Loan to Director
(1) No company shall, directly or
indirectly, advance any loan, including any loan represented by a book
debt to, or give any guarantee or provide any security in connection with
any loan taken by,—
(a) any director of company, or of a
company which is its holding company or any partner or relative of any
such director; or
(b) any firm in which any such
director or relative is a partner.
(2) A company may advance any loan
including any loan represented by a book debt, or give any guarantee or
provide any security in connection with any loan taken by any person in
whom any of the director of the company is interested, subject to
the condition that—
(a) a special resolution is passed by
the company in general meeting:
COMMENT: The explanatory
statement to the notice for the relevant general meeting shall disclose
the full particulars of the loans given, or guarantee given or security
provided and the purpose for which the loan or guarantee or security is
proposed to be utilised by the recipient of the loan or guarantee
or security and any other relevant fact; and
(b) the loans are utilised by the
borrowing company for its principal business activities.
NOTE: For the purposes of this
sub-section, the expression "any person in whom any of the director
of the company is interested" means—
(a) any private company of which any
such director is a director or member;
(b) any body corporate at a general
meeting of which not less than twenty-five per cent. of the total voting power
may be exercised or controlled by any such director, or by two or more such
directors, together; or
(c) any body corporate, the Board of
directors, managing director or manager, whereof is accustomed to act in
accordance with the directions or instructions of the Board, or of any director
or directors, of the lending company.
(3) Nothing contained in sub-sections
(1) and (2) shall apply to—
(a) the giving of any loan to a
managing or whole-time director—
(i) as a part of the conditions of
service extended by the company to all its employees; or
(ii) pursuant to any scheme approved
by the members by a special resolution; or
(b) a company which in the ordinary
course of its business provides loans or gives guarantees or securities for the
due repayment of any loan and in respect of such loans an interest is charged
at a rate not less than the rate of
prevailing yield of one year, three
years, five years or ten years Government security closest to the tenor of the
loan; or
(c) any loan made by a holding
company to its wholly owned subsidiary company or any guarantee given or
security provided by a holding company in respect of any loan made to its
wholly owned subsidiary company; or
(d) any guarantee given or security
provided by a holding company in respect of loan made by any bank or financial
institution to its subsidiary company:
COMMENT: The loans made under
clauses (c) and (d) are utilised by the subsidiary company for its principal
business activities.
(4) If any loan is advanced or a
guarantee or security is given or provided or
utilised in contravention of the
provisions of this section,—
(i) the company shall be punishable
with fine which shall not be less than five lakh rupees but which may extend to
twenty-five lakh rupees;
(ii) every officer of the company who
is in default shall be punishable with imprisonment for a term which may extend
to six months or with fine which shall not be less than five lakh rupees but
which may extend to twenty-five lakh rupees; and
(iii) the director or the other
person to whom any loan is advanced or guarantee or security is given or
provided in connection with any loan taken by him or the other person, shall be
punishable with imprisonment which may extend to six months or with fine which
shall not be less than five lakh rupees but which may extend to
twenty-five lakh rupees, or with both.]
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