Procedure For Giving Loan to Directors


As per the provisions of Section 185(1) of Companies Act, 2013 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.

Procedure For Giving Loan to Directors

Case 1: If a loan made or guarantee given or security provided is up to, 60% (sixty percent) of its paid-up share capital free reserves and securities premium account or 100% (one hundred percent) of its free reserves and securities premium account, whichever is more.

Step 1:   Convene and hold a board meeting and pass the necessary resolution.

Step 2: File the Board Resolution as required to be filed u/s 179(3) in Form MGT-14 within 30 days of passing the resolution.

Case 2 : If a loan made or guarantee given or security provided along with investment already made by Company is exceeding the limit as specified in Case – 1.

Step 1 :  Convene and hold a board meeting to discuss the following matters:
>> Consider the issue and approve unanimously the same
>> Fix the date, time and place for holding a general meeting,
>> Approve the notice of the general meeting and explanatory statement

Step 2 : Issue Notice of the General Meeting to all Members, Directors and the Auditors of the company in accordance with the provisions of Section 102 of the Companies Act, 2013.

Step 3  : Hold the general meeting and pass the special resolution
Step 4 : File certified true copy of the resolutions in Form MGT – 14 within thirty days of passing of the resolution with the ROC along with the explanatory statement annexed to the notice of the general meeting and the prescribed filing fee.

Note :- 
i)   Maintain register in MBP-2 for all loans, guarantee, security and acquisition made by the company.
ii)  Ensured that no loan shall be given at a rate of interest lower than the prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.
iii) Company shall disclose to the members in the financial statement the full particulars of the loans given, the investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.
iv) Obtain prior approval of public financial institution, if any term loan is existing from such public financial institution where the aggregate loan, investment, guarantee and security proposed is beyond the limits specified and there is a default in repayment of loan or interest thereon to the Public Financials Institution
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