A Compliance Note: Loan to Directors (Section 295)

Section 295 of the Companies Act deals with the pros & cons while giving loan to directors. The section states that No public Company can without the prior approval of the Central Government give any loan to or give any security or guarantee in connection with a loan by any person to ( or to any person by):

a) A Director of the lending co or of its holding company or a partner or relative of any director

b) A firm in which a Director or his relative is a partner

c) A private company in which a director is a director or member

d) Any company in which at least 25 percent of voting power is held or controlled one or more Directors of the lending company

e) Any body corporate, the Board of Directors, Managing Director or manager whereof is accustomed to act according to the instructions of the Board or of any Director or Directors of the lending company.

Therefore, to state very categorically, to apply section 295 following are the pre-requisites.

1. There must be a public limited company

2. Incidence of loan/ security/ guarantee by that public limited company

3. Loan /security/guarantee given to any of the concern mentioned in Supra

If all these conditions exist, a prior approval of central government must be obtained before initiating any loan/security/guarantee in whatsoever form.

The Procedure:

The procedure for obtaining such approval can be elaborated as below :

1. A necessary Board Resolution for making application to the Central Government for sanctioning the loan to the director

2. Application in plain paper to the Central Government furnishing the details of the loan , purposes, with prescribed documents ( see footnote I )

3. Filing form 24 AB with the MCA

4. After taking a prior approval form the Central Government convening a Board Meeting to approve the loan amount to the extent of the ceiling limit as prescribed by the Central Government

In nutshell, this is the procedure for obtaining a prior approval from the Central Government. To sum up, it will be advisable to comply with section 295 before you initiate any loan/security/ guarantee to any person/ company as mentioned in the scope of section 295.

Notes:

1. Documents to be attached with the application:

A. Copy of board of directors resolution indicating

(i) The proposal of the company, terms and conditions

(ii) Rate of interest chargeable

(iii) Interest of directors or relatives, if any

(iv) The schedule and terms of repayment

(v) The loan is not being made out of borrowed funds of the company

(vi) Any other major or important condition having bearing on the loan or financial position of the company

B. Copy of member resolution containing specific approval of Members along with explanatory statement.                  

C. A declaration that company has defaulted in making repayments to the investors as and when they become due to them.

D. List of directors of board of both the companies and disclosing inter-se   Interest if any.

E. Copy of draft loan agreement.

F. Declaration to the effect that funds proposed to be loaned are not required for its working capital requirements at least for a year.

G. Copy of loan schemes for the employees of the company, if any.

H. A No objection certificate (NOC) or prior approval of public financial institutions or banks in case. any term loan is subsisting.

I. A declaration from the Statutory Auditor or a company secretary in whole time practice that the company has not defaulted in :

(i) The repayment of any fixed deposits or part thereof or interest thereon

(ii) Redemption or repayment of debenture and timely payment of interest thereon

(iii) Payment of dividend

(iv) Redemption of preference shares, and

(a) The company is regular in filing all forms or returns as required to be filed under the Companies Act,1956

(b) The proposal is in conformity within the provisions of the section 372A of the Companies Act, 1956

(c) That the company is not in any default on account of undisputed dues of the Central Government , e.g. income tax, central excise etc

J. Copy of letter from bank or financial institutions wherein the company has been asked to furnish corporate guarantee or security for the loan sanctioned to the borrower company

K. Shareholding pattern of applicant and borrowing company

L. Optional attachment(s) - if any

2. The section 295 does not apply to any loan made or security or guarantee given to any of its directors by :

(i) A private company which is not a subsidiary of a public company

(ii) A banking company

(iii) Any loan by a holding company to its subsidiary

(iv) Any guarantee or security by a holding company in respect of a loan to its subsidiary

(v) Any loan given by holding company to a Director of its subsidiary.