Loan to Subsidiary/ Wholly Own Subsidiary Under Section 185 Companies Act, 2013 By Jaya Ahuja


Dear Professional Colleagues,

As we are aware of Section 185 of Companies Amendment Act, 2017 has been notified w.e.f. 07.05.2018. Please find below article on "Loan to Subsidiary / Wholly owned subsidiary".

Loan to Subsidiary/ Wholly Own Subsidiary [Section 185(3)]                                        

The main focus of this article is on “Whether a Company can give Loan/ Guarantee / Security to its Subsidiary Company, Wholly Owned Subsidiary Company or Holding Company”.

Section 185:

(1)  No Company (Private & Public)

  • Directly or Indirectly
  • Advanced any loan, including Book Debt
  • Or any Guarantee or provide any security in connection with any loan taken by

Following Persons

  1. Any director of a Company which is its Holding Company, or
  2. Any director of Company, or
  3. Any partner of Director of lender company, or
  4. Any relative of Directors of Lender Company, or
  5. Any firm in which any of Director of Lending Company is Director, or
  6. Any firm in which any relative of Director of lending Company is Director.

Note to be kept in Mind while complying with this Section

  • This Subsection applicable to Public Limited as well as Private Limited Company (whether small, OPC, Startups etc.)
  • Guarantee or Security in respect of only ‘Loan’ is covered.
  • Only individuals/ firms are covered in subsection 1.
  • Companies/body corporate are not covered in above subsection

(2)  Following loan can be given by a company to any person in whom directors are interested in fulfilling the Conditions mentioned below:

 Give any guarantee in connection with any loan taken

  • Provide any security in connection with any loan taken
  • Advance any loan, including loan represented by a book debt, to

 Any Person:

 Any Private Company of which any such Director is a Director or member;

  1. Body Corporate in which 25% or more voting power rests with one or more directors;
  2. Body Corporate whose Board accustomed to act on directions of BOD or Directors of the lending company

 Conditions:

1. Special Resolution passed by the Company in General Meeting.

2. The loans are utilized by the borrowing company for its principal business activities.

 Note to be kept in Mind while complying with this Section 

  • If the borrower is Private Limited Company having common directors/ members then by using this subsection loan can be given. 
  • Body Corporate includes LLPs, therefore as per, point (ii) of any person Loan/Guarantee/Security can be given to LLP also. [Condition 25% or more voting power vested with one or more director of lender Company together]. 

3. Restrictions of Sub Section (1) and (2) shall not be applicable on following transactions: 

  • 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 

  • 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;
  • Any loan made by a Holding Company to its Wholly own subsidiary company or any guarantee given or security provided by a Holding Company in respect of any loan made to its wholly own subsidiary Company Give any guarantee in connection with any loan taken 
  • Any guarantee is given or security provided by a Holding Company in respect of Loan made by any Bank or financial institution to its subsidiary Company.

 Conditions:

In case of Guarantee on behalf of the Subsidiary loan made under this clause utilized by the subsidiary company for its principal business activity only.

 (Penalty Provision: )

4. If any loan is advanced or a guarantee or security is given or provided or utilized 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.]

Note to be kept in Mind while dealing with Subsidiary u/s 185(3) (d)

  • As per Sub Section 3, Lender Company can give Guarantee / Security on behalf of Subsidiary Company.
    • Guarantee / Security shall be given only to Bank and Financial Institutions on behalf of Subsidiary.
    • Subsidiary shall use such money only for the “Principle Business Activity” of the Company.

In case Lender Company giving Guarantee / Security to Subsidiary as per above 3 conditions then no need to comply with the provisions of Section 185 of Companies Act, 2013.

  • Situations for Loan to “Subsidiary”:

a) Guarantee / Security in respect of Loan taken by the subsidiary from Bank/Financial Institutions. In such situation Lender Company can give loan u/s 185(3) without complying with the provisions of Section 185.

b) Guarantee / Security in respect of loan taken by the subsidiary from other than Bank / Financial Institution. In such situation there are following situations:

  • Where Director of Lender Company is Director / Member of Subsidiary Company:

In this Situation Lender Company can give loan as per provisions of Section 185(2) by passing of Special Resolution. 

  • Where Director of Lender Company is not Director / Member of Subsidiary Company:

In this situation, there is no restriction anywhere under Section 185(1), (2) and doesn’t fall under 185 (3). Therefore, in this situation Company can freely give guarantee/security on behalf of Subsidiary by complying the other provision of Companies Act, 2013 (like Section 179(3), 186 etc.)

In the above mentioned both situations, Company can give Guarantee/ Security on behalf of its subsidiary Company without falling under provisions of Section 185.

  • Loan by Lender Company to a subsidiary in both above-mentioned situation:

Section 185(1): This sub-section restrict only for Loan/ Guarantee/ Securities to Individuals, not Companies or Body Corporate. Therefore, this subsection doesn’t restrict the above-mentioned transaction.

