Key Regulations to help Companies manage Loan requirements

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Quick Summary

Navigating India’s corporate loan landscape requires adherence to key regulations to ensure compliance and financial stability. The Reserve Bank of India (RBI) regulates bank lending under the Banking Regulation Act, 1949, setting limits on lending to single and group borrowers at 15% and 30% of a bank’s capital funds, respectively.

For businesses seeking loans, maintaining a strong credit profile is essential. Eligibility criteria often include a minimum operational period of 2–3 years and a CIBIL score of at least 650.

Additionally, lenders must adhere to the Fair Practices Code prescribed by the RBI, ensuring transparency in loan processing, interest rate disclosures, and grievance redressal mechanisms.

By understanding and complying with these regulations, companies can effectively manage their loan requirements and maintain financial health.

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.

About the Author

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

Principal 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.