CS Nilesh Patel

Loans & Advances [Section 185 & 186]

Loans to Directors Section 185
No company shall give loan, provide guarantee/ security to Director/ persons
connected with Director
Persons connected with Director:
a) any director of the lending company, or of a company which is its holding
company or any partner or relative of any such director;
b) any firm in which any such director or relative is a partner;
c) any private company of which any such director is a director or member;
d) 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
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 Board, or of any director or directors, of the lending
company.

Private Companies are also covered

Two possible interpretation of Save as otherwise provided in the Act
Section 185 not applicable to transactions permitted under Section 186(2) Will render
Section 185 redundant
Section 185 is prohibitory in nature and a code in itself. Permission u/s 186 available
only for loans/ guarantee not otherwise prohibited u/s 185
Accustomed to act in accordance with the directions or instructions
Regular or usual practice of issuing directions or instructions by the Board or Director
of lending company
Directions or instructions are followed by the Board of receiving entity

Exemptions
Loans may be provided to MD/WTD as a policy for employees; or pursuant to
scheme approved by special resolution
Loans by company in its ordinary course of its business at a rate not less
than the Bank Rate declared by RBI
Loans/ guarantee/ security by holding company to its Wholly Owned Subsidiary
Guarantee/ Security by holding company to its subsidiary is exempted
Provided Loans are utilized by subsidiary for its principle business
activities


Ordinary course of its business Complex test for determination
Memorandum of Association may be decisive
Transaction is in furtherance of the business objectives and has close
proximity with the normal business of the company
Recurring in nature - Previous instances to demonstrate that such activity is
customary

Negative Test
Transaction should not be of extraordinary or unusual nature


Loans, investments, guarantee - Section 186(2)
Company can:
a) Give loan to any person or body corporate
b) Give guarantee or security in connection with Loan to any body corporate or
person
c) Acquire securities of any other body corporate
upto 60% of share capital, free reserves and securities premium or 100% of
reserves and securities premium with approval of the Board

Unanimous resolution at the Board meeting for loan, investment, guarantee
or security
Private companies are also covered
Interest on loan not lower than G-sec

Prior Special Resolution required for loans, investment etc. exceeding the limit
Special Resolution not required
In respect of loans, investment, guarantee etc. to Wholly Owned Subsidiary/ Joint
Venture company
In respect of acquisition by holding company of securities of Wholly Owned Subsidiary
However, such loans guarantee/ securities will be counted for calculating the
limit, unlike earlier Section 372A



Special resolution to specify cap on loans, guarantee, security etc.
Special resolution by existing companies To be passed within one year from
notification i.e. by 31/03/2015
Particulars of loans, investment etc including the purpose of utilization by
recipient to be disclosed in financial statement
Company which has defaulted in repayment of Deposits or interest thereon are
not eligible to give loan or provide guarantee/ security till default is subsisting
Register to be maintained in Form MBP 2 (For entries after 1
st
April, 2014)

Exemption from Section 186:
Infrastructure companies/ Financing Companies/ Banks/ NBFC/ HFC/
Insurance companies

















* Exemption to infrastructure companies/ Financing Companies/ Banks/ NBFC/
HFC/ Insurance companies

Transaction Whether Section 185 or 186
attracted?
185 186*
Loans to employees as a part of company
policy (except MD/WTD)
No
Loans, guarantee, security by holding to
wholly owned subsidiary
No Yes But
Special
Resolution not
required
Loans by holding to subsidiary (If not
connected to Director in anyway)
No Special
Resolution, if it
exceeds limit
Corporate Guarantee by holding company for
term loan by subsidiary
No (Rule 10) Special
Resolution, if it
exceeds limit
Corporate Guarantee by holding company for
Bank/ Performance Guarantee by subsidiary
No No
Related Party Transactions [Section 188]
Approval of Board at a meeting required for following Related Party
Transactions:
Sale/ buy of goods or supply of services
Sale/ buy any property
Leasing of any property
Appointment of any agent for purchase/ sale of goods etc.
Appointment to any office or place of profit in company, its subsidiary or
associate
Underwriting of share or debentures

Approval of Audit Committee for all transaction with Related Party {Section 177(4)}

Conditions to enter into RPTs:
Board Agenda shall disclose, names of related parties, material terms including
value, nature/ duration of contract etc
Director shall not be present at the meeting during discussions
All RPTs to be reported in Board Report with justification
Contracts entered without approval of Board or shareholders and ratified within 3
months Voidable at option of Board
Prior approval of shareholders by Special Resolution:
Company with share capital of Rs. 10 Cr or more
Sale, purchase of goods & material exceeding 25% of turnover
Selling, buying of any property exceeding 10% of net worth or 10% of turnover
Lease contracts above 10% of networth or 10% of turnover
Availing or rendering of Services exceeding 10% of networth
Appointment to place of profit in company, subsidiary or associate at
remuneration above Rs. 2.5 Lac p.m.

