Proposed Amendment in Provisions related to Loan to Directors

Govt has proposed Changes in Section 185 and 186 vide Companies (Amendment) Bill, 2016 with following objects :-

Companies (Amendment) Bill, 2016 seeks to amend section 185 of the Act to limit the prohibition on loans, advances, etc., to directors of the company or its holding company or any partner of such director or any firm in which such director or relative is a partner. It also allows a company to give loan or guarantee or provide security to any person in whom any of the director is interested subject to passing of special resolution by the company and utilisation of loans by the borrowing company for its principal business activities.

Companies (Amendment) Bill, 2016 seeks to amend section 186 of the Act by deleting the restrictions on layers of investment companies. It also seeks to provide for aggregation of loan and investments so far made and guarantees so far provided, for the purpose of calculating the limits of loans and investments. It also provides to exclude employees from the word “person” used in sub-section (2). Further it also seeks to provide that requirement of  passing a special resolution at general meeting shall not be necessary where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company of the securities of  its wholly owned subsidiary company. Further it also seeks to clarify when the company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities.

Analysis of Proposed Changes is as follows :-

New Section 185 (1)

No Company ( Private & Public) shall Directly or Indirectly Advance any loan, including book debt, or Any guarantee or provide any security in connection with any loan taken by

Any director of Company, or of a Company which is its Holding Company or
any partner or relative of any such director; or
Any firm in which any such director or relative is partner.
Subsection 2:

Following loan can be given by company to any person in whom directors are interested after fulfilling the conditions mentioned below:

Advance any loan, including loan represented by a book debt
Give any guarantee
Provide any security in connection with any loan taken
Conditions:

a) Special Resolution passed by the Company in General Meeting

b) The loans are utilized by the borrowing company for its principal business activities.

Sub-section 3: Nothing contained in sub-section (1) and (2) shall apply to-
Clause (a): Loan to Managing Director & Whole Time Director:

There are two ways to give Loan to Managing and Whole Time Director. The exception is extended to a particular class of directors, i.e. to the managing or whole-time directors only.

i. Loan can be given to a Managing or Whole-Time Director as a part of the condition of their service.

Condition:  Conditions should be available for all the employees of the Company.

ii. Loan can be given to a Managing or Whole-Time Director pursuant to any Scheme.

Condition:  Scheme should be approved by Shareholders by passing of Special Resolution.

Example: The Companies pass a resolution for appointment of Managing Director and it approves the terms and conditions of its appointment and if as a part of its terms, there is a loan which can be given to that director, then it falls under the exception given in section 185 of the Act.

Clause (b): Loan in Ordinary Course of Business:

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 rate of prevailing yield of one year, three year, five year or ten year government security closest to the tenor of the loan; or.
Clause (c): Loan by holding Company to its wholly own subsidiary Company:

Any loan made by a Holding Company to its Wholly own Subsidiary Company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly own subsidiary Company.

Condition: loan made under this clause utilized by the subsidiary company for its principal business activity only.

Clause (d): Guarantee and Security by holding Company to its subsidiary Company:

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.

Condition: loan made under this clause utilized by the subsidiary company for its principal business activity only.

Sub-section 4: Punishment for violation –: According to sub-section 2 of Section 185 of the Act, if any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1):

(a) The Company shall be punishable with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, and

(b) 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 6 months or with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, or with both.

EFFECTO OF AMENDMENT IN THE BILL U/S 185:
As per amendment Bill, 2016 following will be effects on Loan to director and person in whom director are interested:

1. Company can give loan, Guarantee, Security to person in whom director are interested after passing of special resolution in General Meeting. Condition company will use such money for the principle business activity of the Company.

Like: Private Company in which director is director or member. Exp. If person A is Director in Company XYZ Pvt Limited and PQR Private Limited. In such situation XYZ limited are allowed to give loan and guarantee to PQR limited after passing of special resolution.

2. Companies are still restricted to give loan, guarantee and security to

Any director of Company, or of a Company which is its Holding Company or
any partner or relative of any such director; or
Any firm in which any such director or relative is partner.
3. The term “any person in whom any of the director of the Company is interested” has been changed.

Definition as per Companies Act, 2013 Definition as per Companies Amendment Bill, 2016 Any other director of the lending company, Any director of the holding company of the lending company Any partner or relative of such director Any private company of which director is a director or member Any private company of which director is a director or member Body Corporate in which 25% or more voting power rests with one or more directors Body Corporate in which 25% or more voting power rests with one or more directors Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company. Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company.
New Section 186:

Subsection (1) shall be omitted

Sub Section (2): In sub-section 2 the word “Person” does not include any individual who is in the employment of the Company;

Sub Section (3): Where aggregate of any Loan & Guarantee or providing any security or the acquisition exceeds the limit mention in sub section 2 then no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a Special Resolution passed in the General Meeting.

Exemption to Sub Section (3):

Proviso: This sub-section 3 will not apply to

Where a Loan or guarantee is given or Where security has been provided by a Company to
its wholly owned subsidiary Company or
Joint Venture Company; or
Where any acquisition is made by a holding Company, by way of subscription, purchase or otherwise of the securities of its wholly owned subsidiary Company,
Explanation:- for the purpose of this section:

a) the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities and a Company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in share, debentures or other securities constitute not less than 50% of its total assets, or if its income derived from investment business constitutes not less than 50%, as a proportion of its gross income.

Sub Section (11): Section 186 not applicable to followings:

.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)