Application and guidelines for company loans to directors and their relatives.

Application of loans required and the Government in the Department of Company Affairs (DCA) has issued guidelines providing norms stringent norms for loans or guarantee corporate or furnishing security under Sections 295 and 372A of the Companies Act,

Application and guidelines for loans of company to their relatives and directors.

 

Application of loans required and the Government in the Department of Company Affairs (DCA) has issued guidelines providing norms stringent norms for loans or guarantee corporate or furnishing security under Sections 295 and 372A of the Companies Act, 1956 to the companies directors or their relations. The application for loans such required to be addressed to the Secretary, DCA with floor, “A” Wing, Shastri Bhawan, New Delhi after meeting conditionalities stiff. Such loans applications and or guarantee of corporate is to be accompanied by the fee prescribed of Rs.500 for company with share capital authorized of less than Rs. 25,00,000, Rs. 1,000 for company with Rs.25 lakhs or more but less than Rs. 25, 00,000 , Rs,1000 for company with Rs. 25 lakhs or more but less than authorized share capital of Rs. 5 crores of share capital authorized and Rs, 2000 fee with Rs. 5 crores for company or authorized share capital more by demand payable draft to Pay and Accounts officer, DCA.

The other conditions provide that the proposed interest date on the loan must not be less than four per cent, above the bank rate prevailing as the rate standard  made public under Section 49 of the Reserved bank of India Act, 1934 and the quantum of loan along with taken other loans , if any, should not exceed 25 times the drawn gross salary in six months preceding prior to the application making. Besides, no commission guarantee shall be allowed to anyone in accordance of the proposals.

In addition, the required application to be accompanied by the duly approved proposal at the board meeting with a copy certified of such a resolution indicating the company proposal, condition and terms, directors interest or their relatives, if any, specifying clearly the chargeable the rate of interest, the schedule and repayment terms, stating that the loan was not being made out of the borrowed company funds and any other major or main condition with a bearing on the loan or company financial position. The application is needed to be accompanied by specific approval of members, along with the explanatory statement containing all the details that are relevant and the resolution certified copy with explanatory statement so passed.

In the protecting area the investors interest, such application is needed to be accompanied by that company declaration has not defaulted in repayments making to the investors as and when their amounts of deposit become payment due. It requires a certificate from the statutory auditors or a Company Secretary in  whole-time practice mentioning that the proposal is in conformity with the provisions of Section 372A of the Companies Act and the company has not defaulted in any fixed deposit repayments accepted by the company under Section 58A of the Companies Act, 1956 or thereof part or thereon interest, dividend payment redemption and debenture repayment and timely payment of thereon interest, preference shares redemption and company regularity in all forms filing and returns as per the Companies Act provisions. Besides, a no objection certificate or approval prior of financial institutions that is public or in case of banks any term of loan maintain is required.

Other conditions need the company to attach a certified copy to the application of the memorandum and the applicant-company articles of association, the applicant share holding pattern and borrowing companies, controlling interest and the interest that are common especially mentioning the interest of along director with her or his relative for applications under Section 372A of the Companies Act. The other requirements includes director list of the board or both the applicant and companies borrower wherever applicable and disclosing inter se interest, if any, net worth of both the companies financial position for three years along with the annual reports copies, draft loan agreement certified copy the name and guarantor particulars with their consent if the loan is backed by any details, guarantee, given loan details, guarantee of the corporate given or provided any company security, firm, person and with the proof of compliance with Section 372 A wherever needed, the given loan details, given corporate corporate or provided security to any person, company, firm under section 295, to the effect with the declaration that proposed funds to be loaned are not needed for its requirements of working capital atleast for a year. The other requirements include the loan scheme certified copy for the employees of the company, if any, and for quantum of loan justification, for furnishing guarantee security by the company.

These guidelines  are intended to safeguard investors from being defrauded by loans resorting for their directors by companies, other employees and their relations from the funds of the companies and for their employees of the shareholders detriment, investors, debenture holders, financial institutions and stake holders and other investors in order to prevent prosecution under the Companies Act. This also forms of the corporate governance part through the process of compliance with statutory and legal requirements which the Government has incorporated in the Companies Act by the Companies (Amendment) Act, 2000 increasing the directors responsibilities and their accountability.

Department of Affairs of the Company Check List under Sections 372A and section 295 of Companies Act.

Please make sure while submitting the application in accordance of loans/corporate guarantee for security furnishing under Sections 295 and  372 of the Companies Act , 1956 that the information following/documents have been furnished.

