Loans to /from pvt.ltd. companies

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CA Kunjan - www.canaresh.com (Querist)
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22 January 2016 CAN PVT.LTD.CO. HAVING 1 LAC AUTHORISED & PAID UP CAP :-
1. GIVE LOANS TO / TAKE LOANS FROM ITS DIRECTORS?
2. GIVE LOANS TO / TAKE LOANS FROM ITS MEMBERS?
4. GIVE LOANS TO/ TAKE LOANS FROM DIRECTOR'S RELATAVES?

REGARDS, CA KUNJAN, 9222922292

Arpit Shah

Arpit Shah (Expert)
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22 January 2016 Acceptance and Giving loans by companies under Companies Act 2013

Loans are the major source of funding for most of the Companies apart from their Share Capital. Companies borrow from various sources like banks and various other financial institutions. Where public limited companies borrow from mass public by accepting public deposits private companies are strictly prohibited from accepting any loan or deposits from the public. The Companies Act,1956 permitted private companies to borrow from directors, shareholders and relatives of directors. However the Companies Act 2013 has brought a major change in the borrowing provisions for private companies and removed shareholders and relatives of directors from the list of lenders. Going forward the private companies can borrow only from directors apart from banks and financial institutions provided the director gives a declaration that the amount that he is giving is not out of borrowed funds.
Let us analyze the various provisions pertaining to loans given and accepted by the Companies as per Companies Act 2013
Provisions pertaining to loans /deposits accepted by the company.
1) Section 73: It states that No company whether public or private can accept deposit from anybody without complying with the provisions mentioned in Section 73. Clause (viii) of Rule 2(c) specifically excludes loans from directors from the purview of deposit definition if the director gives a declaration that the amount he is lending is not out of borrowed funds. Clause (vi) of Rule 2(c) excludes loans received from any other company from the definition of Deposits.
To sum up any company whether public or private can accept loan or deposit from directors (subject to obtaining a declaration) and any other company whether private or public (subject to the restrictions imposed by S.180(1)(c),of the Act) apart from banks and financial institutions. If any company is desirous of obtaining loan from any other person then they have to comply with the Deposit rules which include obtaining credit rating, issuing circular, creating deposit repayment reserve account, etc.
2) Section 180(1)(c) : This sections corresponds to S. 293 of the Companies Act,1956 which was applicable only to public companies and private companies which are subsidiaries of public companies. The provision which is now applicable to private companies as well, states that if the amount to be borrowed by the company along with the amount already borrowed by the company exceeds the aggregate of its paid up share capital and free reserves then consent of the company by means of a special resolution shall be taken. The borrowings exclude temporary loans taken by the company i.e. loans repayable on demand or within 6 months from the date of such loan.
To sum up even though companies are permitted to borrow from companies, directors and financial institutions they have to obtain the consent of the company prior to obtaining further loans if the aggregate of such loans exceed the aggregate of its paid up share capital and free reserves. Obtaining temporary loans are excluded from the purview of this section.
Provisions pertaining to giving loans by the company
3) Section 185:- The section provides that no company shall directly or indirectly advance any loan to its director or to any other person in whom the director is interested or give any guarantee or provide security in connection with the loan taken by the director or any such other person. The term “any other person in whom the director is interested” includes firm in which director or his relative is partner and private companies in which the director may be director or shareholder.
To sum up advancement of loan to any individual or company or firm in whom the director of the lending company is related is strictly prohibited.
4) Section 186: – No company shall directly or indirectly give any loan to any other person or body corporate exceeding 60% of its paid up share capital, free reserves and share premium or 100% of its free reserves and securities premium whichever is more. If the company proposes to advance any such loan exceeding its limits then prior approval by means of a special resolution passed at a general meeting shall be required. Prior approval of the public financial institution shall also be required if there is any default in repayment of instalment or interest on the term loan.
To sum up prior approval of the shareholders shall be obtained by the company if any loan is advances exceeding the given limits.
Checklist for Lender Company
a) The borrower is in no way related to the director of the lender company.
b) The loan advanced is not in excess of the limits specified. If it is then prior approval of shareholders is obtained by means of a special resolution.
Checklist for Borrower Company
a) The lender is the director, bank or any other approved financial institution. For any other lender deposit rules are followed prior to acceptance of such deposit.

b) Prior approval of shareholders is taken if the borrowings exceed the aggregate of paid up share capital and free reserves.

