Section 185 states that no Company shall, directly or indirectly, advance any loan, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person. One of the exemptions to this section is giving of any loan to a Managing or Whole-time Director as a part of the conditions of service extended by the Company to all its employees or pursuant to any scheme approved by the members by a special resolution.




Section 186 enables a company to give any loan, guarantee or provide security in connection with a loan to any person or other body corporate and acquisition of securities of any other body corporate not exceeding sixty percent of its paid-up share capital, free reserves and securities premium account or one hundred percent of its free reserves and securities premium account, whichever is more and if any loan or guarantee or providing any security or the acquisition exceeds the above mentioned limits, prior approval by means of a special resolution passed at the general meeting shall be obtained.


The aforesaid Sections did not lay down any specific requirements for cases where any loans and/or advances granted by companies to its employees (other than Directors) in the ordinary course of business, which is usual and most common across all industries.

The subject of deliberation was whether provisions of Section 186 of the Companies Act, 2013 apply to loans and/or advances granted by the company to its employees and therefore, addressing this issue, MCA has vide General Circular No. 04/2015[1] dated 10 March, 2015 clarified that loans and/or advances made by the companies to their employees, other than the Managing Director or Whole Time Directors (which is governed by Section 185) are not governed by the requirements of Section 186 of the Companies Act, 2013. This clarification will, however, be applicable if such loans and/or advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.