Director Loans, Remuneration

Director Loans

Section 185 of the Companies Act, 2013 lays down certain restrictions with regard to the granting of loans to Directors in order to monitor their working.

When the Companies Act, 1956 was in force, public companies were permitted to grant loans, guarantees, and securities as long as they obtained prior permission from the Central Government to do so. The companies used to exercise a practice of borrowing funds and passing them to subsidiaries and other associate companies through inter-corporate loans.

However, when it came to compliance with the terms of the loan agreement, the holding companies used to take a step back, leaving the subsidiaries in the lurch. In order to put a stop to the exploitation of the subsidiaries, Section 185 of the Companies Act, 2013 came into force.

Section 185 (as amended by the Companies (Amendment) Act, 2017):

• Limits the prohibition on loans, advances, etc. to Directors of the company or its holding company or any partner of such Director or any partner of such Director or any firm in which such Director or relative is a partner.
• Allows the company to give a loan or guarantee or provide security in connection with any loan to any person/ entity in whom any of the Directors are interested, subject to:-
  • Passing of Special Resolution by the company in a General Meeting (Approval of at least 75% of the members is required).
  • Utilization of loans by the borrowing company shall be solely for its principal business activities.
• The penalty provisions as set out under Section 185 (4) of the Act, in addition to the Company, now extends to an officer in default of the company (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act).

Exemptions with Regard to Loans Given to Directors

• Loans to the Managing Director or Whole Time Director:
• The loans to MD or WTD may be given only if the following conditions are met with:
  • Where it is part of the Policy of Service of the company to grant loans to all employees.
  • Pursuant to any scheme which is duly approved by the members by way of a Special Resolution
• Loans to Subsidiary Company:

Where the holding company grants the loan, guarantee or security to its wholly-owned subsidiary company, which uses the same for its principal activity of business only.

• Loans to Companies as part of Ordinary Business:

If the rate of interest charged on such loans is not lesser than the rate prescribed by RBI at the time, loans may be given to companies in the ordinary course of business.

• Loans given by Banks and Financial Institutions to Subsidiaries:

Grant of loan is permitted based on:

• Where the holding company provides the security or guarantee with respect to the loan made by the bank or any financial institution to the subsidiary company.
• The loan must be utilised for the subsidiary’s principal activity of the business.

Director Remuneration

‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

Directors’ remuneration is the process by which directors of a company are compensated, either through fees, salary, or the use of the company’s property, with approval from the shareholders and board of directors.

The process of directors’ remuneration came about because of shareholder concerns that directors were rewarding themselves large salaries despite showing poor profits or revenue.

Therefore, the process was initiated by which shareholders were able to agree to or reject fees paid to directors in general. This amount is the upper limit that can be paid to the board of directors.

The board of directors, in turn, will determine how those fee payments are split up among the directors, including the general director of the company.

On the other hand, director’s remuneration, meaning the salaries and bonuses paid out to directors, is part of the directors’ employment contract signed with the company. The board of directors then has direct control over that remuneration agreement.

Shareholders may sue the directors if they pay excessive amounts that exceed the agreed payment or if they pay themselves a disproportionately large number of profits instead of distributing it to the stockholders as dividends.

Permissible managerial remuneration

• Total managerial remuneration payable by a public company, to its directors, managing director and whole-time director and its manager in respect of any financial year:

The percentages displayed above shall be exclusive of any fees payable under section 197(5).

Until now, any managerial remuneration in excess of 11% required government approval. However, now a public company can pay its managerial personnel remuneration in excess of 11% without prior approval of the Central Government. A special resolution approved by the shareholders will be sufficient.

In case a company has defaulted in paying its dues or failed to pay its dues, permission from the lenders will be necessary.

• When the company has inadequate profits/no profits:In case a company has inadequate profits/no profits in any financial year, no amount shall be payable by way of remuneration except if these provisions are followed.