Loan to Directors, etc. – Section 185

1. No company shall directly or indirectly

– Advance any loan (including loan represented by a book debt) or

– Give guarantee or provide security in connection with such loan to any director or related person.

Exceptions to the above rule

1. Loans to MD or a WTD if such loan is:

i) In accordance with the terms of services extended to all employees; or

ii) Approved by share holders by special resolution.

2. Loans by a company which in its ordinary course of business provides loans or gives guarantees or securities for the due repayment of any loan in respect of such loans an interest is charged at a rate not less than the bank rates declared by the RBI.

3. Loan by a holding company to its WOS company or any guarantee given or security provided by a holding company in respect of any loan made to its WOS company and the funds are utilised for its principal business activities.

4. Any guarantee given or security provided by a holding company in respect of loan made by any bank/FI to its subsidiary company and the funds are utilised for its principal business activities.

Section 185 shall not be applicable to private companies:

1. In whose share capital no other body corporate has invested any money;

2. Borrowings of such a company from banks/FIs/any body corporate is less than twice of its paid-up capital or Rs.50 crores, whichever is lower, and

3. Such company has not defaulted in repayment of such borrowings subsisting at the time of making transactions under section 185.

Loan and Investment by Company – S.186

1. A company shall make investment through not more than two layers of investment companies

2. No company shall directly or indirectly give any –

1. Loan, guarantee or security to any person or other body corporate; and

2. Acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

Higher of the following:

1. Exceeding 60% of its paid-up share capital, free reserves and securities premium account or

2. 100% of its free reserves and securities premium account, whichever is more.

A special resolution shall be necessary to be passed at a GM if the limit exceeds.

3. The company shall disclose to the members in the FS the full particulars of guarantee given and the purpose for which guarantee is proposed to be utilised by the recipient.

4. No company, which is registered u/s. 12 of SEBI Act, 1992 (Registration of stock brokers, sub-brokers, share transfer agents etc.) and covered under such class or classes of companies which may be notified by the CG in consultation with the Securities and Exchange Board, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its FS the details of loan or deposits.

5. 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. This is applicable provided such loans/advances are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, if such policy is required to be formulated. (Circular No. 04/2015)

Related Party Transactions – Section 188

1. Definition of “related party” – Section 2(76)

“Related Party” with reference to company means:

1. Director or his relative;

2. KMP or his relative;

3. Firm, in which a director, manager or his relative is a partner;

4. Private company in which a director or manager or his relative is a member or director;

5. Public company in which a director or manager is a director or and holds along with his relatives, more than 2% of its paid-up share capital;

6. Anybody corporate whose BoD, managing director, or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

7. Any person under whose advice, directions or instructions a director or manager is accustomed to act;

8. Any company which is—

9. A holding, subsidiary or an associate company of such company; or

10. A subsidiary of a holding company to which it is also a subsidiary

11. A director or a KMP of the holding company or his relative with reference to a company.

Scope of section 188

A company shall enter into following contract or arrangement with a related party only with the consent of the BOD given by a resolution at a meeting of the Board

1. Sale, purchase or supply of any goods or materials;

2. Selling or otherwise disposing of, or buying, property of any kind;

3. Leasing of property of any kind;

4. Availing or rendering of any services;

5. Appointment of any agent for purchase or sale of goods, materials, services or property;

6. Related party’s appointment to any office or place of profit in the company, its subsidiary company associate company; or

7. Underwriting the subscription of any shares in or derivatives thereof;

– No contract or arrangement in the case of a company having a paid-up share capital or Rs.1 crore or more or transactions exceeding such sums, as prescribed shall be entered into except with the prior approval of the company by a resolution.

– No member of the company shall vote on such resolution to approve any contract or arrangement which may be entered by the company, if such member is a related party.

– Section 188 shall not be applicable to the transactions between private holding and subsidiary/associate company as well as between a subsidiary of a holding company to which the private company is also a subsidiary company.

2. Every contract or arrangements entered into with a related party will be referred to in the board’s report to share holders, along with justification for entering into such transactions.

3. Where any contract or agreement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the GM and if it is not ratified by the Board/share holders at a meeting within 3 months from the date on which such transactions was entered into then such transactions would voidable at the option of the Board.