Section 185 of the Companies Act, 2013 imposed a ban on loans to directors, their relatives and partners. The main intention of Section 185 is to ensure that directors who hold a fiduciary position with respect to shareholders do not misappropriate the funds of the company for their own benefits.
Public companies were allowed to grant loans, guarantees and securities subject to Central Government approval and private companies were exempted under Section 295 of the former Companies Act, 1956.
Private Companies were facing problems due to stringent provisions of Section 185 while carrying out operations. So, Government exempted private companies from entire Section 185 to ease the compliance requirement vide notification dated 5th June, 2015.
Companies (Amendment) Act, 2017
Government substituted entire Section 185 by way of Companies (Amendment) Act, 2017 to promote ease of doing business. The original Section 185 specified more exhaustive list to which Companies can’t give loans, guarantee and securities. Thus, at par with the global company laws, the provision has been amended to remove the prohibition to an extent and provides for the passing of shareholders’ resolution for granting of loans, guarantees, and securities to entities in which directors are interested.
- There should be no investment in the concerned company from any other body corporate;
- The company should not have any borrowings from banks, financial institutions and other bodies corporate equal to or more than twice its paid-up share capital, OR Rs. 50 crores, whichever is lower; and
- There should be no subsisting default at the time of making such transaction, and that the company should have the capability to pay off the loan.
