Sections 185 and 186 of the Companies Act 2013 regulate how companies can utilize their funds for loans, primarily to protect stakeholder interests. Companies are prohibited from providing loans to directors, with some exceptions, and penalties are enforced for violations. Furthermore, limits on loan amounts and conditions for approval are outlined to ensure responsible fund management.

1. Loans By Company
Introduction:
Sections 185 and 186 of the companies act 2013 lays down the provisions on how
the company can utilize its funds to provide loans. The purpose of introducing these
provisions is to safeguard the interest of stakeholders. Since there is huge money
of from the public at large involved in the company, therefore it becomes necessary
for regulating authorities to introduce such sections to safeguard the interest of all
those investors who have invested their funds in the company. Such investors
include banks, financial institutions, governments and people at large
(shareholders, debenture holders or bondholders).
While running the business in the format of body corporate, the basic questions
that arise in mind are what are how a company can avail the funds, how the
company can provide loans to its directors and others, how much a company can
give loan or how much a company can invest in different ways. All these questions
are dealt with herewith.

2. First, Can the company provide a loan to its directors?
Section 185 of the Companies act 2013 clearly states that a company cannot
provide loans to its directors. A company cannot directly or directly provide any
advances or provide any guarantee provide security to its directors or to any other
persons in whom directors are interested.
The exception to the above rule is,
1. The company can provide loans to managing directors or whole-time
directors as a part of the condition of service extended by the company to all
its employees or in terms of any scheme approved by members by passing
of a special resolution.
2. In the ordinary course of business, a company can provide loans or gives
guarantees or securities for the due repayment of any loan and in respect of
such loans an interest is charged at a rate not less than the bank rate
declared by the Reserve Bank of India
3. A holding company can provide a loan or give guarantee or provide any
security to its wholly owned subsidiary company provided that such funds
shall be utilized by the subsidiary company for its principal business activity
4. A holding company can provide security in respect of loan made by any banks
or financial institution to its subsidiary provided that such funds shall be
utilized by the subsidiary company for its principal business activity
For the above explanation, “to any other persons in whom directors are
interested” shall include the following persons:
1. any director of the lending company, or of a company which is its holding
company or any partner or relative of any such director
2. any firm in which any such director or relative is a partner
3. any private company of which any such director is a director or member
4. Anybody corporate at a general meeting of which not less than twenty-five
per cent. of the total voting power may be exercised or controlled by any
such director, or by two or more such directors together

3. 5. Anybody corporate, the Board of directors, managing director or manager,
whereof is accustomed to act under the directions or instructions of the
Board, or of any director or directors, of the lending company
In case of contravention of the above-mentioned provision, the company
shall be punishable with a fine which shall not be less than 5 lakh rupees
which may extend to 25 lakh rupees. The director or the person to whom the
loan is given or security is provided shall be punishable with imprisonment
which may be extended to six months or with a fine which shall not be less
than 5 lakh rupees but which may extend to 25 lacs or with both.
Second, how much loan a company can provide?
For this, the company’s act 2013 has laid down section 186. According to this
section, a company can directly or indirectly,
a. give 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
c. acquire by way of subscription, purchase or otherwise, the securities of
any other body corporate NOT exceed 60% of its paid-up share capital,
free reserve and securities premium account or 100% of its free reserve
and securities premium account whichever is more.
A few conditions attached with the above provision which need to be fulfilled
are mentioned herein below:
 Prior approval by way of a special resolution passed at a general
meeting shall be necessary where the provision of a loan exceeds
the above-specified limit.
 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

4. institution concerned where any term loan is subsisting, is
obtained.
 Prior approval of a public financial institution shall not be required
where the aggregate amount of the loans, the amount for which
guarantee or security is provided 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
 A company cannot give any loan under this section at a rate of
interest lower than the prevailing yield of one-year, three-year, five
years or ten years of Government Security closest to the tenor of
the loan
 No company which is in default in the repayment of any deposits
accepted before or after the commencement of this Act or in
payment of interest thereon, shall give any loan or give any
guarantee or provide any security or make an acquisition till such
default is subsisting
 Every company giving a loan or giving a guarantee or providing
security or making an acquisition under this section shall keep a
register which shall contain particulars of loan or securities given
In case of contravention of the above-mentioned provision, the company shall be
punishable with a fine which shall not be less than 25 thousand rupees which may
extend to 5 lakh rupees. The officer in default shall be punishable with
imprisonment which may be extended to two years or with a fine which shall not
be less than 25 thousand rupees but which may extend to 1 lakh Rupees or with
both.
Conclusion:
The companies act 2013 has imposed rigorous penalties for contravention of the
above provisions because of the reason that the funds of the company be utilized
in the best interest of all the stakeholders. The fund shall not be misused and the
reporting of all these transactions shall be done properly in the registers as well as
in the audit reports of the company.