Loans are the major source of funding for most of the Companies apart from their Share Capital. Companies borrow from various sources like banks and various other financial institutions. Where public limited companies borrow from mass public by accepting public deposits private companies are strictly prohibited from accepting any loan or deposits from the public.
However the Companies Act 2013 has brought a major change in the borrowing provisions for private companies and removed shareholders and relatives of directors from the list of lenders.
Going forward the private companies can borrow only from directors apart from banks and financial institutions provided the director gives a declaration that the amount that he is giving is not out of borrowed funds.
7) Any amount received against subscription to any securities including share application money provided the securities are allotted within 60 days from the date of receipt of the application money or advance. If the securities are not allotted within 60 days then the same should be refunded within 15 days else the same shall be treated as deposit after completion of 15 days. 8) Any amount received from a person who at the time of receipt was a director provided the director furnishes a declaration that the amount given is not out of borrowed funds. 9) Any amount raised by issue of bonds or debentures secured by first charge on any assets referred to in Schedule III of the Act excluding intangible assets. 10) Any amount received from an employee of the company not exceeding his annual salary in the nature of non interest bearing security. 11) Any amount received as a Non- interest bearing amount received or held in trust. 12) Any amount received in the course of or the purpose of the business for the following :-
a. As advance for the supply of goods or provision of services provided such advance is appropriated against supply of goods or provision of service within 365 days from the receipt of such amount, b. As advance received in connection with consideration for property under an agreement or arrangement, c. As security deposit for the performance of the contract for supply of goods or provision of services. d. As advance received under long term projects for supply of capital goods. If any amount received under clause (a),(b) and (d) becomes refundable due to the reasons that the company accepting money does not have necessary permission or approval to deal with the goods or services then the amount received shall be deemed to be a deposit after the expiry of 15 days from the date they become due for refund. 13) Any amount brought in by the promoters themselves or their relatives by way of unsecured loan in pursuance of a stipulation of any lending institution on the promoters. Such exemption shall be available only till the loans of the Financial Institutions are not repaid and not thereafter. 14) Any amount accepted by a Nidhi Company in accordance with rules made u/s 406 of the Act.
(i) any other director of the lending company, or of the holding company of the lending company; (ii) any partner or relative of such director; – definition of relative is spouse, lateral ascendants upto two levels i.e. father & grandfather, mother & grandmother and father includes step father, lateral descendants on the son’s side upto two levels i.e son and son’s children, daughter (including step daughter), her husband and siblings. (iii) any private company of which director is a director or member (iv) any body corporate at a general meeting of which such director exercises control of at least 25% of its voting power either singly or with other director(s) – which means basically the shareholding of such body corporate because presently in India voting power derives from shareholdings
186 5 >>>Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
Loans & deposits as per new companies act 2013
Loans & Deposits
As per Companies
Acceptance and giving loans
The Companies Act,1956
permitted private companies to borrow from
Relatives of directors.
Companies Act 2013
borrowing provisions for private companies removes the
following from from the list of lenders
Relative of directors
Going forward the private companies can borrow only from
• directors apart from banks
• and financial institutions provided the director gives a declaration that the
amount that he is giving is not out of borrowed funds.
Let us analyze the various provisions pertaining to loans given and
accepted by the Companies as per Companies Act 2013
1)A private Company and an un-eligible public company cannot
accept loans or deposits from any person other than its
For accepting any loan from person other than Directors the
company will have to comply with all the conditions mentioned
including creation of reserve account, deposit insurance, credit
2)Share application money received but not allotted shall be
treated as deposit.
3)Any money received as advance in the course of ordinary
business shall be treated as deposit if goods or services are not
provided within 365 days of receipt.
4)Private Companies and an un-eligible public
company will have to file a return of deposits on
30th June if they have any deposit received from
person other than director.
5)As of now if the private companies have any loan
received from any person other than director then
they have to file a statement with the Registrar
within 3 months of the commencement of the Act
i.e. 30th June 2014 in Form DPT-4.
