October 10, 2025
3 mins read
Section 185 of the Companies Act, 2013 deals with the restrictions on companies providing loans to directors or entities connected to them. Introduced to improve corporate governance and prevent misuse of company funds, this section outlines when and how companies can offer financial assistance to their directors or to parties in which directors are interested. The idea is to prevent conflicts of interest and protect the interests of shareholders and stakeholders. It lays down strict penalties and exceptions to ensure transparency in corporate transactions and to avoid directors unduly benefiting from company resources in their capacity.
Section 185 of the Companies Act, 2013 initially prohibited companies from directly or indirectly advancing loans to their directors or entities in which directors hold an interest. However, this changed with amendments in 2017. The updated version permits loans to certain related parties, but only under specific conditions, such as passing a special resolution and meeting disclosure requirements. The section now allows for greater flexibility in genuine business transactions, particularly among group companies, while maintaining necessary safeguards. It applies to both private and public companies and is a vital check to prevent directors from misusing their position for personal financial gain.
Under Section 185, a company is generally restricted from advancing loans, including any loan represented by a book debt, to its directors or any other person in whom the director is interested. This also includes giving guarantees or providing security in connection with any loan taken by such persons. However, this restriction is not absolute. For example, if the company is giving loans as part of its ordinary business and charges an interest rate not lower than the prevailing yield of government securities, then it is allowed. Private companies not having any external borrowings or body corporate investors are also exempt.
Several exemptions are allowed under Section 185, subject to certain conditions. A company may lend to its managing director or whole-time director if the loan is part of the service contract or approved by the shareholders. Loans extended in the ordinary course of business at an interest rate equal to or higher than the prevailing government security rate are permitted. Group companies can provide loans to their subsidiaries or joint ventures, provided a special resolution is passed. However, public companies with significant borrowing or investment from other bodies corporate must comply strictly with the rules unless exempted.
The penalties for violating Section 185 are severe and apply to both the company and the defaulting director or recipient. If a company breaches the provisions, it may face a fine ranging from ₹5 lakh to ₹25 lakh. The director or person receiving the loan can be fined up to ₹5 lakh or be imprisoned for up to six months, or both. Additionally, any gains made from such a transaction may be required to be repaid. These strict penalties are intended to ensure accountability and discourage misuse of company funds for personal or related-party benefits.
Section 185 of the Companies Act, 2013 has evolved from a blanket prohibition to a more nuanced framework that allows certain loans under prescribed conditions. The aim is to strike a balance between flexibility for business transactions and preventing financial misconduct. Directors and companies must tread carefully, ensuring they comply with both the letter and the spirit of the law. Misinterpretation or negligence can lead to heavy penalties and reputational damage. Companies should consult legal experts and ensure board-level approval and shareholder transparency before offering any financial assistance to directors or entities linked to them.
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It regulates loans given by a company to its directors or related parties to prevent conflict of interest and ensure corporate transparency.
Exemptions include loans in ordinary business with proper interest rates, or to subsidiaries and managing directors under approved service contracts.
As per Taxguru’s interpretation, Section 185 governs loans to directors, specifying when it is prohibited or conditionally permitted under corporate law.
The 2017 Amendment relaxed the original restrictions and allowed loans under specific conditions with shareholder approval and clear disclosures.
Section 185 is part of the Companies Act, 2013, and lays down restrictions and exceptions for companies offering loans to directors or related entities.
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