The document discusses related party transactions, loans to directors, and loans/investments by companies under the Companies Act 2013. It defines related parties and key managerial personnel. It outlines the limits and approval processes for related party transactions involving sale/purchase of goods, property transactions, service contracts, and appointments. It also discusses the provisions around loans to directors and other persons in whom a director is interested, and the penalties for non-compliance. Finally, it covers the limits, approvals and disclosures required for loans and investments made by companies.

1. TODAY’S TOPICS
1.Related Party Transactions.
2.Loan to Directors.
3.Loan and Investment by the company.

2. RELATED PARTY
TRANSACTIONS

3. DEFINITIONS – KMP [SECTION 2(51)]
Key Managerial Personnel [Section 2(51)] (Notified on 12th
September, 2013) - in relation to a company, means
The CEO or the MD or the
manager
Company Secretary
Whole – time Director
CFO
Any other prescribed officer
As per AS – 18:
KMP means those persons
who have the authority and
responsibility for planning,
directing and controlling the
activities of the reporting
enterprise

4. RELATED PARTY TRANSACTION (NOTIFIED)
4
 Sec 2(76) -Related party with reference to a company,
means:
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative
is a partner;
(iv) a private co. in which a director or manager is a
member or director;
(v) a public co. in which a director or manager is a
director or holds along with his relatives, more
than 2% of its paid-up S/C;
(vi) any body corporate whose BOD, M.D or manager
is accustomed to act in accordance with the
advice, directions or instructions of a director or

5. (vii) Any person on whose advice, directions or instructions a
director or manager is accustomed to act: Provided that
nothing in sub-clauses (vi) and (vii) shall apply to the
advice, directions or instructions given in professional
capacity;
(viii) any company which is—
(A) a holding, subsidiary or an associate company of
such company; or
(B) a subsidiary of a holding company to which it is also a
subsidiary;
(C) such other person as may be prescribed

6. CONTRACTS WITH RELATED PARTIES WHICH ARE
COVERED UNDER SECTION 188 :-
(a) Sale or purchase or supply of any goods and or
materials; (directly or through appointment of agent)
LIMIT : 10% of Turnover ; or
Rs. 100 cr.
Whichever is lower
If transaction exceeds the limit:
Board Approval
Resolution at the General Meeting
If transaction does not exceed the limit:
Board Approval
Condition applies to all the transaction.

7. (b) Selling or Otherwise disposing of, or buying,
property of any kind; (Whether directly or
through appointment of agent)
LIMIT:
10% of Net Worth of Company; or
Rs. 100 cr.
Whichever is lower.
(c) Leasing of property of any kind;
LIMIT:
10% of Turnover of company; or
10% of Net worth of company; or
Rs. 50 cr.
Whichever is lower.

8. (d) Availing and rendering of any services;
(Whether directly or through appointment of
agent)
LIMIT:-
10% of Turnover of company; or
Rs. 50 Cr.
Whichever is lower.
(e) Appointment of any agent for purchase or sale of
goods, materials, services or property
LIMIT:-
Limits of point (a), (b) or (d) will be applicable as
the case may be.

9. Note:
 The above limits shall apply for transactions to be
entered into either individually or taken together with the
previous transactions during a financial year.
 The turnover or Net worth shall be computed on the
basis of audited financial statements of preceding
financial year.

10. (f) Such related party’s appointment to any
office or place of profit in company, its
subsidiary company or associate company;
LIMIT:
Monthly remuneration exceeds 2.5 Lakh
rupees.
(g) Underwriting the subscription of any
securities or derivatives thereof, of the
company.
LIMIT:
Remuneration exceeds 1% of Net worth of
company.

11. CONTENTS OF EXPLANATORY STATEMENTS
TO BE ANNEXED WITH THE NOTICE OF
GENERAL MEETING
(a) Name of the related party;
(b) Name of the director or Key Managerial
personnel who is related, if any
(c) Nature of relationship
(d) Nature, material terms, monetary value and
Particulars of the contract or arrangement
(e) Any other information relevant or important
for the members to take the decision on
proposed contract.

12. NOTE:-
 No member of the company shall vote on
such resolution, to approve the contract or
arrangement, if such member is a related
party.
 Where director is in interested in any contract
or arrangement with the related party, such
director shall not be present at meeting
during the discussions on that subject matter.