Section73 It states that No company whether public or private can
accept deposit from anybody without complying with the
provisions mentioned in Section 73.
Clause (viii) of Rule 2(c)
specifically excludes loans from directors from the purview
of deposit definition if the director gives a declaration that
the amount he is lending is not out of borrowed funds.
Clause (vi) of Rule 2(c)
excludes loans received from any other company from the
definition of Deposits.
The Companies Acceptance of Deposit rules are not
1) A Banking Company,
2) A Non Banking Finance Company registered with RBI,
3) A Housing Finance Company registered with National
4) Any other Company which the Central Government may
To sum up even though companies are permitted to borrow from
companies, directors and financial institutions they have to obtain
the consent of the company prior to obtaining further loans if the
aggregate of such loans exceed the aggregate of its paid up share
capital and free reserves. Obtaining temporary loans are excluded
from the purview of this section.
Deposit includes any receipt of money by way of deposit or loan
or in any other form, by a Company.
Following amount received shall not be considered Deposits
under this Chapter
Central Government /State Government/ local authority
Foreign or international banks / multilateral financial institutions
Banking Institution including co-operative banks notified under
Banking Regulation Act.
Public Financial Institution /Regional Financial Institutions /
Insurance Companies / Scheduled Banks.
commercial paper or any other instruments issued in accordance with
the guidelines of Reserve Bank of India.
any other Company.
any securities including share application money
a person who at the time of receipt was a director provided the
issue of bonds or debentures secured by first charge on any assets
an employee of the company not exceeding his annual salary in the
nature of non interest bearing security.
a Non- interest bearing amount received or held in trust
Any amount received in the course of or the purpose of the business for
As advance for the supply of goods or provision of services
As advance received in connection with consideration for property
under an agreement or arrangement,
As security deposit for the performance of the contract for
supply of goods or provision of services.
As advance received under long term projects for supply
of capital goods.
Any amount brought in by the promoters themselves or their
relatives by way of unsecured loan in pursuance of a stipulation of
any lending institution on the promoters
Any amount accepted by a Nidhi Company in accordance with rules
made u/s 406 of the Act.
To sum up any company whether public or private can accept
loan or deposit from directors (subject to obtaining a
declaration) and any other company whether private or public
(subject to the restrictions imposed by S.180(1)(c),of the Act)
apart from banks and financial institutions. If any company is
desirous of obtaining loan from any other person then they have
to comply with the Deposit rules which include obtaining credit
rating, issuing circular, creating deposit repayment reserve
Section 76 Eligible Company
Eligible Company means:-
• A public Company and it has either of the following
• Net worth of not less than one hundred crore rupees or
turnover of not less than five hundred crore rupees.
• It has obtained the prior consent of the company in general
meeting by means of a special resolution
• It has filed the above resolution with the Registrar of
Companies before making any invitation to the Public for
• Exception: An eligible company may accept deposits my
means of an ordinary resolution if it is accepting deposits
within the limit specified under clause (c) of sub section (1)
of section 180.
Conditions for acceptance of Deposit
1.No Company shall accept or renew deposit whether, secured or
unsecured, which is repayable on demand or upon receiving a notice
within a period of less than 6 months or more than 36 months from
the date of acceptance or renewal of such deposit.
Exception : A company may for the purpose of meeting its short term
requirements of funds accept or renew deposits whose repayment is
before six months provided they do not exceed 10% of the aggregate
of the paid up share capital and free reserves of the company and they
are not repayable before 3 months from the date of deposits.
2.Deposits may be accepted in Joint names not exceeding 3.
3.A non Eligible company Shall accept deposit only to the extent of
25% of the aggregate of paid up share capital and free reserves.
1) Deposit from members shall not exceed 10% of
the aggregate of paid up share capital and free
2) Deposit from others shall not exceed 25% of
the aggregate of paid up share capital and free
reserves (excluding deposit from members)
5) A Government companies shall not accept deposit more than 35%
of the aggregate of paid up share capital and free reserves.
