Section 185: Loans to Directors & Related Parties
General prohibition: A company cannot advance loans, guarantees, or securities to a director, their relative, or associated firms/body corporate Permitted transactions:
- Loan may be extended to a managing or whole‑time director as a service condition, or by a special resolution .
- Can also be issued to related persons with shareholder special resolution and used strictly for principal business activities.
Private company exemption: Section 185 does not apply to private firms where:
- No other corporate holds investment;
- Total borrowings < 2× paid‑up capital or ₹50 cr (whichever lower);
No default on borrowings Penalty scope: Expanded to include officers (KMPs, managers) in default category .
Section 186: Loans, Guarantees & Investments
Thresholds
A company may lend, guarantee, invest, or provide security up to the higher of:
- 60% of paid-up share capital + free reserves + securities premium;
- 100% of free reserves + securities premium.
Exceeding these limits requires a shareholder special resolution
Interest rate must not be lower than the closest RBI G‑sec yield of corresponding tenor .
Exemptions:
- Loans to employees under approved schemes are not counted as “persons”
- Complete exemption for transactions by holding companies to wholly‑owned subsidiaries and joint ventures
- Companies in financial domain (banking, NBFC, housing finance, insurance, infrastructure financing) are exempt .
Compliance obligations:
Board resolution required for any such transaction If borrowing is from a public financial institution, its prior consent is required unless amounts remain within Section 186 limits and no default exists Maintain Form MBP 2 register, file Form MGT 14 within 30 days, and carefully disclose full details in financial statements (amounts, purposes, recipients, funding sources
2025 Amendments & Practical Implications
- Regulatory consolidation: Recent statutory clarifications have reaffirmed exemptions and procedural clarity for wholly‑owned subsidiaries and employee loans .
- Expansion of penalties and obligations to KMPs ensures governance adherence throughout the management chain.
- Reinforcement of conformities to interest and reporting norms, especially for listed entities and those regulated by financial institutions.
Company Secretary—Checklist for Compliance
- Threshold monitoring: Constantly review total ICLs against Section 186 limits.
- Board & shareholder approvals: Obtain appropriate resolutions (Board for within limits, special resolution for exceeding).
- Track exemptions: Apply private‑company and subsidiary exemptions where applicable.
- Interest compliance: Use benchmarked G‑sec yields per Section 186(3).
- Maintain registers: Keep Form MBP‑2 updated.
- Timely filings: File MGT‑14; update MBP‑2; detailed disclosure in financial statements.
- Coordinate with lenders: Obtain prior consent if under public borrowing.
- Risk management: Document for audit and governance reviews, especially in cross‑company funding pools.
Final Thoughts
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