185 → Loan to Directors

Why Section 185 is framed

Popli Industries Ltd A.P.

Loan/Guarantee/Security company to its

Director by or to an entity where he is having
some interest

Now as Per Sec 185, there are certain restriction and conditions subject to which such loan may be
granted

Sec 186(1)
No company shall
 advance any loan (including loan represented by Book-Debt) or
 provide any guarantee/security in connection with loan to

(a) Any director of company, or any director its holding company, any partner or relative of any
or such director

(b) Any firm in which any such director or relative is a partner

Decide whether following transactions are allowed u/s 185

D1 i.e. Director of A Ltd

A Ltd
Loan

E.g.-1

Solution

1
 D1 i.e. Director of A Ltd
A Ltd

Loan
E.g.-2

Solution

A Ltd D1 i.e. Director of A Ltd

(Finance Company) Loan

(Fi

D Ltd

This company has given a guarantee to A Ltd in connection with Loan to D1

E.g.-3

Solution

H1 i.e. Director of Holding of A Ltd

A Ltd
Loan
E.g.-4

Solution

A Ltd H1R i.e. Relative of H1

Loan

E.g.-5

2
Solution

S1 i.e. Director of Subsidiary

A Ltd
Loan

E.g.-6

Solution

A Ltd ABC & Co, i.e. a firm where H1 is

Partner
Loan
E.g.-7

Solution

ABC & Co, i.e. a firm where H1R is

A Ltd
Partner
Loan

E.g.-8

Solution

Sec 185(2) :- Section 185 shall not apply i.e.

 A company may advance any loan including any loan represented by a book debt, or
 give any guarantee or provide any security in connection with any loan taken by

3
  any person in whom any of the director of the company is interested,
Subject to the condition that—
1. If S/Res is passed in general meeting
2. Loans are utilised by the borrowing company for its principal business activities

4
Explanation.—Meaning of "Any person in whom any of the director of the company is interested" —
(a) any private company of which any such director is a director or member;
(b) any body 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; or
(c) 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 Board, or of any director or directors, of
the lending company.

Decide whether following transactions are allowed u/s 185

X Pvt Ltd
A Ltd
D1 = Director
D1 is Director of A Ltd
Loan to

E.g.-9

Solution

A Ltd X Pvt Ltd

D1 is Director of A Ltd Loan to D1 = Member

E.g.-10

Solution

A Ltd X Pvt Ltd

D1 is Director of A Ltd Loan to D1R = Director
D1R is relative of D1

E.g.-11

Solution

5
 Z Ltd
A Ltd
A1 is Director of A Ltd
Loan to

A1 is also holding 26% in Z Ltd even though he

does not hold directorship in Z Ltd

E.g.-12

Solution

Reliance Jio Ltd

Reliance Indust Ltd
Loan to

BOD/MD/Manager of Jio are liable to comply

directions of Reliance Industries Ltd

E.g.-13

Solution

Sec 185 (3) Nothing in Sub Section (1) and sub Section (2) shall apply to
(a) Giving of any loan to a managing or whole-time director—
 as a part of the conditions of service extended by the company to all its employees; or

6
  pursuant to any scheme approved by the members by a special resolution; or
(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 loans an interest is charged at a rate not less than the rate of prevailing yield of
one year, three years, five years or ten years Government security closest to the tenor of the
loan; or
(c) Any loan made by a holding company to its wholly owned subsidiary company or
any guarantee given or security provided by a holding company in respect of any loan made to its
wholly owned subsidiary company; or
(d) Any guarantee given or security provided by a holding company in respect of loan made by any
bank or financial institution to its subsidiary company:
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its
principal business activities.

E.g.-14 A Ltd

Policy Home loan upto 60 months for all employees

2018 Company provided home loan to MD/WTD for 36 months

Solution

E.g.-15 A Ltd

Policy No policy of any loan to employee

2018 Company provided home loan to MD/WTD for 36 months after passing
S/Res

Solution

7
Decide whether following transactions are allowed u/s 185

H Pvt Ltd S Pvt Ltd i.e. subsidiary of H Pvt Ltd

Director = H1 , H2 , H3 Director = S1 , S2 , S3
=
Loan to

E.g.-16

Solution

E.g.-17 Suppose in above e.g., S Pvt Ltd is a Wholly Owned Subsidiary of H Pvt Ltd

Solution

Reliance jio Ltd

Reliance Industries Ltd i.e. Subsidiary of Reliance Industries
Director = H1 , H2 , H3 Ltd

Guarantee

ICICI Bank

Loan To

D1 i.e. Director of Reliance Industries Ltd is holding 26% in Jio Ltd

E.g.-18

Solution

8
 X Ltd Z Ltd (Delhi) i.e. an Indian Company
Foreign Company
Loan to

Director of X Ltd is holding 40% shares in Z Ltd

E.g.-19

Solution

Penalty u/s for any contravention u/s 185 (4)

Company Officer/Director or Any other person

Min. 5 Lakh Max. 25 Lakh Penalty Imprisonments

Up to 6 months

9
Meaning of Loan Represented by Book-Debt

A Ltd
D1 i.e. Director of A Ltd
Goods Sold

Details of Transactions

Case-1 Case-2

1. Normal Credit by Company 1-Month 1-Month

2. Credit to D1 i.e. Director of A Ltd 6-Month 1-Month

E.g.-20

Solution

A Ltd
D1 i.e. Director of A Ltd
Sale of Flat ` 5 Cr

Payment terms

1. Down Payment ` 1 Cr

2. Payment in Installment ` 4 Cr

10
 Decide whether the above transaction is covered u/s 185

E.g.-20

Solution

E.g.-21 Whether company can waive such debt due from director or provide extension in payment thereof

Section 177 → Audit Committee

1. Formed in → Listed public Co. or Public Co. having

P.U.C. ≥ 10 Cr. Turnover ≥ 100 Cr. o/s Loan/borrowing > 50Cr.

