What Is Loans to Directors?
"Loans to directors" is the shorthand for the prohibition in Section 185 of the Companies Act, 2013, which stops an Indian company from advancing a loan, or giving a guarantee or providing security for a loan, to its own directors and a defined circle of people and entities connected to them. The prohibition is not a cap or a ceiling — unlike the general lending rules for companies, it is an outright bar, subject only to a narrow special-resolution route for group entities in which a director has an interest, and a handful of statutory exemptions for managerial pay schemes and lending businesses.
For a foreign-owned Indian subsidiary, this provision surfaces the moment anyone tries to route money to or through a director — a relocation advance, an intercompany loan to a joint-venture entity that shares a director with the subsidiary, or a guarantee the subsidiary is asked to give for a director's personal borrowing. The rule applies regardless of whether the director is an Indian national or a foreign national holding a Director Identification Number as a nominee of the foreign parent.
The Prohibition — Section 185(1)
Section 185(1) of the Companies Act, 2013, as substituted by the Companies (Amendment) Act, 2017 with effect from 7 May 2018, provides that no company shall, directly or indirectly, advance any loan — including a loan represented by a book debt — or give any guarantee or provide any security in connection with a loan taken, to or by:
- any director of the company;
- any director of a company which is its holding company;
- any partner or relative of any such director; or
- any firm in which any such director or relative is a partner.
There is no minimum amount below which the prohibition stops applying, and it covers the three distinct acts separately: advancing the loan itself, guaranteeing a loan the director takes elsewhere, and providing security (such as a company asset) for such a loan.
"Any Person in Whom Any of the Director of the Company Is Interested"
A wider circle of entities is also relevant, because the special-resolution route in Section 185(2) turns on it. The Explanation to Section 185(2) defines "any person in whom any of the director of the company is interested" to mean:
- any private company of which any such director is a director or member;
- any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors together; or
- any body corporate whose board of directors, managing director, or manager is accustomed to act in accordance with the directions or instructions of the board, or of any director or directors, of the lending company.
This is what catches group structures: a private company that shares a director with the Indian subsidiary, or a body corporate in which that director controls a quarter or more of the voting power, falls inside the prohibited/special-resolution circle even though the company itself is not the director's employer.
The Special-Resolution Route — Section 185(2)
Section 185(2) lets a company advance a loan, or give a guarantee, or provide security, to any person in whom a director is interested (the Explanation categories above), but only if two conditions are both met:
- A special resolution is passed at a general meeting. The notice of the meeting must include an explanatory statement disclosing the full particulars of the loan, guarantee, or security, together with the purpose for which it will be used by the recipient.
- The loan is used by the recipient for its principal business activities. A loan that is diverted to on-lending, investment, or a use unrelated to the recipient's own principal business falls outside the exception even if a special resolution was passed.
This route requires shareholder approval, not merely board approval — a materially higher bar than the loan-and-investment framework a company otherwise operates under.
Exemptions — Section 185(3)
Section 185(3) carves out four situations in which sub-sections (1) and (2) do not apply:
- Managing or whole-time director loans given as 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.
- Companies whose ordinary course of business is the provision of loans, guarantees, or security for the due repayment of any loan, provided interest is charged at a rate not less than the prevailing yield of the one-year, three-year, five-year, or ten-year Government security closest to the tenor of the loan.
- Loans made by a holding company to its wholly-owned subsidiary company, or a guarantee given or security provided by a holding company for a loan made to its wholly-owned subsidiary, where the loan is used by the subsidiary for its principal business activities.
- A guarantee given or security provided by a holding company for a loan made by a bank or financial institution to its subsidiary company, again where the loan is used for the subsidiary's principal business activities.
Note the asymmetry: the wholly-owned-subsidiary exemption covers a holding company lending to its subsidiary, not the reverse. A subsidiary lending to its holding company, or to a director who happens to sit on the holding company's board, is not covered by this limb and has to be tested against Section 185(1) and (2) on its own facts.
Penalties — Section 185(4)
Section 185(4) sets out the consequences of a contravention:
- The company is punishable with a fine which shall not be less than ₹5 lakh but which may extend to ₹25 lakh.
- Every officer of the company who is in default is punishable with imprisonment for a term which may extend to six months, or with a fine in the same ₹5 lakh–₹25 lakh range. Unlike the third limb below, this one does not add "or with both".
- The director or the other person to whom the loan is advanced, or the guarantee or security is given, is punishable with imprisonment for a term which may extend to six months, or with a fine which shall not be less than ₹5 lakh but which may extend to ₹25 lakh, or with both.
These figures are the ones fixed by the 2017 substitution, and they remain the current text. Neither the Companies (Amendment) Act, 2019 nor the Companies (Amendment) Act, 2020 — the two rounds that decriminalised or re-rated penalties across much of the Companies Act, 2013 — touched Section 185, and the Jan Vishwas (Amendment of Provisions) Act, 2026 does not amend the Companies Act, 2013 at all.
