WHAT CAN BE CONSTRUED AS ‘LOAN’?
- Since the term ‘loan’ is not defined under Section 2 of the Companies Act, 2013, it becomes absolutely necessary to understand the precise and concise meaning of word ‘Loan’, as there are serious implications in the event of non-compliances.
- As per the oxford dictionary, loan has been defined as under:
“As a thing lent; something the use of which allowed for a time, on the understanding that it shall be returned or an equivalent given, a sum of money lent on these conditions and usually with interest”
The essential element of a loan is the advance of money upon the understanding that it shall be returned, fully or in instalments, and it may or may not carry interest. Even, a mere book entry to record amount payable to a person can be brought in ambit of loan, if above elements are satisfied.
Loans can be categorized as following:
- Direct Loan: Any amount granted by the company as ‘loan/ borrowing’, directly to its employees, provided the payment is as per Company policy. However, provisions regarding loans to Directors and KMP are stated under Sec 185 of Companies Act, 2013.
- Indirect Loan: Any amount granted by the company indirectly, or, through one or more intermediaries.
WHAT IS NOT COVERED AS LOAN?
- Any advance payment of salary given to employee who is relative of Director, provided payment is as per rules of the company,
- Any advance made to trust in which Director are trustee,
- Any advance given to a Director, for example, loan for building house, subject to the guidelines issued for that purpose by the Central Government.
LOAN TO DIRECTORS BY THE COMPANY (Sec 185):
- Not allowed to:
– Any Directors (other than MD/ WTD)
– Any person in whom Directors are interested
- Allowed to:
– Any loans given to Managing Director (MD) or Whole Time Director (WTD), provided
- as a part of condition of service, or
- pursuant to any scheme approved by the Shareholders through Special Resolution
– Any person by the Company whose ordinary course of business is granting loans or guarantees or securities
RELAXATION TO PRIVATE COMPANIES:
Since private companies were facing a lot of challenge due to the above restrictions, Ministry of Corporate Affairs issued a notification vide G.S.R 464(E) effective from 05th June, 2015, providing certain relaxation to the following private companies:
- In which no money has been invested by Body Corporate in share capital, or
- In which borrowings from banks or financial institutions or body corporate is less than twice of each paid up share capital or INR 50 crores, whichever is less, or
- No defaults in repayment of borrowings
LOAN FROM DIRECTOR TO THE COMPANY:
Any company can accept loan from its Directors but compliances may differ based on the limits of such loans.
Limits as defined:-
– A company can borrow money together with already money borrowed upto 100% of paid up share capital and free reserve, apart from temporary loan obtained from the company’s banker in ordinary course of business, by taking approval of the Board of Directors, and
– in case of exceeding the above limits, the consent of shareholders will be required.
However, Ministry of Corporate Affairs has notified vide its notification vide G.S.R 464(E) w.e.f. 05th June, 2015, that no such restriction would prevail in case of Private Company but the Director has to give a self declaration that the loan given to the company has been granted from their own funds and not from any borrowed money.