1. The application should be addressed to the Department of the Company Affairs, the secretary, 5th floor, “A” wings, Shastri bhawan, Dr. Rajendra Prasad Road, New-Delhi-110001.
2. The application should be submitted along with the fee prescribed by draft of the demand taken in favor of Pay and Officer of Accounts, Department of Affairs of the Company, New Delhi in the manner given by GSR No. 501 (E) dated 6.7.1999.
3. For application made by the companies                                                                            Amount of fee to be paid in Rs.
4. With share capital authorized
5. a, Less than Rs, 25,00,000/-                                                                                                    500.
6. Rs. 25 lacs or more but less than Rs.5 crores                                                                     1,000.
7. Rs 5 crore or more                                                                                                                    2,000.
8. The proposed interest rate on the loan should not less than the four percent above the bank rate prevailing being the rate which is standard made public under Section 49 of the R.B.I Act, 1934.
9. The loan quantum along with the loans taken, if any , should not taken should not exceed gross salary of 25 times in the preceding six months drawn prior to the application making.
10. No commission guarantee shall be allowed to be paid to anyone in accordance of the proposals.
11. The accompanied applications by the documents following.
12. The proposals should be approved at the board meeting. A certified resolution copy passed should be submitted indicating the company proposals, conditions and terms, directors interest/relatives if any , specifying clearly a, the chargeable interest rate b, the Schedule and repayment terms, c, the loan is not being made out of the company borrowed funds , d, any other major or the main condition having the bearing of loan/ company financial position.
13. Wherever needed specific approval for proposal to be obtained. The resolution along with the statement explanatory statement should contain all the details that are relevant as defined in point 6 above. A resolution certified copy along with the statement that are explanatory passed should be enclosed.
14. The proposal should be accompanies with the declaration that the company in making repayments has not defaulted to the investors as the amounts and when they becomes due to them.
15. Memorandum and Articles of Association of Applicant certified copy
16. Shareholding pattern of the companies (borrower and applicant), common interest and controlling interest should mention specially the director interest along with his/her relative ( for Section 372A applications).
17. Directors list of the board of both the companies (borrower and applicant companies wherever applicable) and disclosing inter-se interest if any;
18. A certified copy of the schemes of loans for the company employees, if any,
19. Quantum of loan Justification/guarantee or security furnishing by the company.
20. In accordance of all proposals, a certificate from the auditors that are statutory or a secretary of the company in full-time practice to the following effect be enclosed mentioning therein that:
21. the proposal is in conformity of Section 372A with the provisions of the Companies Act, 1956.
22. the company has not defaulted in–
23. the repayment of any fixed deposit that is accepted by the company under Section 58 of the Companies Act, 1956 or thereof part or thereon interest;
24. Dividend payment;
25. Redemption or debenture repayment and timely payment of interest thereon;
26. Preference shares redemption; and
27. the regular company in filing all forms/returns as needed to  be filed under the Companies Act, 1956.
28. A NOC/ prior approval of the public financial institutions / banks in case any term loan is subsisting.
29. Board’s Sanction for Contracts in which Directors are interested.
30. Section 297 of the Companies Act, 1956 provides that the Board of directors consent is needed for contracts certain in which particular directors are interested. It provides that the company director or his relative, a form in which such a director or a partner relative , in such a firm any other partner, or a private company of which the director is a member or a director, shall not enter into any contract except with the company with the consent of the Board of directors;
31. i, for the sale , supply of any goods or purchase, services or materials; or
32. ii, for undertaking any shares subscription in or the company debentures.
33. In the company case having paid-up share capital of not less than one crore rupees, the Central Government previous approval would be required (proviso to Section 297(1)]
34. Sub-section (2) of the Section gives that nothing contained in (i) above shall apply to;
35. a, the goods purchase and from the company materials or the sale of the goods and to the company materials, by any director, firm, relative, private company or partner as aforesaid for cash at prevailing prices of market; or
36. any contract or contracts between the company on one side and any such relative, director, firm private company or partner on the other for sale, supply or purchase of any goods, services and materials and services in which either the director or the company, firm, relative, private company or the partner as the case may be  regularly trades or does business. However the contract value or contracts should not relate to materials and goods the value which, exceeds rupees five thousand in the aggregate in any comprised year of the contract in the period or contracts or;in the banking case or company insurance any transaction in the business ordinary course of such company with any relative, firm director, private company or partner as aforesaid.
37. In urgent necessity circumstances, firm, relative private company or partner as aforesaid may enter, without getting the consent of the Board, into any contracts for the sale with the company, supply or purchase of any goods, materials or services even if such goods value or such services cost exceeds five thousand rupees in the aggregate in any year comprised in the contract period , but then the consent of the Board at the meeting must be obtained at a meeting within the date of three months on which the contract was entered into.
38. The directors consent must be accorded by a passed resolution at the board meeting. It is not enough to get the consent by means of a passed resolution by the circulation.
39. The contemplated consent here cannot be a general consent but consent to specific contract each. If consent of the Board to any contract is not accorded under this section, done anything in pursuance of the contract shall be voidable at the board option.
40. This section does not apply to contracts between companies that are public and also is not attracted to a transaction of loan made to the company by the director because it is not a sale or goods purchase or to render services of a contract. It has been observed by the Calcutta High court that the section does not seen to recognize any policy which is public prohibiting a contract between public and private company with some shareholders that are common or directors.
41. If ‘X’ is a director of A Ltd. and also a member/director of B Private Ltd., then Section 297(1) will apply to contracts between two companies, subject to the provided exception therein. However, if the relatives of X only are directors/members of B Private Ltd. (and
42.    not himself ‘X’) the section will not apply. The rule which is same will apply also to Section 295.
43.