🔴 Section 185(1): Prohibited Loans

A company cannot directly or indirectly:

  • Advance loans (including book debts), or
  • Give guarantees or security in connection with any loan taken by:
    • Any director of the company or its holding company
    • Any partner or relative of such director
    • Any firm in which such director or relative is a partner

This section prohibits such transactions to protect stakeholders and prevent misuse of company funds.


Permitted Exceptions Under Section 185

A company may lend to directors/related persons if ALL the following apply:

✅ Applicable to Private Companies only:

  1. No body corporate has invested in the company’s share capital.
  2. Company’s borrowings from banks/FIs/other companies < twice its paid-up share capital or ₹50 crore, whichever is lower.
  3. The company has not defaulted in repayment of any borrowings at the time of transaction.

📊 Loan Limits (When Conditions Are Met)

Loans may be granted to directors, their relatives, or specified persons up to the higher of:

BasisMaximum Loan Limit
60% of Paid-up Share Capital + Free Reserves + Securities Premium✅ Permitted
100% of Free Reserves + Securities Premium✅ Permitted

📌 Special Cases Permitted under Section 185(2)

A company can give loans to its directors under the following scenarios:

  1. ✅ As a condition of service extended to all employees.
  2. ✅ In the ordinary course of business, where interest is charged not less than the rate prescribed under RBI regulations.
  3. ✅ To a wholly-owned subsidiary company (loan or guarantee/security).
  4. ✅ To a joint venture company (guarantee/security).

🌍 Loan to NRI Directors

While the Companies Act, 2013 does not distinguish between resident and non-resident directors for the purpose of Section 185, NRI Directors are still subject to the same restrictions. Therefore:

  • ✅ Loans to NRI Directors are prohibited under Section 185(1), unless the exceptions under Section 185(2) or the Private Company exemptions (above) apply.
  • ✅ Additionally, FEMA compliance is required when remitting funds to or from NRI accounts (e.g., NRO/NRE).

🏦 Loans to Other Persons (Non-Directors)

  • Permitted without limit, unless the transaction is not on an arm’s length basis or not in the ordinary course of business.
  • 🚫 If the person is a shareholder holding ≥10% in a closely held company (i.e., not widely held), the loan may be treated as a Deemed Dividend (u/s 2(22)(e) of the Income Tax Act) and is taxable in the hands of the shareholder.

💼 Deposits Not Considered

Money accepted from directors or their relatives is not treated as “deposits” under the Companies Act, 2013, provided appropriate declaration is furnished.


📘 Quick Compliance Checklist

SituationPermitted?Conditions
Loan to director (general)❌ Not permittedUnless exception applies
Loan to NRI director❌ Not permittedSame as above; plus FEMA compliance
Loan to director as employee✅ PermittedAs part of service conditions
Loan to WOS or JV✅ PermittedSubject to section 185(2)
Loan to other persons (non-directors)✅ PermittedOn arm’s length, ordinary course
Loan to 10%+ shareholder (closely held)✅ But taxableAs deemed dividend under IT Act

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