13.  2nd proviso to section 188(1) shall not be
applicable on Private Company.
 1st Proviso: Need for getting resolution in case
transaction exceeds the limit
specified.
 2nd Proviso: Member who is related party to
contract, not allowed to vote in meeting.
 1st and 2nd proviso also not applicable on
 Contracts between two government companies.
 Contracts for which approval of Ministry or deptt.
Of CG has been obtained before entering into the
contract.

14.  Every contract or arrangement entered into, shall be referred
to in Board’s Report to the shareholders along with the
justification for entering into such Contract.
 Contract or arrangement shall be voidable at the option of
Board, if:-
a. Contract is entered into without obtaining consent
of the board or approval by a resolution,
wherever required.
b. Not ratified by the board or shareholders at
meeting within 3 months from the date on which
contract was entered into.

15. Nilesh S VikamseyCompanies Act, 2013
Section 185:-Loan to Directors

16. SECTION: 185
185(1): Save as otherwise provided in this Act, no
company shall:
 directly or indirectly
 advance any loan (including any loan represented
by a book debt)
To:
a. any of its directors or
b. to any other person in whom the director is interested or
c. give any guarantee or
d. provide any security in connection with any loan
taken by him or such other person

17. NOTE:-
 The words ‘save as otherwise provided in this Act’ is to
be noticed. To elucidate, this would mean that if anywhere
else, i.e. if any other section of the Companies Act, 2013
(and not that of Companies Act, 1956) allows giving of loans
etc. to the persons covered in section 185 then that will be
permitted.

18. For the purposes of this section, the expression “to
any other person in whom director is interested”
means-
a) Individual entity:
i. any director of the lending company; or
ii. any director of its holding company; or
iii. any partner of any such director; or
iv. relative of any such director;
b) Firm:
i. any firm in which any such director is a partner; or
ii. any firm in which the relative of any such director
is a partner;

19. c) Company:
i. any private company of which any such director
is a director; or
ii. any private company of which any such director
is a member;
d) Any body corporate at a general meeting of
which not less than 25% of the total voting
power may be exercised or controlled by
i. Any such director; or
ii. By 2 or more such directors, together; or

20. e) Any body corporate, the board of directors, managing
director or manager, whereof is accustomed to act
in accordance with the directions or instructions of
the:
i. Board; or of
ii. Any director or directors of the lending
company

21. In the proviso to this sub-section, some exceptions have
been provided :-
(a) the giving of any loan to a managing or whole-time director:
(i) as a part of the conditions of service extended by
the company to all its employees; or
(ii) pursuant to any scheme approved by the
members by a special resolution;
(b) a company which in the ordinary course of its business
provides:-
 loans; or
 gives guarantees; or
 securities for the due repayment of any loan and
 in respect of such loan an interest is charged at a rate not less than
the bank rate declared by the Reserve Bank of India.

22. (c) Any loan made by a holding company to its wholly
owned subsidiary company; or
any guarantee given or security provided by the
holding company in respect of any loan made to its
wholly owned subsidiary company.
(d) Any guarantee given or security provided by holding
company in respect of any loan made by bank or
financial institution to its subsidiary company.
Condition: Loan should be utilized for the principal
business activity.

23. EXAMPLES:
 ABC Private Limited is a wholly owned subsidiary of XYZ
Limited.
 The principal business activity of ABC Private Limited is
manufacturing of cement.
 ABC Private Limited borrows money from State Bank of
India.
 It seeks corporate guarantee from XYZ Limited.
 Mr. R is a director of ABC Private Limited and also a director
of XYZ Limited.
 Prior to the clarification dated 14.02.2014, this would have
attracted the provisions of section 185 because of common
directorship.

24.  E.g. 1: ABC Private Limited having Mr. R as a Director decides to give
loan to XYZ Private Limited also having Mr. R as its Director.
 E.g. 2: If XYZ Private Limited is a wholly owned subsidiary of a Limited
Company.
 E.g. 3: ABC Private Limited having Mr. R as a Director decides to give
loan to XYZ Private Limited in which Mr. R is not a Director but a
shareholder.
 E.g. 4: ABC Private Limited and XYZ Private Limited does not have a
single common director. In ABC Private Limited, Mr. R is a Director and
in XYZ Private Limited, the wife of Mr. R is a Director.

