Key Regulations to help Companies manage Loan requirements

Loan from Directors or Relatives and Compliances involved

In urgent situations, companies often seek to quickly augment their working capital by sourcing funds from their Directors in the form of loans. This approach provides a rapid solution for meeting immediate financial needs. However, it is crucial to ensure that such transactions comply with the provisions outlined in the Companies Act, 2013 (the “Act”).

Key Compliance Points

01. Board Approval Required
According to Section 179(3)(d) of the Act, any loan from Directors or their relatives must be approved by a formal Board resolution. This means that the company must convene a Board Meeting and pass a resolution authorizing approval of these loans.

02. Declaration of Source of Funds
Under Rule 2(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014 (“Deposit Rules”), the Director or their relatives must provide a declaration stating that the funds are not sourced from loans or deposits accepted from other parties.

03. Permissible Loans
The Deposit Rules outline specific conditions for permissible loans that are not classified as deposits. Compliance with these conditions is crucial to ensure proper categorization and regulatory adherence.

04. Disclosure in Financial Statements and Director’s Report
Any loans received must be appropriately disclosed in the notes to the Financial Statements and the Director’s Report, ensuring transparency and compliance with regulatory requirements.

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Sanmita Poojari

Senior Associate | Compliance | [email protected]

A compliance expert with a strong foundation in corporate legal and secretarial practices. Excels in corporate governance, regulatory filings, and advisory services on legal and financial matters, ensuring seamless corporate law compliance for clients.

Darshana Chauhan

Senior Associate | Compliance | [email protected]

Manages compliance for acquisitions, fundraising, and due diligence with meticulous execution. Ensures adherence to the Companies Act and FEMA while delivering seamless regulatory solutions.