Loan to directors

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This query is : Resolved

Krishnadas S (Querist)

16 September 2011 Sirs
What are the implications and procedures required if a company gives loans to its directors and receives interest on such loan?

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)

18 September 2011 Loan to Directors and the Provisions of the Companies Act

Loans to the directors of the company given by the company are governed by section 295 of the companies act, 1956. Section 295 put restrictions on a public company or a private company being a subsidiary of a public company intending to make any type of transaction with a director of the company or partner or relative of a director, etc. whether, directly or indirectly to make any loan, or to give any guarantee, or to provide any security in connection with a loan made by any other person to, or to any other person by, and it calls for obtaining the previous approval of the Central Government. This section is applicable to a public company or a private company, which is a subsidiary of a public company.

Exemption

(a) Private Company which is not a subsidiary of public company;

(b) Banking Company;

(c) Government Company'

(d) Loan made by holding company to its subsidiary company;

(e) Guarantee given or security provided by holding company in respect of any loan made to its subsidiary company

Persons covered under section 295

(a) Any director of the lending company;

(b) Any director of the holding company;

(c) Any partner of any such director;

(d) Any relative of any such director;

(e) Any firm in which any such director is a partner;

(f) Any firm in which a relative of such a director is a partner;

(g) Any private company of which any such director is a director;

(h) Any private company of which any such director is a member;

(i) any body corporate of which not less than 25% of the total voting power may be exercised or controlled t a general meeting by any director or by two or more directors together; and

(ii) any body corporate, the Board of directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

.

Non-applicability of the provisions of section 295

* any loan made to an employee of the company, who is not a relative of any director;
* any loan or advance made to a trust in which directors are trustees;
* any quasi-loan;
* any advance or deposit made in connection with leasing/hire-purchase transaction;
* any advance payment of salary given to an employee who is a relative of a director as per the rules of the company;
* any investment made in acquiring residential accommodation for director(s) (whether by way of purchase or entering into a lease agreement);
* house building loan given to a director subject to the guidelines issued for that purpose by the Central Government;
* any loan made to a Registered Co-operative Society;
* any loan given by a holding company to any director of its subsidiary company;
* advance given for services to be rendered or goods to be supplied provided it is reasonable and commensurate with the services to be rendered or goods to be supplied;
* section 295(1) does not apply to a government company provided that such company has obtained the approval of the Ministry or Department of the Central Government, which is administratively in charge of the company, or as the case may be or the State Government.

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Krishnadas S

Krishnadas S (Querist)

20 September 2011 Thank you sir...

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