LOAN TO DIRECTORS U/S 295
Under the Companies Act, 1956 the provisions relating to Loan to directors by a Company were governed by Section 295 of the Companies Act, 1956. Section 295 of the Companies Act, 1956 had a wide scope and for the purposes of Section 295 of the Companies Act, 1956, there was no distinction between the loan and deposit. The provisions of the said section were applicable even if the monies advanced to the directors are shown as deposits or described as deposits as in both the cases the relationship created is one of the creditor and the debtor.

Furthermore, the Government of India had issued guidelines providing stringent norms for loans or corporate guarantee or furnishing security under Section 295 of the Companies Act, 1956 to the directors of the companies or their relations. Such conditions inter alia provided that the rate of interest proposed on the loan must not be less than 4 percent above the prevailing bank rate as the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934 and the quantum of loan with the other loans taken, if any, should not exceed 25 times the gross salary drawn in the preceding 6 months prior to the making of the application. Also, no guaranteed commission was allowed to anyone in respect of the proposals.

Further, an application is required to be accompanied by the declaration that the Company has not defaulted in making repayments to the investors as and when their deposit becomes due for the payment and the statutory auditors or the Company Secretary in Practice shall certify that the proposal is on conformity with the provisions of Section 372A of the Companies Act, 1956 and the Company has not defaulted in the repayment of any fixed deposits accepted by the Company under Section 58A of the Companies Act, 1956 or part thereof or interest thereon or payment of dividend, redemption and repayment of debenture and timely payment of interest thereon, redemption of preference shares, and regularity of company in filing all forms and returns as per the provisions of the Companies Act, 1956. Also, in case there is any term loan subsisting on the Company, a no objection certificate or prior approval is required from such lender.

LOAN TO DIRECTORS U/S 185

After being assented by both the houses, certain provisions of the Companies Act, 2013 were brought in force and Ministry of Corporate Affairs vide its circular dated 12.09.2013 enforced 98 sections of the Companies Act, 2013 which also contained the Section 185 of the Companies Act, 2013 which deals with the provisions of Loan to Directors henceforth. Section 185 of the Companies Act, 2013 reads as follows:

185. Loan to Directors etc.

(1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:
Provided that nothing contained in this subsection shall apply to—
(a) the giving of any loan to a managing or wholetime director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression "to any other person in whom director is interested" means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(e) 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.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

With the Section 185 coming into force from 12.09.2013, the position for the loan to directors has been changed. Section 185 of Companies Act, 2013 can be understood by dividing its provisions as follows:

RESTRICTIONS

No Company shall directly or indirectly advance any loan, including any loan represented by a book debt, to any of its Directors or to any other person in whom the Director is interested, or give any guarantee or provide any security in connection with loan taken by Director or such other person.
Thus, a Company (hereinafter referred to as 'Lending Company') cannot advance a loan to:

Any Director;
Any Director of Holding company of the Lending company;
Any Partner or Relative of any such Directors mentioned above;
Any Firm in which any such Director or Relative is partner;
Any Private Company of which any such Director is a Director or Member of Lending Company;
Any Body Corporate (i.e. Company or LLP) at a general meeting of which not less than 25% of total voting power may be exercised individually or jointly by any such Director/(s) of Lending company;
Any Body Corporate, the Board of Directors of which is controlled by the any Director(s) of Lending Company.

EXEMPTIONS

The aforesaid restrictions are not applicable to:

Giving any loan to the Managing or Whole-time Director in following manner:–

(i) as a part of the conditions of service extended by the company to all its employees;
(ii) pursuant to any scheme approved by members vide special resolution.

A Company which provides loans in the ordinary course of its business and interest in respect of such loans is charged at a rate not less than Bank rate declared by RBI.

PENALTIES

On Lending Company
In case of contravention of this section, the Lending Company shall be punishable with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs;
On Recipient Director/ Entity
In case of contravention of this section, the recipient Director or other entity shall be punishable with imprisonment which may extend to six months or with a minimum fine of Rs.5 lacs but which may extend to Rs.25 lacs, or with both.

