Section 185 of the Companies Act 2013 is an important provision that deals with the loans and investments made by companies to their directors and related parties. This section imposes certain restrictions on such transactions to ensure transparency and prevent any potential conflict of interest. In this blog, we will discuss the provisions and implications of Section 185 of Companies Act 2013.
Provisions of Section 185:
As per Section 185, a company cannot advance any loan, guarantee, or provide any security in connection with a loan to:
- Any of its directors, or a director of its holding company or any partner or relative of such director.
- Any firm in which such a director or relative is a partner.
- Any private company in which such a director is a director or member.
- Any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together.
However, there are some exceptions to the above provision:
- When a loan is given to a managing or whole-time director as a part of the conditions of service as approved by the members of the company in a general meeting.
- When a company gives a loan or provides a guarantee or security for a loan to a person in whom any of the directors is interested as a director or member of any company or in any other capacity subject to certain conditions.
- When a company invests in any entity in which any of its directors is a director, provided that such investment is not made through more than two layers of investment companies.
Implications of Section 185:
Section 185 is a crucial provision that helps to maintain the integrity and transparency of corporate governance by preventing directors from abusing their positions to gain personal benefits. The restriction on loans and investments to related parties ensures that the interests of the company and its shareholders are not compromised in any way. This provision also helps to protect the minority shareholders who may be at a disadvantage if the majority shareholders, who are also directors, use the company’s resources for their personal gains.
In case a company violates the provisions of Section 185, the director who is a recipient of the loan or investment, along with the company, shall be punishable with a fine of not less than Rs. 5 lakhs which may extend up to the amount of the loan or investment made or up to imprisonment for a term which may extend to 6 months, or both.
Conclusion
Section 185 of Companies Act 2013 aims to ensure that companies do not misuse their resources by giving loans or investments to directors or related parties. The restrictions under this section help to promote transparency and protect the interests of shareholders. Directors should ensure that they comply with the provisions of Section 185 and avoid any potential conflicts of interest that may arise from such transactions. Overall, this provision is a significant step towards promoting good corporate governance and ensuring the long-term sustainability of companies.
Frequently Asked Questions (FAQs)
Q: What is Section 185 of Companies Act 2013?
A: Section 185 of Companies Act 2013 is a provision that deals with the loans and investments made by companies to their directors and related parties. It imposes certain restrictions on such transactions to ensure transparency and prevent any potential conflict of interest.
Q: Who is covered under Section 185?
A: Section 185 covers the following entities:
Any director of the company or a director of its holding company or any partner or relative of such director.
Any firm in which such a director or relative is a partner.
Any private company in which such a director is a director or member.
Any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together.
Q: What are the restrictions under Section 185?
A: A company cannot advance any loan, guarantee, or provide any security in connection with a loan to the entities mentioned above, except under certain conditions such as when a loan is given to a managing or whole-time director as a part of the conditions of service as approved by the members of the company in a general meeting.
Q: What are the exceptions to Section 185?
A: The exceptions to Section 185 are:
When a loan is given to a managing or whole-time director as a part of the conditions of service as approved by the members of the company in a general meeting.
When a company gives a loan or provides a guarantee or security for a loan to a person in whom any of the directors is interested as a director or member of any company or in any other capacity subject to certain conditions.
When a company invests in any entity in which any of its directors is a director, provided that such investment is not made through more than two layers of investment companies.
Q: What is the punishment for violating Section 185?
A: In case a company violates the provisions of Section 185, the director who is a recipient of the loan or investment, along with the company, shall be punishable with a fine of not less than Rs. 5 lakhs which may extend up to the amount of the loan or investment made or up to imprisonment for a term which may extend to 6 months, or both.
Q: What is the purpose of Section 185?
A: The purpose of Section 185 is to ensure that companies do not misuse their resources by giving loans or investments to directors or related parties. The restrictions under this section help to promote transparency and protect the interests of shareholders. Directors should ensure that they comply with the provisions of Section 185 and avoid any potential conflicts of interest that may arise from such transactions.