How Section 185 Differs from Section 186
Section 185 is easy to confuse with Section 186, the general provision on loans and investments by a company, but the two work very differently. Section 185 is a targeted, near-absolute prohibition aimed specifically at directors and their connected circle. Section 186 is a permissive framework with quantitative ceilings that applies to loans, guarantees, security, and investments made to any person or body corporate, whether or not connected to a director.
Under Section 186(2), a company cannot give a loan, guarantee, security, or make an investment exceeding 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is more, without prior member approval. Section 186(3) requires a special resolution once that ceiling is crossed. Section 186(5) requires the board resolution sanctioning the loan, guarantee, or security to be passed with the consent of all directors present at the meeting — unanimous consent of those present, not a simple majority. Section 186(7) sets an interest-rate floor: no loan may be given at a rate lower than the prevailing yield of the one-year, three-year, five-year, or ten-year Government Security closest to the tenor of the loan. Section 186(11) disapplies the section — except the two-layer investment restriction in sub-section (1) — to loans, guarantees, security, and investments made in the ordinary course of business by banking, insurance, and housing-finance companies, and to investments made by an investment company.
The two sections are not alternatives — they can both apply to the same transaction. A loan from an Indian subsidiary to a group company in which its director holds a 25%+ voting interest has to clear the Section 185(2) special-resolution and principal-business-use tests and, if it is large enough relative to the lending company's reserves, the Section 186 ceiling and unanimous-board-consent tests as well.
Why It Matters for a Foreign Company or Investor
Two situations recur in foreign-owned Indian subsidiaries and are easy to get wrong:
- Group loans routed through a common director. If the Indian subsidiary and a group or joint-venture entity share a director, and the Indian subsidiary is asked to lend to that other entity, Section 185(2)'s special-resolution and disclosure requirements apply — board approval alone is not enough, and the explanatory statement circulated to shareholders has to spell out the purpose and use of the funds.
- Personal advances to a resident or expatriate director. An Indian subsidiary cannot advance a personal loan to any of its directors, resident or foreign, outside the narrow MD/WTD-scheme exemption in Section 185(3)(a). Nationality and residence status of the director are irrelevant to the prohibition.
A separate, and separately regulated, situation is a foreign parent lending directly to an individual — for example, a personal loan from the US or Singapore parent to the Indian subsidiary's finance director, made in the director's personal capacity rather than to the Indian company. That transaction does not engage Section 185 at all, because the lender is not the Indian company. It instead falls under the Reserve Bank of India's foreign-exchange framework for cross-border borrowing: the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, under which borrowing or lending in foreign exchange or in rupees between a person resident in India and a person resident outside India is prohibited by default, subject to permission granted by the Reserve Bank of India or to the routes specifically permitted under the Regulations. Clearing Section 185 says nothing about whether the FEMA borrowing-and-lending framework has been cleared, and vice versa — the two questions have to be worked through separately.
Frequently Asked Questions
Can an Indian subsidiary give a relocation loan to its foreign director?
Not as a standalone personal loan. Section 185(1) prohibits it regardless of the director's nationality or residence. The only route is the Section 185(3)(a) exemption — the advance has to be part of the conditions of service extended to all employees, or made under a scheme approved by the members through a special resolution, not a one-off arrangement for that director alone.
Does Section 185 apply if the loan goes to the director's spouse or to a firm they are a partner in, instead of the director personally?
Yes. Section 185(1) expressly extends the prohibition to any relative of the director and to any firm in which the director or a relative is a partner. Routing the loan through a relative or a partnership does not take the transaction outside the section.
How is a loan to a director different from a loan to a wholly-owned subsidiary?
A loan from a holding company to its own wholly-owned subsidiary is exempted outright under Section 185(3), provided the subsidiary uses it for its principal business activities. A loan to a director, or to a company in which a director merely has an interest, has no such blanket exemption — it is either prohibited outright under Section 185(1) or requires the Section 185(2) special resolution.
Can a foreign parent lend money directly to a director of its Indian subsidiary, bypassing Section 185?
Section 185 only restricts what the Indian company itself can lend to its directors; it does not regulate a foreign parent lending to an individual out of its own funds. But that transaction is not therefore unregulated — it becomes a cross-border borrowing question under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, where borrowing by a resident individual from a non-resident is prohibited unless it fits a permitted route or has Reserve Bank approval.
Who is liable if a company breaches Section 185 — the company or the director?
Both, along with any officer in default. Section 185(4) fixes a fine of ₹5 lakh to ₹25 lakh on the company, up to six months' imprisonment or a fine in the same range on the officer in default, and up to six months' imprisonment or a fine of ₹5 lakh to ₹25 lakh, or both, on the director or other person who received the loan, guarantee, or security.
See also: Related-Party Transaction, Independent Director, and Key Managerial Personnel.
Need to structure an intercompany loan or director advance without tripping Section 185? Beacon Filing helps foreign-invested Indian companies structure related-party lending and secretarial compliance.