Credit goes to Companies (Amendment) Act, 2015 issued by the Ministry of Corporate Affairs (MCA) that made borrowing funds in form of loans from directors, shareholders, subsidiaries etc., easy. Addressing the fact that raising external funds, especially for early-stage startups, is like moving mountains, we at Wazzeer decided to write this blog on how private limited companies in India can accept loans from its stakeholders, with a view to help those in need of one.
Firstly, to borrow loan from any stakeholder of any amount, board resolution must be passed.
Secondly, let’s look at the different stakeholders that can loan a private limited company:
Directors of the company can loan the private limited company. The director has to provide a declaration that the amount has not been given out of funds acquired by him borrowing or accepting loans or deposits from others.
- If the money accepted from members exceeds 100% of the paid-up capital and free reserves, then such shareholders cannot loan.
- If the money accepted from members does not exceed 100% of paid up capital and free reserve, then the shareholder can loan.
#3: Director cum Shareholder
This person can loan, he/she has to provide a declaration that the amount has not been given out of funds acquired by him by borrowing or accepting loans or deposits from others.
#4: Subsidiary or Any other company
- Not allowed if any director of the lending company is a director or member of the borrowing company
- Not allowed if, the director of the lending company, individually, or along with one or more of its directors, exercises or controls not less than 25% of voting rights of the borrowing company
- Not allowed, if the board of directors, MD or manager of the borrowing company is accustomed to act in accordance with the directions or instructions of the board, or any director or directors of the lending company.
- If the lending and borrowing company are both private limited companies, then it can give loan irrespective of common directors if in the lending company no other body corporate has invested any money
- If the lending and borrowing company are both private limited companies, then it can give loan irrespective of common directors if the borrowing of the lending company from banks or financial institutions or anybody corporate is less than twice its paid-up capital or INR 50C
- If the lending and borrowing company are both private limited companies, then it can give loan irrespective of common directors if the lending company is not in default in repayment of such borrowings subsisting at the time of giving such loan.
Yes, allowed to lend loan, the amount borrowed must not exceed the employee’s annual salary in the nature of interest-free security deposit.