CONCLUSION

With the new regime in place with respect to loans to directors, it can be concluded that no company can offer loan to its directors except in case such director is a managing director or a whole time director and such proposed loan is either a part of the conditions of service extended by the company to all its employees; or pursuant to any scheme approved by members vide special resolution, or such company is in the business of extending loans. The provisions of Section 185 of the Companies Act, 2013 does not provide any exemption to a private company as provided in the provisions of Section 295 earlier. However, the company whose primary business is that of lending, is exempted from the provisions of Section 185 of the Companies Act, 2013. The said change is anticipated to bring the better governance & transparency in the affairs of the Companies in the light of the applicable laws keeping in view the fiduciary character of the directors of the Company.

Companies Acts - Section 185, 186 and 372A - Ambiguities come fully loaded!

BY Lalit Kumar

First this circular states that section 185 prohibits giving of guarantee or security by a holding company in respect of any loan taken by its subsidiary.

Section 470 of the new Companies Act, 2013 gives power to central government to remove difficulties which arise in giving effect to the provisions of the new law but the manner in which the Ministry of Corporate Affairs (MCA) is releasing circulars to clarify certain provisions of the new law, it only compounds the already existing difficulties, what to talk about removing them. Although, none of the circulars so far issued has been under its power of section 470 (although they have been issued to clarify doubts) but all of them make the issues more ambiguous. The case in point is MCA’s circular of February 14 on clarification with regard to Section 185 of the Companies Act, 2013.

It appears that this circular wanted to further clarify the ambiguity which persisted after MCA’s earlier circular dated November 19, 2013 on a similar issue. But, it suffers from many flaws. First this circular states that section 185 prohibits giving of guarantee or security by a holding company in respect of any loan taken by its subsidiary. This is not correct. Nowhere does section 185 give a clear language that a holding company is prohibited from giving guarantee or security in respect of any loan taken by its subsidiary.

It seems that the circular’s basis to interpret this is the expression used in explanation (e) of sub-section 1 of section 185 which covers a body corporate whose board of directors acts in accordance with the directions or instructions of the board of its holding company. That may not be always true i.e. it is not always true that a subsidiary will act according to the directions and instructions of the board of the holding company. There are concepts of separate legal entity and fiduciary duties of directors with respect to the company they represent. This concept of fiduciary duties is further strengthened by the new section 166 introduced in the Companies Act, 2013 which lays duties of directors. Therefore, whether a body corporate acts in accordance with the directions or instructions of the board of its holding company will depend upon the facts and circumstances of the case. If the board of a subsidiary is always bound to act as per the instructions of the board of its holding company, then that will always defeat the concept of fiduciary duties of directors of the subsidiary.

Further explanation (e) of sub-section 1 uses the expression “acts in accordance with the directions or instructions of the board of the lending company.” So does it mean that section 185 only restricts lending activities because a company providing guarantee or security would in real terms not be called a lending company? So for this reason is giving of guarantee or security free from clutches of section 185? That cannot be the intent. The problem is the expression used here is copied from section 185’s earlier avatar section 295 of Companies Act, 1956 which clearly defined the expression lending company to mean a company advancing loan, giving guarantee and providing security, while explanation (e) has been copied verbatim, regrettably no mind was applied that it could mislead if expression lending company is also not copied verbatim.

Another flaw in the circular is it mentions that section 185 is not notified, however, that is not true, section 185 has already been notified on September 12, 2013. Surely, this circular meant to write section 186 but inadvertently mentions section 185. This being an important circular on an important issue, the MCA should be more careful to ensure the contents are accurate; otherwise it will again create confusion because of this inadvertent error.

Although, the principal concept of this circular is not on the issue of exemption in cases of “ordinary course of business”, which is another debatable point in section 185, however, the way this expression is used in the circular, it seems the MCA’s understanding of the meaning of the term “ordinary course of business” are those actions which are done in the usual and ordinary course of a company’s business and not necessarily as a ‘principal business’ for which the company was established. Further, since the circular provides for expression ‘ordinary course of business’ as an exception in the case of section 185 – does it mean that if things are done in ordinary course of business between the holding-wholly owned subsidiary, then the benefit of section 372A is in any case not needed (which this circular provides), as that will be covered by section 185 itself.

