Loan to Directors under Companies Act, 2013

(Updated Overview with Provisions, Exceptions & Penalties)

The Companies Act, 2013 introduced significant changes in how loans to directors are regulated in India. Unlike the earlier Companies Act, 1956—where prior approval from the Central Government was needed (and private companies were largely exempt)—the 2013 Act brought stricter controls with broader applicability. However, amendments made via notification dated 5th June 2015 introduced some key exemptions for private companies.

General Provision Under Section 185 of the Companies Act, 2013

A company shall not directly or indirectly:

●       Advance any loan (including book debts)

●       Provide any guarantee

●       Offer security in connection with a loan

to any of the following:

1. A director of the company

2. A relative or partner of such director

3. A firm in which such director or relative is a partner

4. A private company in which such director is a director or member

5. A body corporate where such director(s) hold 25% or more voting rights

6. A body corporate whose board of directors act on the instructions of the lending company's directors

   
   

Note: These provisions are applicable even to the directors of the holding company.

Key Exceptions Under the Act

Loans or guarantees can still be provided under the following conditions:

1. To Managing or Whole-time Directors:

●       As a part of the conditions of service extended to all employees

●       OR backed by special resolution passed by shareholders

2. Loan/Guarantee/Security in Ordinary Course of Business:

●       The lending company must be in the business of providing loans

●       Interest rate must not be lower than the RBI’s bank rate

3. Loan/Guarantee by Holding Company to Wholly-Owned Subsidiary:

●       Allowed if the funds are used only for the principal business activities of the subsidiary

 Penalties for Contravention

Applicable Party	Penalty
Company	Fine of ₹5,00,000 to ₹25,00,000
Director or Person receiving the loan	Up to 6 months imprisonment OR Fine ₹5,00,000–₹25,00,000 OR both

Private Company Exemptions

The provisions of Section 185 do not apply to a private company if it satisfies all of the following conditions:

Condition	Details
A) No other body corporate holds shares	No company (body corporate) is a shareholder in the private company
B) Borrowing within limits	Borrowings from banks/FIs/other bodies < 2× paid-up capital or ₹50 crore
C) No default	The company is not in default in repayment of any existing borrowings

Conclusion

The intent behind these stringent rules is to improve transparency and corporate governance. Companies must ensure compliance to avoid harsh penalties. Private companies, however, can benefit from the specified exemptions if they meet the required conditions.