Loan Acceptance by Company – Regulations and Exemptions

Introduction:

Loans have been the major source of funding for most of the Companies apart from Equity. The Companies Act, 1956 permitted private companies to borrow from directors, shareholders and relatives of directors. However the Companies Act, 2013 (The New Act) has special thrust on loans and has regulated & restricted it. The new act has brought a major change in the borrowing provisions for private companies and removed shareholders and relatives of directors from the list of lenders. These provisions have taken a back the management of the private companies and need review & revisions at the government level. We have witnessed, with the passage of time the Ministry of Corporate Affairs has revisited these issues and relaxed many provisions related to loan acceptance for private companies.

Let us explore the various provisions pertaining to loan acceptance by the Private Companies from Directors, Relatives & Members under Companies Act 2013.

Loan from Directors:

Section 73 of the new act states that no company whether public or private can accept deposit from anybody except in a manner provided under this Chapter. Clause (viii) of Rule 2(c) of the Companies (Acceptance of Deposits) Rules, 2014 (The Deposit Rules) specifically excludes loans from directors from the purview of deposit definition subject to some conditions. Loan or an amount received by the company from its director is not regarded as a 'deposit' if the following conditions are fulfilled:

(i) At the time of receipt of the amount by the company, the lender was a director of the Company. The rule nowhere state that the exemption applies "as long as the lender is a director”. The loan will continue to be exempt even after the person concerned ceases to be a director thereafter.

(ii) Director at the time of giving money should give declaration in writing that amount so advanced is not given out of the funds acquired by the director by borrowing or accepting loans or deposits from others.

(iii) [1]The company shall disclose the details of money so accepted in the Board's report

We can conclude that if a director at the time of giving loan to company fulfill the above conditions, such loans shall not be regarded as deposits.

Loan from Relative of Directors:

Under the 1956 Act, private companies were allowed to take loans from the relatives of the directors, but the same liberty doesn’t continue under the new Act. Any amounts taken from the relative of the director were regarded as deposits. The Companies (Acceptance of Deposits) Second Amendment Rules, 2015 came as savior for all private companies there by including Directors Relatives under the exemption list of deposit in Clause (viii) of Rule 2(c) of the Deposit Rules. After the said amendment any amount received from the relatives of the director who satisfy all the below conditions were categorized under exempted deposits:

(i) At the time of receipt of the amount by the company, the lender was a relative of the director of the Company.

(ii) He must give aforesaid declaration in writing.

(iii) The company shall disclose the details of money so accepted in the Board's report.

 Loan from Shareholders:

 Loans from Shareholders under the new Act were treated as deposits in similar lines of director’s relative even though the same were not considered deposits under the 1956 Act. The provisions related to loan from shareholders has changed multiple times with various exemptions for private companies. It is pertinent to not that till today even though exemptions are prescribed but loans taken from shareholders are to be considered as Deposits under Companies Act, 2013.

The first exemption for Loan from Shareholder came on the historic date of June 5th, 2015 when many rockets of exemptions for private companies were launched. The Exemption Notification states that “Clause (a) to (e) of Sub-section 2 of Section 73 shall not apply to private Companies which accepts from its members monies not exceeding one hundred percent, of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified” (i.e. form DPT-3).

On 13th June, 2017, these exemptions were further extended and the limits for loans from shareholders were removed in certain cases. This Exemption Notification substitutes the aforesaid exemption pertaining to the matter issued and states that “Clause (a) to (e) of Sub-section 2 of Section 73 shall not apply to private Companies-

(A) which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid up share capital, free reserves and securities premium account; or 

(B) which is a start-up, for five years from the date of its incorporation; or

(C) which fulfils all of the following conditions, namely:-

• which is not an associate or a subsidiary company of any other company;
• if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
• such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section

Provided that the company referred to in clauses (A), (B) or (C) shall file the details of monies accepted to the Registrar in such manner as may be specified” (i.e. form DPT-3).

The exemption dated 13th June, 2017 has further enlarged the scope for the private companies to accept loans from their shareholders.

Conclusion:

There are circumstances wherein a company is in urgent need of financing. As a contingency plan, it may become relevant to take the loan from the directors. Such kind of arrangement has its own perk of raising loan with low or no rate of interest in the hands of a company. Directors, who are often founders, may be able to park available funds for the purpose of expanding the business. That’s why it is important to understand the nature of transaction whether it will be a loan or a deposit. The Government has relaxed the provisions relating to acceptance of loans, but for private companies loan from members must be excluded for the deposit arena.

[1] Amended by Companies (Acceptance of Deposits) Second Amendment Rules, 2015 Dated 15th September, 2015