Section 185(2): This Subsection allows by passing of Special Resolution to give a loan to (Private Company, Body Corporate in which directors of lender Company are Directors or Shareholders)

In a situation where the director of Lender Company are not directors or members of other Company then this transaction doesn’t fall u/s 185(2) and no need to pass Special Resolution.

There is no restriction anywhere under Section 185(1), (2) and doesn’t fall under 185 (3). Therefore, one can opine that in this situation Company can freely give a loan to Subsidiary by complying the other provision of Companies Act, 2013 (like Section179 (3), 186 etc.)

In the above mentioned both situations one can opine that a Company can give Loan to its subsidiary Company without falling under provisions of Section 185. 

PROCESS OF GIVEN OF LOAN UNDER SECTION 185:

As per above-mentioned provisions of Section 185, a Lender Company can give loan/ Guarantee/ Security to Subsidiary:

1. Holding of Board Meeting: Lender Company have to hold a Board Meeting;

 Pass Board resolution [u/s 179 (3)(f)] (Passed Unanimous Board Resolution as per Section 186(5))

  • Pass a resolution to call Extraordinary General Meeting [if transaction fall u/s 185(2)]
  • Issue Notice of EGM
  • Check Limit of Loan/ Guarantee/ Security as per Section 186(2) whether it is in limit or not.
2. If Lender Company is Public Company then file the Board Resolution in e-form MGT-14 with Roc within 30 days from the date of Board Meeting.

3. Convening of General Meeting: 
Hold the EGM and pass the Special Resolution for granting a loan, guarantee or security by mentioned following information in the Explanatory Statement: [if transaction fall u/s 185(2)]

  • Full Particular of the loans given; or
  • A guarantee is given or security provided and
  • The purpose for which the loan or guarantee or
  • security is proposed to be utilized by the recipient of the loan or guarantee or security and other relevant facts
4. File MGT-14 with ROC: File copy of Special Resolution along with explanatory statement with ROC in e-form MGT-14 within 30 days of EGM

Other Conditions to be fulfilled:

5. Declaration from Borrower: 
Take a declaration from the borrower Company that it will use this Loan for the Principle Business Activity only. (If guarantee/security u/s 185(2) or 185(3) otherwise no need of same)

6. Limits of Loan/Guarantee/Security u/s 186(2): Check whether the loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not. Limited as mentioned below:

  • 60% of Paid-up share capital + Free Reserve + Securities Premium Account OR
  • 100% of Free Reserve + Securities Premium Account
7. Approval of Public Financial Institution: If Loan is not covered in above-mentioned Limit or there is any default in repayment of loan instalments or payment of interest by the lender to a public financial institution then before initiation loan to borrower take approval of public financial institution also.

8. Disclosure by Lender: 
As per Section 186(4) Company shall disclose in the Financial statement full particular of Loan/ G/ S and purpose for which such Loan/Guarantee/Security is proposed to be utilized by
the borrower.


9. Interest on Loan u/s 186 (7): 
Loan shall be given at a rate of interest not lower than the prevailing yield of one year, three
years, five years or ten years Government security closest to the tenor of the loan.

 Note to be kept in Mind while dealing with Wholly Own Subsidiary u/s 185(3) (C)

  • As per Sub Section 3, Lender Company can give Loan/Guarantee/Security on behalf of WOS Company.
  • WOS Company shall use such money only for the “Principle Business Activity” of the Company.

Therefore, one can opine that whatever is situation Section 185 shall not applicable while giving Loan/ Guarantee/ Security by Holding Company to its subsidiary Company.

In simple word, we can say that Section 185 and Section 186(3) doesn’t Apply to private limited Company.

PROCESS OF GIVEN OF LOAN UNDER SECTION 185:

As per above-mentioned provisions of Section 185 & 186 a Lender Company can give loan/ Guarantee/ Security to Wholly-owned Subsidiary:

1. Holding of Board Meeting: Lender Company have to hold a Board Meeting;
  • Pass Board resolution [u/s 179 (3)(f)] (Passed Unanimous Board Resolution as per Section 186(5))
2. If Lender Company is Public Company then file the Board Resolution in e-form MGT-14 with Roc within 30 days from the date of Board Meeting.

Other Conditions to be fulfilled:

3. Limits of Loan/Guarantee/Security u/s 186(2): Check whether the loan is in limit u/s 186(2) if not then whether Special Resolution for such has been passed or not. Limited as mentioned below:
  • 60% of Paid-up share capital + Free Reserve + Securities Premium Account OR
  • 100% of Free Reserve + Securities Premium Account
4. Approval of Public Financial Institution: If Loan is not covered in above-mentioned Limit or there is any default in repayment of loan instalments or payment of interest by the lender to the public financial institution then before initiation loan to borrower take approval of public financial institution also.

5. Disclosure by Lender: 
As per Section 186(4) Company shall disclose in the Financial statement full particular of Loan/Guarantee/Security and purpose for which such Loan/Guarantee/Security is proposed to be utilized by
the borrower.


6. Interest on Loan u/s 186 (7): 
Loan shall be given at a rate of interest not lower than the prevailing yield of one year, three
years, five years or ten years Government security closest to the tenor of the loan.

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