A common question that arises is whether a director or shareholder can give a loan to a company. This applies to both private companies and unlisted public companies. If a company accepts a loan from an individual who is both a director and a shareholder, should this be considered a loan from a shareholder or a loan from a director?

For Private Companies: Loans from Directors/Relatives.

Yes, directors and their relatives can give loans to a private company. According to Section 73(2) of the Companies Act, 2013, and the Companies (Acceptance of Deposits) Rules, 2014, this is allowed. However, it’s important to ensure that the loan comes from the director’s or relative’s own funds. The company must receive a declaration confirming this.

If the director or relative gives the loan from borrowed funds, this transaction is classified as a “Deposit.” In such cases, the company needs to comply with the Deposit Rules. Loans given by directors or their relatives from their own funds are considered exempt category deposits, which means they have different regulatory requirements compared to regular deposits.

For Public Limited Companies: Loans from Directors/Relatives.

Public limited companies can also accept loans from directors or their relatives under the same legal provisions. As per the Deposit Rules, a loan received from the directors is considered an exempt deposit. Again, the crucial factor is that the loan must come from the director’s or relative’s own funds, accompanied by a declaration to that effect.

If the loan comes from borrowed funds, it falls under the category of “Deposits,” and the company must follow the corresponding rules.

This version simplifies the legal jargon and makes it easier to understand the key points regarding loans from directors or their relatives.

FAQs (Frequently Asked Questions).

1. Is there any reporting to the government when a loan is obtained from a director?

 Answer: Yes, the company must report this to the government. Specifically, by the 30th of June in the next financial year, the company needs to file Form DPT-3. This form includes details about how much loan has been obtained from directors during the year, how much has been repaid, and the outstanding loan balance.

2. Do we need to file MGT 14 to borrow money from a director?

Answer: Well, in the context of a private company, the loan doesn’t have to be approved by the shareholders because the shareholders’ approval is not required. Still, in the context of the share-funded public company, the loan, as well as its amount, need to be authorized by the shareholders. If the Memorandum of Incorporated provides for the conversion of the loan into equity shares at a later time, the same can only be done by a special resolution of the shareholders by passing a special resolution and filing of MGT-14.

DISCLAIMER: The information provided in this article is intended for general informational purposes only and is based on the latest guidelines and regulations. While we strive to ensure the accuracy and completeness of the information, it may not reflect the most current legal or regulatory changes. Taxpayers are advised to consult with a qualified tax professional or you may contact to our tax advisor team through call +91-9871990777 or info@semantictaxgen.in. the appropriate government authority to verify the accuracy of the information and to obtain advice on their specific tax situations.