exception to the above rule is,

1. The company can provide loans to managing directors or whole-time directors as a part of the condition of service extended by the company to all its employees or in terms of any scheme approved by members by passing of a special resolution.
2. In the ordinary course of business, a company can provide 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
3. A holding company can provide a loan or give guarantee or provide any security to its wholly owned subsidiary company provided that such funds shall be utilized by the subsidiary company for its principal business activity
4. A holding company can provide security in respect of loan made by any banks or financial institution to its subsidiary provided that such funds shall be utilized by the subsidiary company for its principal business activity

For the above explanation, “to any other persons in whom directors are interested” shall include the following persons:

1. any director of the lending company, or of a company which is its holding company or any partner or relative of any such director
2. any firm in which any such director or relative is a partner
3. any private company of which any such director is a director or member
4. Anybody corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors together
5. Anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act under the directions or instructions of the Board, or of any director or directors, of the lending company

• In case of contravention of the above-mentioned provision, the company shall be punishable with a fine which shall not be less than 5 lakh rupees which may extend to 25 lakh rupees. The director or the person to whom the loan is given or security is provided shall be punishable with imprisonment which may be extended to six months or with a fine which shall not be less than 5 lakh rupees but which may extend to 25 lacs or with both.

Second, how much loan a company can provide? 

For this, the company’s act 2013 has laid down section 186. According to this section, a company can directly or indirectly,

1. give loan to any person or other body corporate
2. give any guarantee or provide security in connection with a loan to any other body corporate or person
3. acquire by way of subscription, purchase or otherwise, the securities of any other body corporate NOT exceed 60% of its paid-up share capital, free reserve and securities premium account or 100% of its free reserve and securities premium account whichever is more.

A few conditions attached with the above provision which need to be fulfilled are mentioned herein below:

• Prior approval by way of a special resolution passed at a general meeting shall be necessary where the provision of a loan exceeds the above-specified limit.
• No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.
• Prior approval of a public financial institution shall not be required where the aggregate amount of the loans, the amount for which guarantee or security is provided or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified
• A company cannot give any loan under this section at a rate of interest lower than the prevailing yield of one-year, three-year, five years or ten years of Government Security closest to the tenor of the loan
• No company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting
• Every company giving a loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain particulars of loan or securities given

In case of contravention of the above-mentioned provision, the company shall be punishable with a fine which shall not be less than 25 thousand rupees which may extend to 5 lakh rupees. The officer in default shall be punishable with imprisonment which may be extended to two years or with a fine which shall not be less than 25 thousand rupees but which may extend to 1 lakh Rupees or with both.

Conclusion:

The companies act 2013 has imposed rigorous penalties for contravention of the above provisions because of the reason that the funds of the company be utilized in the best interest of all the stakeholders. The fund shall not be misused and the reporting of all these transactions shall be done properly in the registers as well as in the audit reports of the company.

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