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Tuesday, October 5, 2010

Section 295 - Loans to Directors etc.

Cases falling within the ambit of section 295:

According section 295(1), previous approval of the Central Govt. will be required, if a company wants directly or indirectly, to –

a.       Make any loan to any of the persons mentioned in sec.295(1)
b.      Give guarantee in connection with a loan made by any person to any of the person mentioned in sec.295(1)
c.        Give guarantee in connection with a loan made to any person by any of the person mentioned in sec.295(1)
d.      Provide any security in connection with a loan  made by any person to any of the person mention in sec.295(1)
e.      Provide any security in connection with a loan made to any person by any of the person mentioned in sec.295(1)

The person mentioned in Sec.295(1) are as follows:

a.       Any director of the lending company
b.      Any director of the lending company’s holding company
c.       Any partner of the director of the lending company
d.      Any partner of the director of the lending company’s holding company
e.      Any relative of a director of the lending company
f.        Any relative of the director of the lending company’s holding company
g.       Any firm in which director of the lending company is a partner
h.      Any firm in which relative of the director of the lending company is a partner
i.         Any private company in which director of the lending company is a director / member
j.        Any body corporate at a general meeting of which not less than 25% or more of the total voting power is exercised or controlled by any one or more directors of the lending company
k.       Any body corporate, Board of directors, MD or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Inter-corporate deposits:

DCA has expressed a view that deposits kept by one company with another company is loan as envisaged in sec.295/372A, and therefore the provisions of sec.372A are attracted in such a case. However  if the amount is in the nature of pure and simple deposit, the provisions of sec.295 would not apply although  the provisions of sec.372A would apply to inter corporate loans.

Difference between Loans & Debt:

Loan is different from Debt. A loan contracted creates a debt, but there may be a debt contracted without contracting a loan. Therefore every debt is not a loan. In Fredie Ardeshir Mehta (Dr.) v Union of India, Bombai High Court held that deferment of part payment of the consideration for the sale of a flat by the company to its director was not in the nature of loan, but it was only a debt.

Difference between loan & Advance:

In a decided case it was held that advance given to the wife of MD in her capacity as employee is salary advance and does not amounts to a loan. However advance given to the wife of MD in her capacity as such wife, then only it would amount to a loan.


Housing loans to MD or WTD:

Housing loans granted to MD or Whole-time Directors under the housing scheme of the company, applicable to its employees does not attract sec.295 as the housing loan given to the MD/WTD on his capacity as employee not as director.

Cessation of exemption under sec.295 (2):

Department has now advised that the provisions of sec.295 or 372A, as the case may be, would not be applicable to the loans made, guarantee given, securities provided by the exempted companies even though they ceased to be so and the compliance of sec.295/372A, would not be required, if such loan/guarantee/securities are continued after the exemption under sec.295/372A, as the case may be, ceased to exist.


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