Can a company give a loan to its director, subsidiary or group company?
Yes, in certain circumstances—but the Companies Act, 2013 places important restrictions and approval requirements.

For expert guidance on corporate law, ROC compliance and transaction advisory, businesses can consult Chhota CFO.

The two key provisions are Section 185 and Section 186.

To understand the specific restrictions on loans, guarantees and security involving directors, see our guide to Section 185 of the Companies Act, 2013.

Need help determining whether Section 185 or Section 186 applies to your company? Contact us for corporate law support and discuss your requirements with our experts.

Section 185 vs Section 186 — Companies Act, 2013

Particulars

Section 185 – Loan to Directors, etc.

Section 186 – Loan and Investment by Company

What does it regulate?

Loans, including loans represented by a book debt, and guarantees/security in connection with loans

Loans, guarantees, security and acquisition of securities

Persons / entities covered

Directors and specified persons in whom the director is interested

Any person/body corporate, subject to the provisions of the section

General restriction

Company cannot directly or indirectly provide specified loans, guarantees or security to persons covered under Section 185(1), subject to statutory exceptions

Company can undertake covered transactions subject to prescribed limits, approvals and conditions

Loan to director

Generally prohibited, subject to specified exceptions

Section 186 may also need to be considered where applicable

Loan to person in whom director is interested

Restricted, subject to Section 185(2) and specified conditions

May also be subject to Section 186

Loan to subsidiary / holding company

Must be examined based on the persons involved and the specific transaction

Specifically relevant; subject to Section 186 and applicable exemptions

Board approval

Required for permitted transactions under Section 185(2), through a Board resolution passed at a meeting

Required by a resolution passed at a meeting with the consent of all directors present

Shareholder approval

Special resolution required for transactions permitted under Section 185(2)

Special resolution generally required where the prescribed limits under Section 186(2) are exceeded

Statutory limits

No general monetary limit under Section 185; the key issue is whether the transaction is prohibited or permitted

Limits prescribed under Section 186(2), subject to specified exceptions

Interest requirement

No specific general minimum interest-rate requirement under Section 185 itself

Interest on loans covered by Section 186 cannot generally be below the prevailing yield of the relevant Government Security closest to the tenor of the loan

Key compliance focus

Eligibility and prohibition

Limits, approvals, interest and disclosures

Section 185 and Section 186 should not be treated as alternatives. A transaction may need to be tested under both provisions.

Can You Give a Loan to a Group Company?

A loan to a subsidiary, holding company or another group company is not automatically prohibited.

However, the company should examine both Section 185 and Section 186, depending on the facts.

For transactions covered by Section 186, companies should consider:

  • Board approval;
  • Prescribed financial limits;
  • Shareholder approval where applicable;
  • Interest-rate requirements;
  • Statutory disclosures; and
  • Applicable exemptions.

Planning a loan to a director, subsidiary or group company? Contact our experts for guidance on applicable approvals, limits and compliance requirements.

What About a Wholly-Owned Subsidiary?

Certain transactions with a wholly-owned subsidiary receive specific treatment under Section 186, subject to prescribed conditions.

Therefore, simply saying “it’s our subsidiary” is not sufficient. The transaction must still be tested against the applicable provisions.

5 Questions to Ask Before Giving a Loan

Before your company lends money to a director or group entity, ask:

  1. Who is receiving the loan?
  2. Does Section 185 apply?
  3. Does Section 186 apply?
  4. Is Board or shareholder approval required?
  5. Are interest, disclosure and other compliance requirements satisfied?

The Key Takeaway

Section 185 asks: “Is this transaction with a prohibited or restricted person?”
Section 186 asks: “Is the company within the permitted limits and complying with the required approvals and conditions?”

Don’t approve a group-company loan merely because it is an intra-group transaction. Check the Companies Act first.

Have questions about company loans and Section 185 or Section 186 compliance? Get in touch with Chhota CFO for professional guidance and support.