Loan and Advances to Employees

Ministry of Corporate Affairs on 10^th March 2015 came out with a general circular 04/2015 regarding clarification with regard to Section 185 and 186 of the Companies Act 2013 on subject of loan and advances to employees.

The ministry say in circular:

“This Ministry has received a number of references seeking clarification on the applicability of provisions of section 186 of the Companies Act, 2013 relating to grant of loans and advances by Companies to their employees.”

Sub – Section (2) of Section 186 of the Companies Act 201  here says:

No company shall directly or indirectly —

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

Here, term “Person” includes a natural person and a employee also.

Present circular is an examination and clarification as it read on face of it, “The issue has been examined and it is hereby clarified” and at best interpretation Section 185 and 186 of the Companies Act, 2013. This circular may not create any new law, exempting or including anything.

Now the Ministry say in circular:

“Loans and/or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013.”

This statement says at first place that loans and/or advances made by the companies to their employees are not governed by the requirements of section 186 of the Companies Act, 2013. This statement further says loan and/or advances made by the companies to their certain employees; the managing or whole time directors are governed by section 185 of the Companies Act, 2013.

Now, in its second statement the Ministry says:

“This clarification will, however, be applicable if such loans/advances to employees are in accordance with the conditions of service applicable to employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated.”

This is an imposition of a condition “legally under the Companies Act, 2013”. Hence, require examination. As ministry already mentioned in present circular, Section 186 is not applicable to the loan and/or advances to employees. Further, Section 186 even if applicable does not contain such condition either for inclusion or exclusion from applicability of Section 186. Further, the Ministry already mentioned in present circular, Section 185 is applicable to the loan and/or advances to the managing or whole time directors. Even Section 185 does not contain any such “express” condition either for inclusion or exclusion from applicability of Section 185 in case of all other employees.

We find a little reference in Section 185, where proviso to sub – section (1) says:

“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…”

The Ministry in present circular seems to interpret sub clause (i) of clause (a) of this proviso as a condition for loan to all its employees. I am to read again this proviso to ensure this proviso is applicable only in case of “loans” only and not in case of “advances” to managing or whole time directors.

Firstly, there is no issue of “advances” on terms and conditions as “imposed” by present circular.

Secondly, There is no requirement for condition of service to be in place or to be followed for loan to employees under this Section. The section require a company to follow same condition of services to managing or whole time directors regarding loan as applicable to any other employee or in simple terms, generally applicable to all its employees. Language of sub – clause (i) of clause (a) of this proviso “as a part of the conditions of service extended by the company to all its employees” just presuppose such conditions for “all its employees” not impose such condition to “all its employees”.

Further, sub – section (3) of Section 178 read The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. According to sub – section (1) of Section 178, provision of Nomination and Remuneration Committee is applicable to every listed company and such other class or classes of companies, as may be prescribed. Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 prescribes following classes of companies:

(i) all public companies with a paid up capital of ten crore rupees or more;

(ii) all public companies having turnover of one hundred crore rupees or more;

(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.

Provisions of Section 178 read with rules made there under made it clear that the Ministry may presuppose remuneration policy in certain companies but there is no reference to presuppose or impose “condition of service” under the Companies Act, 2013. These “condition of service” is contractual prerogative of the company and its employees. The Companies Act 2013 does not impose (but presuppose, if it exist) and Ministry administrating the Companies Act, 2013 may not impose “condition of service”.