This section is for controlling and restricting companies from giving loans or guarantees to their directors or related parties.
Penalty
(4)(i) the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
(4)(ii) every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and
(4)(iii) the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.]
What the section says
In plain terms
(1)No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—
A company cannot lend money or give guarantees to its directors, or to companies or firms that its directors or their relatives are connected to.
(1)(a)any director of company, or of a company which is its holding company or any partner or relative of any such director; or
(1)(b)any firm in which any such director or relative is a partner.
(2)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 any person in whom any of the director of the company is interested, subject to the condition that—
A company can lend money to someone a director is interested in, but only if the company's members agree to it with a special resolution and the loan is used for the borrower's main business activities.
(2)(a)a special resolution is passed by the company in general meeting:
provisoProvided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and
(2)(b)the loans are utilised by the borrowing company for its principal business activities.
explanationExplanation.—For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means—
(2)(a)any private company of which any such director is a director or member;
(2)(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
(2)(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.
(3)Nothing contained in sub-sections (1) and (2) shall apply to—
The rules about lending to directors do not apply to loans given as part of employee benefits, or to companies that normally lend money as part of their business, or to loans from a parent company to its wholly-owned subsidiary.
(3)(a)the giving of any loan to a managing or whole-time director—
(3)(a)(i)as a part of the conditions of service extended by the company to all its employees; or
(3)(a)(ii)pursuant to any scheme approved by the members by a special resolution; or
(3)(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
(3)(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
(3)(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:
provisoProvided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.
(4)If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section,—
If a company breaks the rules about lending to directors, it can be fined between 5 lakh rupees and 25 lakh rupees, and the people involved can be imprisoned for up to 6 months or fined.
(4)(i)the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees;
(4)(ii)every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees; and
(4)(iii)the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.]
The right-hand column is written from the section text, not quoted from it, and it has no legal force. Where the two differ, the left-hand column is the law.
Reproduced from the official India Code print for reference. Check the current text on India Code before you rely on it, and read the section alongside its Rules. Nothing here is legal advice.