Can someone please provide checklist for Private limited company regarding acceptance of loans and deposits from the directors/shareholders/ relatives of directors and also regarding providing loans to directors, members or relatives. What are the restrictions, prohibitions and applicable law ? What are the penalties in each case of violation?
Legal and Corporate Framework: Loans and Deposits Involving Directors, Shareholders, and Their Relatives – Private Limited Companies
Under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014, the acceptance and provision of loans and deposits by a private limited company are governed by a combination of exemptions, conditional permissions, and express prohibitions. The following delineates the applicable legal framework:
I. Acceptance of Loans and Deposits by the Company
- From Directors and Their Relatives:
- Pursuant to Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014, any amount received from a director of the company or from a relative of a director (in case of a private company) shall not be treated as a deposit, provided a declaration is obtained to the effect that the amount is not given out of borrowed funds.
- Such amounts are not subject to the deposit-related restrictions under Sections 73 to 76 of the Act.
- From Shareholders (Members):
- Acceptance of deposits from members is permissible under Section 73(2) of the Act, subject to fulfillment of prescribed conditions including:
- Issuance of a circular to members.
- Filing of Form DPT-1 with the Registrar of Companies.
- Maintenance of a deposit repayment reserve account.
- Furnishing of deposit insurance.
- Private companies fulfilling specific criteria (e.g., being a start-up, not being a subsidiary/associate, meeting borrowing thresholds) may avail exemption from some of these compliance requirements.
- Disclosure and Reporting Obligations:
- All such non-deposit receipts must be disclosed in the financial statements under relevant heads.
- Annual filing in Form DPT-3 is mandatory, even for exempted deposits, by 30th June of each year for amounts outstanding as on 31st March.
II. Loans Provided by the Company
- To Directors and Their Relatives:
- Section 185 of the Companies Act, 2013 prohibits a company from directly or indirectly advancing any loan, including any loan represented by a book debt, or giving any guarantee or providing any security in connection with any loan taken by:
- Any director of the company or its holding company;
- Any partner or relative of any such director;
- Any firm in which any such director or relative is a partner.
- Permissible Exceptions under Section 185(1) Proviso and Section 185(2):
- Loans may be extended to Managing or Whole-time Directors under a scheme applicable to all employees or pursuant to a special resolution of members.
- Loans to any person or entity in which a director is interested are permissible, subject to:
- Prior approval by a special resolution of the shareholders.
- Utilization of the loan by the borrowing entity for its principal business activities.
- Lending companies whose primary business is the grant of loans in the ordinary course of business may do so, provided the interest rate is not lower than the prevailing yield of government securities.
III. Penal Provisions
- Contravention of Section 73–76 (Acceptance of Deposits):
- The company is liable for a penalty ranging from ₹1 crore or twice the amount of deposit, whichever is lower, which may extend to ₹10 crore.
- Officers in default are liable to imprisonment up to seven years or fine not less than ₹25 lakh, which may extend to ₹2 crore, or both.
- Contravention of Section 185 (Loans to Directors, etc.):
- The company shall be liable to a fine not less than ₹5 lakh but which may extend to ₹25 lakh.
- The officer in default and the recipient of the loan shall be punishable with imprisonment up to six months or with fine ranging from ₹5 lakh to ₹25 lakh, or with both.
IV. Corporate Compliance Recommendations
- Obtain a director’s declaration under Rule 2(1)(c)(viii) for all amounts received.
- Maintain a separate register recording such transactions.
- Ensure timely filing of Form DPT-3 irrespective of deposit classification.
- Do not extend loans or provide guarantees or security to any entity/person falling within the ambit of Section 185 unless covered under statutory exceptions.
- Pass requisite board or special resolutions, wherever mandated.
- Consult legal counsel in structuring intra-group financing or director transactions to ensure full compliance.
Conclusion: While private companies enjoy relaxed norms vis-à-vis deposit acceptance from directors and relatives, any transaction that may fall within the ambit of Sections 73–76 or Section 185 must be closely scrutinized for compliance with procedural and substantive requirements. Non-adherence exposes the company and its officers to severe penal consequences under the Companies Act, 2013.
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