Noteworthy point is that this circular only provides exemption in cases when a bank or a financial institution advances loan to a subsidiary which is guaranteed and secured by the parent company. It does not exempt and cover the other aspect provided under section 372A in a case when a parent company gives a direct loan to its wholly owned subsidiary. Therefore, this circular will only bring relief where a bank finances a subsidiary on the basis of guarantee or security given by the parent company and not in cases where a parent company wants to itself extend a direct loan to its subsidiary. This circular has been released to facilitate smooth bank financing to a subsidiary which created ambiguity when section 185 was notified. This clarification comes with a condition that it will only apply to cases where the loans so obtained by subsidiary are exclusively utilised by the subsidiary for its principal business activities. There is no such condition in section 185 of Companies Act, 2013 and section 372A of Companies Act, 1956.

This circular will apply till section 186 is notified, and if and when section 186 is notified, there will be again ambiguity as section 186 does not grant exemptions in holding and wholly owned subsidiary cases (like section 372A does).

(Lalit Kumar is a partner with J. Sagar Associates. Views are personal.)

SECTION 185 of Companies Act, 2013 – Loan to Directors- Section 185 & its reference with Section 186 of Companies Act, 2013

Section 185 of the Companies Act, 2013 which has been notified on 12th September 2013 corresponds to section 295 of the Companies Act, 1956 which deals in loan to directors. This section is more restrictive than that of old Companies Act, 1956.

Section 185 prohibits any company from giving loans, guarantees and securities in favor of its directors or to any other person in whom the director is interested in.

Bare – Act:

Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:

Provided that nothing contained in this sub-section shall apply to—

a) the giving of any loan to a managing or whole-time director—

i. as a part of the conditions of service extended by the company to all its employees; or

ii. pursuant to any scheme approved by the members by a special resolution; or

b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

b) any firm in which any such director or relative is a partner;

c) any private company of which any such director is a director or member;

d) any body corporate at a general meeting of which not less than twenty five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together, or

e) 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.

Analysis:

a) This section applies to both private and public companies,

b) No company can directly or “indirectly” advance loan to its “directors” or to “other persons in whom directors are interested”

Indirect lending meansthat the company does not give a loan to director through the agency of one or more intermediaries. But, this word of ‘indirect’ cannot be read by converting what is not a loan into a loan as was discussed in Dr Fredie Ardeshir Mehta Vs Union of India (1991) 70 Comp Cas 210,

c) Definition of loan is not mentioned in the companies act. Therefore in layman language, it can be said that all transactions where sum of money is given to a person to be returned with or without interest can be termed as loan,

d) But advance is not covered in the definition of loan as it is a kind of prepayment. For e.g, if the company gives advance to a person against purchase of materials, this will not be treated as loan,

e) Share Application money received is also not covered in the definition of Loans,

f) Company cannot give any guarantee or provide any security in connection with any loan taken by him or such other person,

Now, this is restrict a very common situation of holding company that used to give guarantee of its subsidiary company, so that the later could avail bank funding and loans (if holding company and subsidiary company have common directors),

But, it is to be taken into consideration that here guarantee or security is covered but not letter of comfort. The basic difference between guarantee and letter of comfort is that in case of guarantee, guarantor undertakes the liability of principal debtor, whereas in letter of comfort, guarantor does not undertake any liability of principal debtor but instead introduces him to the third party.

g) Also, company cannot give loan which is represented under the head ‘book debts’ to directors or persons in whom directors are interested, i.e. if a company advances a loan/ sum of money to directors and shows the same under the head of ‘book debts’, i.e. director is debtor from whom company has to receive money is also prohibited.

