1. Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:
Provided that: nothing contained in this sub-section shall apply to:—
a. 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
b. 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 bank rate declared by the Reserve Bank of India.
Explanation.- —For the purposes of this section, the expression “to any other person in whom director is interested“ means”
a. any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
b. any firm in which any such director or relative is a partner;
c. any private company of which any such director is a director or member;
d. any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
e. any body corporate, the Board of directors, managing director 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.
2. If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1 ), 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, and 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.
Legal Commentary & Landmark Judgments: Section 185
Section 185 strictly regulates the advancing of corporate loans, guarantees, and securities to directors and entities in which directors are interested, preventing the extraction of corporate capital for personal benefit.
This statutory framework establishes clear operational guidelines, balancing legal compliance with procedural safeguards.
Section 185 underwent massive amendment in 2017 to reconcile strict promoter discipline with legitimate inter-corporate group funding. The requirement that subsidiary borrower entities use loan funds exclusively for 'principal business activities' prohibits downstream lending or speculative diversion. Statutory auditors must conduct forensic examinations of loan trail accounts to ensure funds were not round-tripped back to promoter accounts.