1. General Prohibition under Section 185 of the Companies Act, 2013

• Public Limited Companies are generally prohibited from directly or indirectly giving:
  
  • Loans to any of their directors, or
    
  • Loans, guarantees, or security in connection with loans to any person in whom a director is interested.
    
• This restriction is intended to prevent misuse of corporate funds and maintain accountability.
  
• It applies to both executive and non-executive directors of the company and its holding companies.
  

2. Who is Covered Under the Prohibition?

• The restriction includes loans to:
  
  • Directors of the company, holding company, or any partner/relative of such directors
    
  • Any firm in which such a director or their relative is a partner
    
• The law prohibits both direct financial assistance and indirect arrangements through proxies or intermediaries.
  

3. Permitted Exceptions (With Conditions)

• A Public Limited Company may grant loans or give guarantees or securities to:
  
  • A managing or whole-time director as part of the terms of employment, or
    
  • Under a scheme approved by shareholders by special resolution
    
• Loans may also be extended to:
  
  • Wholly-owned subsidiaries, provided it is used for principal business activities.
    
  • Joint venture companies, with proper board approval and disclosures
    
• Such exceptions require full disclosure and, in some cases, shareholder approval by special resolution.
  

4. Penalties for Violation

• If a company violates Section 185, both the company and the officer in default (including the director receiving the loan) are liable for penalties.
  
• The company may face a fine of up to ₹5 lakh, while the defaulting director may face imprisonment up to six months or a fine up to ₹5 lakh or both.
  
• Strict enforcement is intended to prevent insider abuse and financial mismanagement.
  

5. Procedural and Compliance Safeguards

• Companies must ensure that any permissible loan arrangement is:
  
  • Properly approved by the Board, and where required, by shareholders
    
  • Fully documented in board resolutions, shareholder minutes, and registers.
    
  • Reported in statutory filings and financial statements
    
• Legal opinion is often sought to ensure compliance with both Section 185 and Section 186 of the Act.