Loan to Directors, Etc. – Section 185

1. No company shall directly or indirectly
   1. Advance any loan (including loan represented by a book debt) or
   2. Give guarantee or provide security in connection with such loan to any director or related person.

Exception to the above rule is made for MD or a WTD if such loan is:

1. In accordance with the terms of services extended to all employees; or
2. Approved by shareholders by special resolution.

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.

Exception: employees (Circular 4 , 2015)

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 utilized 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.

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 is a member or director ;
5. Public company in which a director or manager is a director 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—
   A holding, subsidiary or an associate company of such company; or
   A subsidiary of a holding company to which it is also a subsidiary
9. A director or a KMP of the holding company or his relative with reference to a company.

Point No. viii. is not applicable to a Private company.

Scope of section 188

1. 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;
      • Member of a private company can vote on a resolution for contract or arrangement to be entered into by the company with related party even if such member is a related party.
2. Every contract or arrangements entered into with a related party will be referred to in the board’s report to shareholders, 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 of approval by a special resolution in the GM and if it is not ratified by the Board/shareholders 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.

Provided also that the requirement of passing the resolution under the first proviso shall not be applicable for transaction entered into between the holding company & its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.