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Loan (with interest) to its director by nbfc company

ganesh kumar jhawar (partrner) (25 Points)

26 May 2016

Respected Sir/Madam,

Can u please suggest me whether NBFC Company can give Loan to its Director (with Interest).

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Sanjay S (Chartered Accountant) (1375 Points)
Replied 26 May 2016

The issue you have brought up is governed by Section 185 of the Companies Act, 2013. (Also you may check RBI Norms)

Section 185 prohibits companies from doling out loans to its directors. You have to read the section in the latest bare Act .

However the above section will not apply to - 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 loans on which interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Interpretation of 'IN THE ORDINARY COURSE OF BUSINESS' (Written with reference to A. Ramaiya's book)

To determine whether a transaction has taken place “in the ordinary course business” is a matter to be determined objectively by looking at business practices in the commercial world, the operational activities (ordinary) of business as a going concern, the practices of the past of a company and its dealings with creditors.

The tests are:

The regularity with which the company engages in lending activities and
Indulges in lending not only to directors (or entities in which he is interested) but also to other Parties (unrelated).

In this case, if the NBFC is involved in lending activities in ordinary course, then it may be hit by the exception made above; in which case, it may lend to its directors. However, please do note that, just because its a NBFC, it should not be assumed that its activities are that of lending in ordinary course. Also, Disclosures are required in the financial statments any how.

What's more... The Act says, 'the Director or other person' to whom a loan is made in violation of section 185 can even end up in prison or with a hefty fine.

NOTE: It is advised to refer the Act and latest circulars & notifications before deciding upon the applicability of Section 185.