Companies Act, 2013
Procedure for Loan to Directors
Introduction:
Section 185(1) of the Companies Act, 2013, prohibits a company from directly or indirectly:
- Advancing any loan (including loans represented by book debts), or
- Giving any guarantee, or
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Providing any security in connection with any loan taken by:
- Any director of the company or of its holding company, or
- Any partner or relative of such a director, or
- Any firm in which such a director or their relative is a partner.
However, subject to the fulfillment of certain prescribed conditions, a company may advance any loan (including loans represented by book debts) or provide any guarantee or security in connection with any loan taken by a person in whom any of the company’s directors is interested. This procedure outlines the process for granting loan to the directors of the Company, in accordance with the applicable laws, including the provisions of the Companies Act, 2013, and relevant rules and regulations.
Applicable Provisions:
- Section 101, 117, 173, 185 of Companies Act, 2013
- Clause 1, 4, 7 of Secretarial Standard on Board Meeting (SS-1)
- Clause 1, 4, 17 of Secretarial Standard on General Meeting (SS-2)
- Regulation 30, 44 & 46 of the SEBI (LODR) Regulations, 2015
Mandatory Requirements:
- Pass Special Resolution in the General Meeting.
- Give full particulars of the loans or guarantees given or security provided, in the explanatory statement to the notice of such general meeting.
- Utilization of such loans so granted to be exclusively for the borrowing company’s principal business activities.
Procedure:
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Check Applicability & Eligibility to Grant Loans:
- Identify whether the loan falls under prohibited or permitted categories
- Confirm if the director or entity is exempted under subsection (3) of Section 185, which specifies scenarios where loans, guarantees or securities may be given without restrictions.
Note: Exemptions under sub-section (3) of Section 185 of Companies Act, 2013, which states that loans, guarantees, or securities may be given without restrictions to:
- Loans given to Managing Directors or Whole-Time Directors as a part of service conditions extended by the company to all its employees or pursuant to scheme approved by members by passing special resolution
- Company engaged in the business of providing loans or guarantees/securities, in the ordinary course of business, subject to charging of interest at a rate not less than the prevailing yield of 1-year, 3-year, 5-year, or 10-year Government Security, whichever is closest to the loan tenor
- Holding companies granting loans or provide guarantees/security to their wholly owned subsidiaries
- Holding companies furnishing guarantees or securities for loans, granted by banks or financial institutions to their subsidiary companies.
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Convene a Meeting of Board of Directors
- Issue Notice of Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 days before the date of Board Meeting. A shorter notice can be issued in case of urgent business.
- Attach Agenda, Notes to Agenda and Draft Resolution with the Notice, for grant of loan to Directors.
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Hold a meeting of Board of Directors and pass a Board Resolution
- Advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested subject to approval of members of the Company in next General Meeting
- To fix the day, date, time and venue of the General Meeting and to approve the draft notice convening the General Meeting along with explanatory statement annexed to the notice as per requirement of the Section 102 of the Companies Act, 2013
- Explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact
- To authorize the Director or Company Secretary to sign and issue notice of General Meeting
- To delegate authority to Company Secretary or any one director of the company to sign, certify and file the required form with Registrar of Companies and to do all such acts and deeds as may be necessary to give effect to the Board/Members decision.
- Listed Company shall submit the disclosure of outcome of Board Meeting to the Stock Exchange as soon as reasonably possible but not later than 30 minutes* from the date of the Board Meeting and post the same on the website of the Company within 2 working days.
- Prepare and Circulate Draft Minutes within 15 days from the conclusion of the Board Meeting, by Hand/Speed Post/Registered Post/Courier/E-mail to all the Directors for their comments. [Refer the Procedure for Preparation and Signing of Minutes of Board Meeting]
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Convene General Meeting
- Notice of General Meeting shall be given at least clear 21 days before the actual date of a General Meeting in writing, by hand or by ordinary post or by speed post or by registered post or by courier or by facsimile or by e-mail or by any other electronic means or a Shorter Notice can be issued with the consent of at least majority in number and 95% of such part of the paid up share capital of the company giving a right to vote at such a meeting in accordance with Section 101.
- Notice will be sent to all the Directors, Members, Auditors of Company, Secretarial Auditor, Debenture Trustees and to others who are entitled to receive the notice of the General Meeting.
- Notice shall specify the day, date, time and full address of the venue of the Meeting and contain a statement on the business to be transacted at the Meeting.
- Hold the General Meeting on fixed day and pass a Special Resolution as the case may be for granting loan to Directors.
- Listed Entity shall disclose the proceeding of General Meeting to the Stock Exchange within 12 hours from the conclusion of General Meeting and same shall be posted on the website of the company within 2 working days.
- Listed Companies shall submit to the stock exchange the details of the voting results within 2 working days from the conclusion of the meeting and post the same on the website of the Company.
- Prepare the minutes of General Meeting, get them signed and compile accordingly. [Refer the Procedure for Preparation and Signing of Minutes of General Meeting].
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Filing of Form MGT-14 with ROC
File Form MGT-14, with the Registrar of Companies within 30 days of passing the Special resolution in the General Meeting, along with following documents as an attachment:
- Certified True Copies of the Special Resolutions along with explanatory statement
- Copy of the Notice of meeting sent to members along with all the annexure
- Shorter Notice Consent, if any.
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