It is to be noted that Section 296 of Companies Act, 1956 considered a book debt as loan for the purpose of Section 295. Time for repayment & other terms & conditions should be considered to consider any debt as a loan.

h) Loan given before 12.08.2013 is not covered under this section as the act says “no company shall ‘advance’ any loan or ‘give’ any guarantee or ‘provide’ any security…….” which is in future tense and therefore the section applies prospectively. But, the same loan should not be renewed or altered.

i) Company shall maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made as aforesaid in chronological order in respect of each such transaction within seven days of making such loan or giving guarantee or providing security or making acquisition. The entries in register is to be signed and authenticated by the company secretary employed in the company or by any other person authorised by the Board for the purpose.

j) Penalty:

i. Lender Company – Fine Rs. 5 lakhs to Rs. 25 lakhs &

ii. Receiver: Director or other person to whom any loan is advanced or guarantee or security is given -Imprisonment upto 6 months or fine Rs. 5 lakhs to Rs. 25 Lakhs, or both.

i.e. both receiver and lending company is covered here.

Now lets us discuss the term, “to any other person in whom director is interested”

a) INDIVIDUAL: Director of lending co., or holding co. or any partner or relative of any “such director”;

b) FIRM: in which any such director or relative is a partner;

c) Private Limited Company: of which such director is a director or member;

(it is to be seen that in case of companies, relative of director is not covered),

d) BODY CORPORATE at a general meeting of which at least 25 % of voting power may be exercised or “controlled” by such director, or by two or more such directors, together;
(it is to be seen that in case of companies, relative of director is not covered),

Meaning of word “control”: “Control” has been defined u/s 2(g) of Companies Act, 2013 as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

e) BODY CORPORATE Board, Managing Director or manager, whereof is accustomed to act in accordance with the directions or instructions of Board, or of any director or directors, of lending company.

Exceptions to section 185:

a) the giving of any loan to a managing or whole-time director—

i. as a part of the conditions of service extended by the company to all its employees; or

ii. pursuant to any scheme approved by the members by a special resolution; or

Ordinary Course means that its usual business is to lend & accept loans & deposits from people. It has 2 tests:

i. If the company is engaged in lending activities regularity &

ii. Lend not only to directors/directors’ entities but also to “arms’ length parties/unrelated parties”. Arms length means to give loan to reasonable parties or at reasonable interest rate at which two or more rational people will give their consent.

It is to be noted here that a company is said to be engaged in ordinary course of lending even if its 10% networth has been advanced as loan or even 10% revenue comes from lending activities and principal business of lending when its 50% networth has been advanced as loan or its more than 50% revenue comes from lending activities. Section 185 exempts even those company who are engaged in ordinary course of action.

Section 186:

186(2) No company shall directly or indirectly —

a) give any loan to any person or other body corporate;

b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

Now, to see that whether section 185 renders section 186 inoperative or allows loans to directors and to persons in whom directors are interested, following points is to be considered:

i. Section 185 uses the word, “Save as otherwise provided in this Act”,

ii. Rule of Harmonious Construction is to be used, i.e. law should be interpreted in the manner taking into consideration all other relevant provisions. Relevant provisions cannot be read in isolation. Therefore, section 185 or section 186 is to be operative here but since, section 185 uses the word “Save as otherwise provided in this Act”, this section gets superior position to section 186 and thereby, section 186 gets inoperative in conditions where section 185 prevails.

Planning:

If one company has to advance loan to other company:

i. If that company is a Private Company: then if there are common directors or director of lending company is member of receiving company, just gift the shares to some one else and resign from the post of directorship (if held),

ii. If that company is a Public Company and directors are holding less than 25% of total voting powers: Section 185 is exempt, and

iii. If that company is a Public Company and directors are holding equal to or more than 25% of total voting powers, then liquidate those powers.

iv. Holding company can give loan/guarantee to subsidy company by removing common directors and gift their shares to some one else.

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India: Loans To Directors – Companies Act Of 1956 Vs. Companies Act Of 2013

Last Updated: 29 April 2014

Article by Karan Gandhi

Singh & Associates

CA Gaurav Mittal explains section 185 of companies act 2013

The section 185 of Companies Act,2013 was notified on 12^th September 2013 and was applicable from that day itself. If there is any deviation from the conditions laid under this section then the Auditor is required to report the same in his Audit Report. A non qualified report would hold auditor in default.

The lending company and the receiver both would be liable for the penalty under the same section.

Now let us understand the basic of section 185 and 186

Section 185:- This primarily deals with the subject of person to whom company cannot give loan.

