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Section 295 of the Companies Act, 1956

udit sharma (Company Secretary) (2303 Points)

30 November 2010

A company ABC Ltd. has 3 Directors A,B,and C. Now, Mr.D is a relative of Mr. A.If we propose to give a loan to Mr.D then the provisions of section 295 have to be complied with.

XYZ Ltd. is a holding company of ABC Ltd. Mr. R is a relative of Mr. X who is a Director in XYZ Ltd. If Mr. R apporaches the Company ABC Ltd. for a loan of Rs. 50 Crores, then whether provisions of section 295 ofthe Act are applicable?

To summarise, whether the provisions of section 295 get attracted and will have to be complied with in case the Company proposes to give a loan to a person who is a relative of a Director of its Holding Company??????? Pl. clarify its urgent???????

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5 Replies

Yogesh Shah (Managing Corporate Finance) (1051 Points)
Replied 30 November 2010

Hi Mr. Udit,

Sec. 295 applicable when co. wants to give a loan to specified persons.

Specified person includes (only for answer purpose I am mentioning only two out of total seven) –

1) Director of lending co. or of its holding co.

2) Relative of SUCH a director. ……

Here the term ‘SUCH A DIRECTOR’ is IMP. Such a director means Director covered in category (1). Relative of SUCH a director means Relative of Director of Holding Co.

Hence in your case provisions of Sec. 295 will be applicable.

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Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 30 November 2010

Hi,

It is not possible to give loan to Mr. R without CG's approval bcoz section 295 is applicable in the given case. As per my interpretation of section 295(1)(a) this clause includes the following persons:

1. Director of Lending company

2. Director of Lending company's Holding company

Both the above 2 comes under the word "such" being used in clause (a) of section 295(1).

3. Any partner or ralative of such director.

So your case is falling under point 3 above. Mr. R is relative of such director covered under point 2 above.

Thank you

PHULLJIT SINGH GROVER (PRACTICISING C.A.) (63 Points)
Replied 29 January 2011

My Question is:-

Whether a loan or advance or any guarantee made by a Public Company to another Public Company wherein all the director of lending company are the directors of borrowing company,approval of Central Govt. under section 295 required ?

Explanation: Under section 295 of the companies Act it has been specifically mentioned under Part (c) of clause (1) that if a loan or advance or guarantee has been given to any private Limited Company wherein any such director of lending company is a director or member, we need to sought approval of central government.

However under the part (d) of same clause (1) made restriction for a body corporate and which is a much wider term and includes all foreign and Indian Companies and therefore include Public Company also.

However since the law maker has specifically mentioned about the restriction on private limited company but not public limited company. In my view borrowing Public limited company is exempted from this provision. If anyone is having any legal pronouncement or decision on this question of law, my doubts will be clear.

Thank you

cs ashwini kumar (Company Secretary in Practice) (173 Points)
Replied 29 January 2011

Hi,

as per my opinion Section 372A shall apply instead of 295.

regards

CS Ashwini Kumar

Preety (Company Secretary) (96 Points)
Replied 06 September 2011

Hello friends

I am not clear about the defination of loan considered for purpose of Section 295 & Sec 372A. Whether loans include Secured as well as Unsecured loans or does it include short term loan and advances made by one Co. to Other group Co ., shown under Asset Side. Pl clarify . I am totally confused. Pl treat it as very urgent.

Experts advise are solicited.

Thanks with Regards

Preety