LOANS & ADVANCES TO EMPLOYEES – APPLICABILITY OF

SECTION 185 / 186 OF COMPANIES ACT, 2013

AUTHOR :TG TEAM

https://taxguru.in/company-law/loans-advances-employees-applicability-section-185-186-companies-act-
2013.html

CA Mayank Parekh

Section 185 provides for loans to Directors etc. (Corresponds to Section 295 and 296 of the 1956 Act) and
Section 186 provides for loans and investment by company (Corresponds to Section 372A of the 1956 Act).

These Sections did not provide for cases where any loans and/or advances (generally interest free) granted by
companies to its employees (other than Directors) in the ordinary course of business, which is usual and most
common across all industries. Now, issue of concern is whether provisions of Section 186 of the Companies Act,
2013 apply to loans and/or advances granted by the company to its employees.

In this regard, number of references were made to the Ministry of Corporate Affairs (‘MCA’) seeking
clarification on the applicability of provisions of Section 186 of the Companies Act, 2013 relating to grant of
loans and/or advances by companies to their employees.

The issue was under consideration and MCA has issued General Circular No. 04/2015 dated 10 March 2015
clarifying that loans and/or advances made by the companies to their employees, other than the Managing
Director or Whole Time Directors (which is governed by Section 185) are not governed by the requirements of
Section 186 of the Companies Act, 2013.

This clarification will, however, be applicable if such loans and/or advances to employees and are also in
accordance with the remuneration policy, in cases where such policy is to be formulated. Accordingly,
companies may consider formulating policies for granting loans and/or advances to employees and also provide
for the same in the offer document/ appointment letter.

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General Circular No. 04/2015,

Dated: 10/03/2015

Subject : Clarification with regard to section 185 and 186 of the Companies Act, 2013 — loans and
advances to employees – reg.

This Ministry has received a number of references seeking clarification on the applicability of provisions of
section 186 of the Companies Act, 2013 relating to grant of loans and advances by Companies to their
employees.
2. The issue has been examined and it is hereby clarified that loans and/or advances made by the companies to
their employees, other than the managing or whole time directors (which is governed by section 185) are not
governed by the requirements of section 186 of the Companies Act, 2013 This clarification will, however, be
applicable if such loans/advances to employees are in accordance with the conditions of service applicable to
employees and are also in accordance with the remuneration policy, in cases where such policy is required to be
formulated.

3. This issues with the approval of the Secretary.

No. 1/32/2013-CLV

Yours faithfully,

(KMS Narayanan)
Assistant Director