6)Interest or Brokerage paid should not exceed the maximum rate of
interest or brokerages prescribed by the RBI for acceptance of
deposits by Non Banking Finance Companies.
7)The Company shall not reserve to itself whether directly or
indirectly a right to alter, to the prejudice or disadvantage of the
depositor, any of the terms and conditions of the deposit, deposit
trust deed and deposit insurance contract.
Guidelines for inviting deposits from members and public
Non Eligible Company Eligible Company S. 76
Resolution ordinary resolution special resolution
should not exceed 25% of
the aggregate of paid up
share capital and free
should not exceed 10% of the
aggregate of paid up share
capital and free reserves and
for others it should not exceed
25% of the aggregate of paid
up share capital and free
Interest / Brokerage Rate prescribed as per RBI
Tenure of deposit less than 6 months or more than 36 months.
Circular 1. post
2. in Form DPT-1
3. one English
newspaper and one
1.Form No. DPT-1
2.one English newspaper
and one vernacular
language 3.upload the
circular on its website.
Non Eligible Company Eligible Company S. 76
Statement 1.Financial position
3.Number of depositors
Registration of Circular
signed by majority of directors or their agents duly
authorized along with the statement shall be
submitted to registrar 30 days before the date of such
Validity of circular
6 months from the end of the financial year in which it
was issued or the date on which the AGM is held
whichever is earlier.
Deposit insurance shall be taken 30 days prior to the date
of issuance of the circular or renewal .Ceiling is Rs.
20000 per depositor for principal and interest
Security charge on its assets referred to in Schedule III
excluding intangible assets which shall not be less than
the amount remaining unsecured by deposit insurance
Non Eligible Company Eligible Company S. 76
Form prescribed by the company shall be submitted by
the intending depositor.
The form shall contain a declaration that the deposit is
not made out of borrowed funds.
A receipt shall be furnished within 2 weeks from the date
of receipt of money or realization of cheque
Deposit repayment reserve
On or before 30th April of each year a sum not less than
15% of the amount of deposits maturing in the current
financial year and the next financial years shall be
deposited in a scheduled bank in a separate account
called deposit repayment reserve account which shall be
free from charge or lien.
Non Eligible Company Eligible Company S. 76
A register of deposits shall be maintained at the
registered office and entries shall be made within 7
days from the date of issuance of deposit receipt.
Return of deposits A return shall be filed on or before 30th June of every
year with the Registrar in Form No.DPT – 3 along with
fee giving the status as on 31st March.
Penal Rate of Interest A penal Rate of 18% p.a. shall be payable on all
Where in respect of any deposit accepted by a company before the
commencement of this Act, the amount of such deposit or part thereof or
any interest due thereon remains unpaid on such commencement or
becomes due at any time thereafter, the company shall—
1) File with the Registrar a statement in form DPT-4 a statement of all
deposits accepted by the company and sums remaining unpaid along with
the interest payable thereon along with the arrangements made for such
2) Repay within one year from such commencement or from the date
on which such payments are due whichever is earlier.
This sections corresponds to S. 293 of the Companies
Act,1956 which was applicable only to public companies
and private companies which are subsidiaries of public
The provision which is now applicable to private
companies as well,
states that if the amount to be borrowed by the
company along with the amount already borrowed by
the company exceeds the aggregate of its paid up share
capital and free reserves then consent of the company
by means of a special resolution shall be taken.
The borrowings exclude temporary loans taken by the
company i.e. loans repayable on demand or within 6
months from the date of such loan.
180. (1) The Board of Directors of a company shall exercise the following powers only with
the consent of the company by a special resolution, namely:—
(c) to borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital and free
reserves, apart from temporary loans obtained from the company’s bankers in
the ordinary course of business:
Provided that the acceptance by a banking company, in the ordinary course of its
business, of deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a
borrowing of monies by the banking company within the meaning of this clause.
