Section 185: Why Promoters Cannot Freely Lend Company Funds to Themselves
Many promoter-led companies treat intra-group fund transfers as routine, yet Section 185 of the Companies Act, 2013 prohibits a company from directly or indirectly advancing a loan, or providing a guarantee or security, to its directors, their relatives, firms in which a director or relative is a partner, and certain connected entities. These transactions cannot simply be approved through a Board resolution and regularised later. A limited carve-out allows a holding company to lend to, or guarantee borrowings of, its wholly owned subsidiary, provided the funds are used for the subsidiary's principal business activities and the prescribed conditions are met. Non-compliance can attract a penalty of Rs 5 lakh to Rs 25 lakh on the company, and up to Rs 25 lakh, imprisonment up to six months, or both, for officers in default, with similar consequences for the recipient.
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