Tax Talk: Loans, advances to employees spared from Section 186 of Companies Act

Published: April 7, 2015 12:06:04 AM

While the introduction of Companies Act, 2013, was a welcome move, ambiguity and uncertainty over a few provisions...

While the introduction of Companies Act, 2013, was a welcome move, ambiguity and uncertainty over a few provisions have caused much anxiety. Among these was Section 186, which subjected companies to certain restrictions while giving loans to any person or corporate body.

The provisions were not explicit as to whether the term ‘any person’ under Section 186 also covered ‘employees’ and, thereby, loans to them.

This created a lot of practical difficulties as most companies provide loans and advances to employees, such as home loan, car loan, marriage loan, etc.

Considering that the above-mentioned Section is applicable to all types of companies, including private limited companies irrespective of their size (with certain exceptions), they had to consider loans and advances provided to employees under the provisions of Section 186 of the Companies Act.

Based on various queries received and representations made, the ministry of corporate affairs (MCA) issued a circular dated March 10, 2015, clarifying that provisions of the Section will not be applicable to loans and/or advances made by companies to employees, other than managing director or whole-time directors (which is governed by Section 185).

Further, the loan needs to be provided in accordance with the conditions of service and remuneration policy. Accordingly, companies may consider formulating policies for granting loans and/or advances to employees.

With respect to the effective date of the circular, the same may be applicable from the date of enforcement of the law, i.e., April 1, 2014. Pursuant to the clarification, the hardship for companies would be reduced to a certain extent.

However, note that loans to managing directors and whole-time directors are not exempted from the ambit of Section 186, though such loans are given as part of the conditions of service as they are governed by Section 185 of the Companies Act and the various conditions need to be complied with before providing any loan or advance.

The circular issued by MCA clarifying that the loans and advances provided to employees are not governed by the provisions of Section 186 is a welcome step and will surely bring relief to companies.

While we may expect more guidelines/clarifications from MCA concerning other aspects as well, companies should keep track and review their compliance in accordance with the Companies Act, 2013, where a host of new provisions have been introduced to strengthen corporate governance.

By Amarpal S Chadha

The writer is tax partner, EY. Views expressed are personal

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