Section 186:- This section enlists the exceptions and specifies the limits up to which a company can give loan.

The section 185 of CA, 2013, restrict the company on giving loans, guarantee or provide security to Directors or any other person in whom Director is interested.

The ways via which a director can be interested has been covered via 5 inclusions:-

Point 1 & 2

The inclusion in point 1 and 2 covers the Director and his relatives too.

It Says

1) Any Director of Lending Company.

2) Any Relative of Director.

3) Director of a Company which is its holding company.

4) Any firm in which such director is partner or relative is a partner.

5) Any partner of such Director.

Point 3,4 & 5

The inclusion in point 3,4 & 5 only include Director but not his relatives.

It Says

1) Any PRIVATE Limited company in which such director is a Director or member.

2) Body corporate in which such Director or Directors hold more than 25% shares.

3) Body Corporate, MD, BOD or manager accustomed to act in accordance with direction of board or Director of lending company.

A body corporate does not include a co-operative society. But it includes a foreign company.

EXCEPTION TO SECTION 185

1) WD/WTD

a) As a part of service extended to all of its employee.

b) Any Scheme Approved by members by special resolution.

2) Given in ordinary Course of Business

How to check ordinary Course

a) Is the company engaged in lending activity regularly.

b) Lend not only to Directors and related parties but also to Arm Length Parties or unrelated parties.

KEY TAKEAWAY :- All NBFC may not be engaged in lending activities in ordinary course.

NOW LET US UNDERSTAND THE SECTION WITH THE HELP OF PRACTICAL EXAMPLES

EXAMPLE 1

Company A has two Directors Mr. X and Mr. Y. Both holds 50% share each of Company.

Company A wish to give loan to following and have asked for your views on same.

A) Loan to Director X.

B) Loan to a relative of Director Y.

C) Director of company D which is the holding company of A.

D) A partner of Director of Holding Company.

E) A partner of Director of company A.

F) To a firm in which Mr. X is a partner.

G) To a firm in which relative of Mr. Y is a Partner.

SOLUTION 1

*S No*	*Loan To*	*Whether Co Can*	*Reason*
1	Loan to Director X.	NO	*Included in definition*
2	Loan to a relative of Director Y.	NO	Do
3	Director of company D which is the holding company of A.	NO	Do
4	A partner of Director of Holding Company.	YES	*A partner of Director of Holding co is not included.*
5	A partner of Director of company A.	NO	*Included in definition*
6	To a firm in which Mr. X is a partner.	NO	*Included in definition*
7	To a firm in which relative of Mr. Y is a Partner.	NO	*Included in definition*

EXAMPLE 2 (PRIVATE LTD CO WITH COMMON DIRECTOR)

*Particulars*	*Company A (Pvt Ltd or Ltd)*	*Company B (Pvt Ltd)*
Directors Cum share holder	A (shareholding 60.0%)B (shareholding 40.0%)	B (Shareholding 75.% )D (Shareholding 25% )
Only Share Holder	Nil	Nil

A and B are Husband and wife. D is their Son.

Company B wish to avail loan from Company A, Whether Possible?

SOLUTION 2

Company A cannot give loan to company B as it would be in contravention of Section 185 and would attract penalty.

Planning

1) Mr B should resign from the post of Director of Company A and gift his shares to Mr A (gift of shares is tax free). They shall appoint another Director in the company.

As B resigns and transfer the shares then the provisions of section 185 wont apply and company A would be able give loan to company B.

2) Converting Company A into a LLP.

3) Converting Company B into a Public Limited Company and Mr B reducing his shareholding in Company B to less than 25%.

EXAMPLE 3 (Private Ltd Co To Public Ltd Co)

*Particulars*	*Company A Pvt Ltd or Ltd*	*Company B (Ltd)*
Directors Cum share holder	A (shareholding 60.0%)B (shareholding 20.0%)C (Shareholding 15.0%)	B (Shareholding 10.0% )A (Shareholding 10.0% )C (Shareholding 5.0%)
Only Share Holder	D (Shareholding 15.0%)	Others (75.0%)

Company B wish to avail loan from Company A, Whether Possible?

