Section 185 of Companies Act 2013
Section 185 of Companies Act 2013 Under the Companies Act 1956, private companies could borrow from directors, relatives of directors and shareholders. Companies Act of 2013 changed this. Under the new Act, relatives of directors and shareholders were removed from the list of lenders. Apart from financial institutions and banks, only directors could play the role of lenders with respect to private companies, provided there is a declaration that the lending is not happening out of borrowed funds.
With respect to lending also, there were changes made. Section 185 of the Companies Act, 2013, says that a company would not directly or indirectly give a loan to its director or “any other person in whom the director is interested”. These would include entities in which the director or his relative is a partner or shareholder.
Section 185 has been the most debated among the provisions of the Companies Act of 2013. Such limitations create significant difficulties for companies that provide loans, guarantees/securities to their subsidiaries or associated companies for their operational requirements. However, under the Companies (Meetings of the Board and its Powers) Rules, 2014, companies are allowed to give loans and guarantees to their subsidiaries or associated companies if such is utilized for its main business activities.
Section 185 of Companies Act 2013 Provisions of the Act particularly related to the borrowing of funds from the relatives of directors were denounced by the micro, small and medium enterprises. Friends and relatives are the most critical source of funds for a large number of such companies. Their removal from the list of lenders under the new Act was hard on these companies. Federation of Indian Micro and Small & Medium Enterprises (FISME) consistently raised the issue with the government. FDI
Consequently, the government came up with the Companies (Acceptance of Deposits) Second Amendment Rules, 2015, which came into force on the date of its publication in the official gazette. Under it, the government has sought to bring relief to micro, small and medium enterprises by allowing the acceptance of deposits from relatives and shareholders of private companies with suitable disclosures. The notification states, “any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company, provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report.”
Hence it can be concluded that the amendment clarified the point that all amounts received by the private companies from their members, directors or their relatives prior to 1st April 2014, shall not be treated as ‘deposits’ under the companies act, 2013, provided such money should not be received out of the borrowed funds and the details of deposits from directors and their relatives to be given in the board’s report. This has come as a welcome move for private companies, a majority of whom look towards friends and relatives as lenders.