(This is as per Rule-4 of Appointment & Qualification of Directors Rules, 2014)
2. Min. = 3 Directors [Independent Director in majority (N.A. for sec 8 Cos)]
Majority members well versed with financial statement
3. To act as per instructions specified by B.O.D

Regional Exams Recommend Area Sales Manager

Manager

Scrutiny & Monitoring

1. Review & Monitoring Of the performance of Auditor

11
2. Examination Of Financial Statement & Auditors Report

3. Recommendation For Appointment and terms of Auditor

4. Scrutiny Of Inter-Corporate loans

5. Monitoring Of end use of funds raised through public offers

6. Approval & Subsequent Modification Of Related Party Transactions

4. May call comment of Auditor on

Internal Control Scope of Audit Review of financial statement

before submission to Board

5. Auditor & KMP have right to be heard at meeting, but no right to vote
6. Board report u/s 134 to disclose composition of "A.C." & disclosure where its re- commendation
not accepted (E.g In case of appointment of Auditor, if some conflict occur between opinion of
BOD & Audit CommitteeOpinion of BOD shall prevailHowever disclosure of this fact
required in Boards Report

Combined Analysis of Sec 177 read with Sec 188

For any related party transaction, following approval shall be required

1. Audit Committee u/s 177 (Omnibus option is also available)

1. Board Resolution u/s 188(1)

2. O.Res, if required, as per 1st proviso to Sec 188 (1)

2.5A Section 177 → Omnibus approval [Rule-6A]

All 'RPT' require approval of "Audit Committee", thus " Audit Committee " may provide omnibus subject
to following
(1) "AC" to provide criteria of omnibus value of omnibus
(i) Value of transaction
Aggregate & Individually
(ii) DDisclosure to be made to Audit Committee for seeking approval
(iii) RReview of Related Party Transactions Entered into by company
(iv) T Transactions which can not be subject to Omnibus Approval

12
 (2) Omnibus approval to contain

N A N O

Name of Related Amount of Transaction Nature and Duration of Other information which
Party that can be entered into transaction may be relevant for Audit
Committee to take decisions

(3) If RPT is not foreseen, omnibus approval subject to value per transaction upto ` 1 Cr
(4) Omnibus for 1 F.Y. & not for sale of undertaking
In case of Specified IFSC Public Company - Section 177 shall not apply.

2.5B Section 177 → Vigil Mechanism [Whistle-Blower]

Cos accepting deposit from public
1. By whom or
Borrowing from banks/PFI > 50 Cr.

2. Constitution

Where 'A.C.' in place Otherwise

A.C. to oversee Board to nominate

director to act as "A.C."

3. Purpose →
(i) To provide adequate safeguard against victimization to → Employee/Director
(ii) Suitable action against repeated frivolous complaint

Other Points

1. In case of transaction, other than transactions referred to in section 188, and where Audit
Committee does not approve the transaction, it shall make its recommendations to the Board
Proviso to Sec 177(4)

2.  In case any transaction involving any amount not exceeding 1 crore rupees is entered into
by a director or officer of the company
 without obtaining the approval of the Audit Committee and

13
  it is not ratified by the Audit Committee within 3 months from the date of the transaction,
 such transaction shall be voidable at the option of the Audit Committee and
 if the transaction is with the related party to any director or is authorised by any other
director,
 the director concerned shall indemnify the company against any loss incurred by it
Proviso to Sec 177(4)

3. The provisions of this clause shall not apply to a transaction, other than a transaction referred to
in section 188, between a holding company and its wholly owned subsidiary company
Proviso to Sec 177(4)

Whether Approval of Audit Committee required for transaction between Holding & Its subsidiary
company

Where Transaction is not covered u/s 188

Where Transaction is covered u/s 188
“Audit Committee approval is not required”
“Audit Committee approval is required”

2.6 Section 178 Nomination & Remuneration committee

1. By whom same as Sec 177
Constitute at least 3 Non Executive Directors, out of which majority shall be I.D. Chairperson
may become member, not to chair such committee
2. Role
 identify persons who are qualified to become directors and who may be appointed in senior
management,
 recommend to the Board their appointment and removal and
 shall specify the manner for effective evaluation of performance of Board, its committees
and individual directors
3. The Nomination and Remuneration Committee shall formulate the criteria for determining
qualifications and independence of a director and recommend to the Board a policy, relating to
the remuneration for the directors, key managerial personnel and other employees.

the level and relationship of

composition of remuneration to
remuneration is performance is clear remuneration to directors, key
reasonable and and meets managerial personnel and senior
14 sufficient to attract, appropriate management involves a balance
retain and motivate performance between fixed and incentive pay
directors benchmarks
 2.7 Section 178 → Stakeholders Relationship Committee
1. Applicable cos having 1000 sh. holder, Debenture-holders, Depositors & other security holders
any time during financial year.
2. Constitution = 1 Chairperson (+) Members as decided by board
(NED)
2. Purpose = Resolve grievances of stakeholders

15