Arpit Shah

Arpit Shah (Expert)
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22 January 2016 Loans & Investments under Companies Act, 2013

Provisions related to Loans and Investments under Companies Act, 2013
General Powers of board
With respect to borrowing of Monies – the board of directors of the company are empowered to borrow monies by means of resolution passed at a meeting of the Board. Such power of the Board may also be delegated to any committee of directors, the managing director, the manager, or any other principal officer [Section 179]
With respect to Loan and Investment – for making investment, giving loan or guarantee or security board resolution with the consent of all the directors present at the meeting is required [Section 186]
Restrictions on Powers of board
(a) As per section 180 of the Companies Act, 2013, SPECIAL RESOLUTION of the company is required in case if the money to be borrowed together with the money already borrowed exceeds the paid share capital and free reserves of the company. However, the amount of temporary loans obtained from the company’s bankers in the ordinary course of business will not be included in the moneys borrowed
Temporary loan for this purpose means loans repayable on demand or within six months from the date of the loan, such as cash credit arrangements, discounting of bill, etc. but does not include loan raised for the purpose of financial expenditure of a capital nature
(b) As per section 185 of the Companies Act, 2013, no company is authorized directly or indirectly to advance any loan to or give any guarantee or provide any security in connection with any loan taken by the following persons: –
Any of its director or any partner or relative of such director;
Any director of its holding company or any partner or relative of such director;
Any firm in which any such director or relative is partner;
Any private company of which any such director is a director or member;
Any body-corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director, or by two or more such directors, together;
Any body-corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company;
(c) However, section 185 shall not apply in the following cases: –

If a loan is given to MANAGING or WHOLE TIME director as a part of the conditions of service extended by the company to all its employees or pursuant to a scheme approved by the members by a SPECIAL RESOLUTION;
If the company is in the business of providing loans and in respect of such loan interest is charged at the bank rate declared by RBI;
In case of loan, guarantee or security given by holding company to subsidiary company or with respect to loan to subsidiary company, provided that such loan is utilized by subsidiary company for its principal business activities;
Note: – as per Circular No. 13 / 94 / CL – VI / 67, dated 24th February, 1971 in case if loan is given by holding company to subsidiary company and subsequently it ceases to be holding – subsidiary companies then also the exemption would continue to apply
(d) As per section 186 of the Companies Act, 2013, prior approval by means of SPECIAL RESOLUTION and also prior approval from public financial institution where any term loan is subsisting, is required by the company in case if its gives directly or indirectly any loan or guarantee or provides any security or invests in securities, exceeding 60% of aggregate of its paid up share capital, free reserves and securities premium account, or 100% of aggregate of its free reserves and securities premium account, whichever is more;
(e) No Company shall, unless otherwise prescribed, make investment through not more than two layers of investment companies. The term layer in relation to a holding company means its subsidiary or subsidiaries;
General restriction towards company
Rate of interest to be charged by the company for giving loan should be equal to or more than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan;
No company shall give loan, guarantee, security or invest in case if it is in default in repayment of deposits or payment of interest thereon;
Disclosure requirements
The Company is required to disclose in its Annual Accounts the full particulars of such loan, guarantee or security and its purpose of utilization;
Penalties
In contravention of section 185 – the company shall be punishable with fine ranging between Rs.5,00,000/- to Rs.25,00,000/-. Also the concerned director shall be punishable with imprisonment for six months or fine ranging between Rs.5,00,000/- to Rs.25,00,000/- or with both;
In contravention of section 186 – the company shall be punishable with fine ranging between Rs.25,000/- to Rs.5,00,000/-. Also every officer in default shall also be punishable with imprisonment for two years and fine ranging between Rs.25,000/- to Rs.1,00,000/-;
Secretarial Issues
Every company is required to keep a register in form MBP – 2 for the purpose of giving loan, guarantee, security or making investment;
Register of Investments not held in its own name by the Company shall be in Form No. MBP – 3

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