24 Feb Historical Overview of Loans from Directors, Shareholders, and Relatives of Directors in Company Financing
Loans played a crucial role in financing companies alongside equity in the past. Under the Companies Act of 1956, companies were permitted to borrow from directors, shareholders, or directors’ relatives. However, with the amendment of the act, the New Companies Act of 2013 removed the provision allowing loans from shareholders and directors’ relatives.
Criteria for Obtaining Loans by Companies in India
Several conditions were considered, including:
- The position of directors or their relatives.
- Directors providing a declaration stating that the amount is not borrowed.
- Loans from Relatives of Directors
- Private companies were previously allowed to borrow from directors' relatives under the Companies Act of 1956. However, the Companies Act of 2013 categorized amounts from relatives as deposits, barring companies from borrowing from them.
The Companies (Acceptance of Deposits) Second Amendment Rule of 2015 provided relief for private companies by exempting loans from directors’ relatives who met certain conditions, such as providing a written declaration.
Loans from Shareholders
Under the Companies Act of 1956, companies could accept loans from shareholders without categorizing them as deposits. Nevertheless, the Companies Act of 2013 prohibited companies from accepting such loans.
The Ministry of Corporate Affairs issued exemption notifications for private limited companies in 2015 and 2017, specifying conditions under which such companies could accept monies from members.
Loans from Directors
Loans received from directors were considered loans, not deposits. These loans could be interest-bearing or interest-free, sourced from the directors’ personal funds rather than borrowed funds.
Amounts Received from Borrowed Funds
For public companies, if directors were not shareholders, amounts received from them were treated as deposits, necessitating compliance with specific regulations. However, if directors were shareholders, the amounts were treated as member deposits.
Amounts Received from Directors’ Own Funds
Amounts received from directors’ personal funds were treated as loans, exempt from certain compliance requirements. Directors were required to declare the source of the funds to the company.
Procedure for Accepting Loans from Directors
Companies were required to pass a special resolution during a board meeting to approve loan acceptance limits. Before accepting a loan, the company and directors had to sign a declaration affirming the absence of borrowed funds.
Interest Rates on Loans from Directors
Interest rates on loans varied between 5% to 36%, depending on mutual agreements between the parties.
Penal Interest Rates for Non-Repayment
Companies failing to repay loan amounts to directors were subject to penal interest rates, typically set at 18%.
Circumstances for Accepting Deposits without Compliance
Several circumstances allowed companies to accept deposits without adhering strictly to Section 73(2) provisions.
Conclusion
Companies often require financial assistance, and loans from directors and members offer a convenient solution, particularly during emergencies. Provisions in the Companies Act of 2013 facilitate such loans for both private and public companies.
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