SOLUTION 3

No it is not possible to advance loan to company B as Director A, B and C collectively are holding 25% of shares of Company B. And hence get covered under the clause 4 of interested party to Director.

PLANNING

1) Either Mr A or Mr B or Mr C should resign from the post of Director of Company A. This would bring down the holding of shares to less than 25% and will enable the borrowing between two Companies.

2) Converting Company A into a LLP.

3) Either Mr A or Mr B Or Mr C should give up atleast 1% of their share held in Company B to bring down the holding under 25%.

AMOUNT ALREADY EXISTING ON 12^Th SEPTEMBER 2013

Q. In Case any amount is outstanding on 12^th September as a loan to Director or anyone in whom Director is interested.

A. The loan can still continue to appear in the books of accounts of Company; however it can’t be renewed and is to be repaid on the end of the term. If it’s a loan repayable on demand then still it is suggested to make a formal agreement with tenure specified in it.

Q. Company A holds more than 5 % share of company B and have common Director. Company B has availed a loan from bank and because company A holds more than 5% of share of company B it has to be give corporate guarantee for company B to bank.

A. These types of cases are common between related private limited companies. Banks usually takes corporate Guarantee of the companies. In such a case again company cannot renew the Guarantee given to Bank.

However, the CC limits of a company are renewed each year and new Sanction ticket is issued. In such a case corporate Guarantee also gets renewed. It is advised to approach bank and get the clause of Corporate Guarantee removed.

KEY POINTS

The section is applicable only at the time of granting the loan and any change in circumstances thereafter will not make the section applicable.

Thus, section 185 will not be attracted in respect of a loan given to an employee, who does not fall within the ambit of specified persons as listed above, but who subsequently becomes a member of the board, because at the time of the loan, no contravention was involved.

KEY POINT IN CONVERSION OF A COMPANY INTO A LLP

As per Sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion, turnover of Private Limited Company in any of last 3 years must not exceeds 60 Lakhs. So, if turnover exceeds 60 Lakhs than such conversion will be subject to income tax.

Any capital gain arising in transfer of capital asset would be taxable in hands of company.

Any Gain arising to shareholder on surrendering of shares would be taxable in hands of shareholders.

SECTION 186

Specified transactions are covered under the Section

a) Loans to any person or other body corporate;

b) Guarantee or security given in connection with a loan to any other body corporate or person; and

c) Acquisition by way of subscription, purchase or otherwise, the securities of any other body corporate.

LIMITS UPTO WHICH LOAN CAN BE GIVEN

Higher of

A) 60 % of ( Share Capital + Free Reserves + Security Premium); or

B) 100% of (Free Reserves + Security Premium)

However, if company wishes to invest or give loan to a amount higher than the above then a prior approval of Shareholders is required.

Also shareholders cannot give blanket permission.

KEY POINT

If as on 1.4.2014 the company has given loan or guarantee in Excess of limits specified then it has to file a Special resolution for this by 31^st March 2015.

Q. Whether various Advances would also be considered under this section?

Loan is lending of money with absolute promise to repay whereas advances is to be adjusted against supply of goods and services. Genuine trade advances given to suppliers against orders for supply of goods will not be considered as loans and hence will be out of purview of Section 186. Similarly, advances given to employees against current month’s salary will also not be in the nature of loans.

LOANS AND INVESTMENT BETWEEN HOLDING & SUBSIDIARY COMPANY

Section 185:- Section 185 Exempts loan between Holding Company and Subsidiary Company.

(1) Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding co in respect of any loan made to its wholly owned subsidiary co is exempted from the requirements under this section; and

(2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company is exempted from the requirements under this section:

Provided that loans made under sub-rule (1) and (2) are utilized by the subsidiary company for its principle business activities.

SECTION 186:-

Loan or guarantee given and security provided to its wholly owned subsidiary company or a JV, exempted from calculating the limits prescribed under section 186.+

Also Read- Clarification with regard to Section 185 and 186 of Companies Act

Clarification with regard to Section 185 of the Companies Act, 2013

Applicability of Section 185 / 186 of Companies Act, 2013

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