🔴 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.

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✅ 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.

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📊 Loan Limits (When Conditions Are Met)

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

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

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📌 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).

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🌍 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).

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🏦 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.

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💼 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.

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📘 Quick Compliance Checklist

Situation	Permitted?	Conditions
Loan to director (general)	❌ Not permitted	Unless exception applies
Loan to NRI director	❌ Not permitted	Same as above; plus FEMA compliance
Loan to director as employee	✅ Permitted	As part of service conditions
Loan to WOS or JV	✅ Permitted	Subject to section 185(2)
Loan to other persons (non-directors)	✅ Permitted	On arm’s length, ordinary course
Loan to 10%+ shareholder (closely held)	✅ But taxable	As deemed dividend under IT Act

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