Explanation.—For the purposes of this clause, the expression “temporary loans” means
loans repayable on demand or within six months from the date of the loan such as short-
term, cash credit arrangements, the discounting of bills and the issue of other
short-term loans of a seasonal character, but does not include loans raised for
the purpose of financial expenditure of a capital nature;
The relevant section 180(1)(c) states as follows:
The section provides that no company shall
directly or indirectly advance any loan to its
director or to any other person in whom the
director is interested or give any guarantee or
provide security in connection with the loan
taken by the director or any such other person.
firm in which director or
his relative is partner and
private companies in which the director may be director or
any body corporate at a general meeting of which such director
exercises control of at least 25% of its voting power either singly or
with other director(s)
The term “any other person in whom the director is interested”
any body corporate the Board of Directors, managing director or
manager of which is accustomed to act in accordance with the
instructions or directions of the Board of Directors or director(s)
of the lending company.
• loans to managing director in accordance with the terms of his
• loans to employees in accordance with the conditions of service
applicable to all employees of the company
• where a scheme is framed and which scheme is approved by
the members by way of special resolution.
185. (2) PENALTIES
If any loan is advanced or a guarantee or security is given or provided
in contravention of the provisions of sub-section (1), the company
shall be punishable with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees,
and the director or the other person to whom any loan is advanced or
guarantee or security is given or provided in connection with any loan
taken by him or the other person, shall be punishable with
imprisonment which may extend to six months or with fine
which shall not be less than five lakh rupees but which may extend
to twenty-five lakh rupees, or with both.
To sum up advancement of loan to any individual or
company or firm in whom the director of the lending
company is related is strictly prohibited.
No company shall directly or indirectly give any loan to
any other person or body corporate exceeding 60% of
its paid up share capital, free reserves and share
premium or 100% of its free reserves and securities
premium whichever is more.
If the company proposes to advance any such loan
exceeding its limits then prior approval by means of a
special resolution passed at a general meeting shall be
Prior approval of the public financial institution shall
also be required if there is any default in repayment of
instalment or interest on the term loan.
186 . (1) Without prejudice to the provisions contained in this Act, a
company shall unless otherwise prescribed, make investment through
not more than two layers of investment companies:
Provided that the provisions of this sub-section shall not affect,—
(i)a company from acquiring any other company incorporated in a
country outside India if such other company has investment
subsidiaries beyond two layers as per the laws of such country;
(ii)a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law or under any
rule or regulation framed under any law for the time being in force.
186(2) No company shall directly or indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any
other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any
other body corporate,
exceeding sixty per cent of its paid-up share capital, free reserves and securities
premium account or one hundred per cent of its free reserves and securities
premium account, whichever is more.
186(3) Where the giving of any loan or guarantee or providing any
security or the acquisition under sub-section (2) exceeds the limits
specified in that sub-section, prior approval by means of a special
resolution passed at a general meeting shall be necessary.
186(4) The company shall disclose to the members in the financial
statement the full particulars of the loans given, investment made or
guarantee given or security provided and the purpose for which the loan
or guarantee or security is proposed to be utilised by the recipient of the
loan or guarantee or security.
186(5) No investment shall be made or loan or guarantee or security given
by the company unless the resolution sanctioning it is passed at a meeting
of the Board with the consent of all the directors present at the meeting
and the prior approval of the public financial institution concerned where
any term loan is subsisting, is obtained:
Explanation.—For the purposes of this section,—
(a) the expression “investment company” means a company
whose principal business is the acquisition of shares, debentures
or other securities;
(b) the expression “infrastructure facilities” means the facilities
specified in Schedule VI.
To sum up prior approval of the shareholders shall be obtained by
the company if any loan is advances exceeding the given limits.
Checklist for Lender
• The borrower is in no way
related to the director of
the lender company.
• The loan advanced is not in
excess of the limits
specified. If it is then prior
approval of shareholders is
obtained by means of a
Checklist for Borrower
• The lender is the director,
bank or any other approved
financial institution. For any
other lender deposit rules
are followed prior to
acceptance of such deposit.
• Prior approval of
shareholders is taken if the
borrowings exceed the
aggregate of paid up share
capital and free reserves.