Turnover or networth calculated as per last audited financial statement
Related Party shall not vote on the transaction
Special Resolution by Holding Company will be sufficient for entering into
transaction with its Wholly Owned Subsidiary

Exemption
Transactions entered in the ordinary course of business and at arms length
Ordinary course of business - Refer discussion u/s 185

Arms length transaction between related parties conducted as if they were
unrelated so that there is no conflict of interest
Transfer pricing methods may be adopted
Three stage compliances
Transaction in ordinary course and at arms length
Audit Committee Board Shareholders
Below or
above threshold
X X
Transactions not in the ordinary course or not at arms length
Below threshold X
Above threshold

Posers
Illustrative list of transactions Whether Section 188 attracted?
Providing loans, guarantee etc. to subsidiary No
Equity contribution by holding in subsidiary No
Leasing of premises/ Using joint premises Yes. Exempted if in the ordinary
course of business
Existing contract for 5 years No. Can continue till full tenure.
Material contracts by listed
company - Till first general meeting
after 1
st
October, 2014 if transaction
is likely to continue beyond 31
st

March, 2015
Purchase of shares by KMP through Stock
Exchanges
No
Appointment of Managing Director No
Way out to comply with Section 188
Documents relating to past transactions Ordinary course of business
Documents relating to pricings - Arms length
Shared services Agreement
Proper documentations like Lease Deeds/ Agreements for transactions with
Related Party
Policy frame work with terms of transactions for normal business
transactions may be approved by Audit Committee
Master Service Agreement to avail services/ goods instead of placing
separate PO
A related party transaction is a transfer of resources, services or obligations
between a company and a related party, regardless of whether a price is charged

Parties are related if one party;
Controls the other
Exercises significant influence over the other
Is a related party under Section 2(76)
Is a key management personnel of the Company or of a parent company

An entity is related to a company if any of the following conditions applies:
a) The entity and the company are members of the same group
b) One entity is an associate or joint venture of the other entity
c) Both entities are joint ventures of the same third party.
d) Two entities are JV and associate, respectively of a third entity
e) The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity

Clause 49 of Listing Agreement [w.e.f. 1/10/2014]
Listing Agreement Companies Act 2013
Wider definition of Related Party covering
close family members, fellow group
companies etc.
Close relatives, companies in which
Directors are interested, holding &
subsidiary company etc.
All RPTs to require prior approval of Audit
Committee
Approval or subsequent modification to
all RPTs
All material RPTs to be approved by
shareholders through special resolution and
related parties to abstain from voting
Approval of RPTs exceeding prescribed
threshold by special resolution and
related parties to abstain from voting
Company to formulate policy on material
related party transactions and dealing with
RPTs
(Transaction(s) individually or collectively
entered during FY exceeds 5% or turnover
or 20% of net worth of company)
-
Policy on dealing with RPTs to be disclosed
on website and also in Annual Report
-
Material RPTs to be disclosed to Stock
Exchanges on quarterly basis alongwith CG
Report
All RPT to be reported in Board Report
with justification
Thank you
Notifica
tion not
made
public
Section 2(76) Related party with reference to company means:
Director, KMP or their relative
Firm in which a director, manager or his relative is a partner
Private company in which a director or manager is a member or director
Public company in which a director or manager is a director and holds alongwith
his relatives, more than 2% of its paid-up share capital
Body corporate whose BOD, MD or manager is accustomed to act in
accordance with advice, directions or instructions of a director or manager
(except services provided in professional capacity)
Any person under whose advice, directions or instructions (except services
provided in professional capacity) of director or manager is accustomed to act
Company which is;
Holding, subsidiary or an associate company of such company
Fellow subsidiary
Director, KMP of holding company or his relative
Section 2(77) Relative includes members of HUF and following
relationship:
Self & Spouse
Father &
Mother
Children (Son/
Daughter) & their
spouse
Brother & sister