25.  E.g. 5: ABC Private Limited and XYZ Private Limited does not have any
common directors. ABC Private Limited has Mr. M as a shareholder and
even XYZ Private Limited has Mr. M as a shareholder.
 E.g. 6: ABC Limited wants to give loan to XYZ Limited. The loan will not
be allowed to be given if the voting power in XYZ Limited is exercised or
controlled by a common director between ABC Limited and XYZ Limited
and which is not less than 25% of the total voting power. Here it could be
one such director or by 2 or more such directors, put together.

26. (e) Loan given by Nidhis,
provided the loan is given to director or his relative
in their capacity as a member and
Such transaction is disclosed in the annual accounts
by a note.
(f) Private Company
(i) No other body corporate has invested any
money in its share capital.
(ii) Borrowing < (Paid up share capital) X 2 ; or
Rs. 50 Cr.
Whichever is lower.
(iii) No default in repayment of any loan.

27. Borrowing may be from Bank or Financial Institution or any
other body corporate.
(g) Government company
Condition: Prior approval of the ministry or
department of Central Government has been taken
before
(i) Making loan
(ii) Providing Security
(iii) Giving guarantee

28. PENALTY FOR CONTRAVENTION:-
 185(2): If contravention of section 185(1):
i. The giver and
ii. The receiver, both are punishable;
 The company shall be punishable with:
A fine (not less than Rs.5 lakhs but may extend to Rs.25
lakhs)
 The director or the other person (receiver) shall be punishable
with:
a. imprisonment which may extend to 6 months; or
b. with fine (not less than Rs.5 lakhs but may extend to
Rs.25 lakhs) or with both

29. Section 186
Loans and Investment by
Company

30. 186(1)
A company shall make investment through:
Not more than 2 layers of investment companies.
(unless otherwise prescribed)

31. Exceptions:
(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.

32. 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

33. LIMIT
OR
Whichever is Higher
60% of (Paid up share capital + Free Reserve+
Security Premium)
100% of (Free Reserves + Securities Premium)

34. CLARIFICATION:-
Loans/advances to employees
in accordance with the condition of service
applicable to the employees; and
are in accordance with the remuneration policy, in
cases where such policy is required to be
formulated.
ARE NOT GOVERNED BY THE REQUIREMENTS OF
SECTION 186.

35. APPROVAL NEEDED
Where the present and proposed
LIGS exceeds the ceiling
Yes
1. Pass Unanimous BR
2. Pass Special
Resolution in GM.
NO
1. Pass Unanimous Board
Resolution (All
Directors must be in
favour.

36. DISCLOSURE TO MEMBERS [186(4)]
The company to disclose to the members:
• in the financial statement
• The full particulars of the loans and investments/
guarantee/security provided an
• The purpose for which the same is proposed to be
utilized by the recipient of it.

37. 186(5)
 Unanimous Board Resolution.
 Prior approval of Public financial Institution,
where any term loan is subsisting.
Exception: No approval required, where
(i) Ceiling limit not exceeded; and
(ii) No default in repayment.

38. RATE OF INTEREST ON LOAN [186(7)]:
 Rate should not be less than the prevailing yield of
govt. security closest to the tenor of loan.
NO LOAN TILL DEFAULT IS SUSISTING
[186(8)]:
 If any default in repayment of deposit exist then LIGS is
not allowed.

39. MAINTENANCE OF REGISTER [186(8)]:
 Every company shall keep a register, which
shall contain the particulars of LIGS.
 Entries should be made with 7 days.
 Register to be kept at the Registered office.

40. REGISTER TO OPEN FOR INSPECTION [186(10)]:
 Register to be kept at registered office.
 Shall be open for inspection, and
 Extract may be taken on payment of fee
prescribed in AOA.

41. 186(11):
 Exemption to Banking company, Insurance Company or
Housing Finance Company.
 NBFC
 Company whose principal business is acquisition of
securities.
186(12):
 Power of CG to make the rules.

42. 186(13)
Contravention:
If company contravenes:
Company shall be punishable with fine (not less than
Rs.25000 but which may extend to Rs.5 lakhs)
Every officer of the company who is in default shall be
punishable with imprisonment for a term which may
extend to 2 years and with fine not less than Rs.25000
but which may extend to Rs.1 lakh.

43. Thanks & Regards
Arpit Khandelwal
Email:- todwalarpit@gmail.com