Every rule, on one page
| Question | Governing rule | The requirement | If breached |
|---|---|---|---|
| Can the company lend to a director, his relative, his partner, or his firm? | Sec 185(1) | Never — the prohibition is absolute, and covers guarantees and security too, "directly or indirectly" | Company fine ₹5–25 lakh; officers fined; the recipient director risks imprisonment |
| Can it lend to a company in which a director is interested? | Sec 185(2) | Only with a special resolution (full particulars in the explanatory statement) and use for principal business activities | Same Sec 185(4) penalties — on lender, officers and recipient |
| Can a holding company fund its subsidiary? | Sec 185(3)(c)–(d) | Loan / guarantee / security to a wholly-owned subsidiary, and guarantees for bank loans to any subsidiary, are exempt — if used for principal business activities | Exemption lost if the utilisation condition fails |
| How much can any company lend / invest / guarantee in aggregate? | Sec 186(2)–(3) | Up to the higher of 60% of (paid-up + free reserves + securities premium) or 100% of (free reserves + securities premium); beyond that, a prior special resolution | Sec 186(13): company fine ₹25,000–₹5 lakh; officers fined |
| How must the board approve? | Sec 186(5) | Unanimous resolution at a board meeting — all directors present consenting; circulation and committees do not count | The approval itself is defective |
| At what interest? | Sec 186(7) | Not below the prevailing yield of the 1, 3, 5 or 10-year Government Security closest to the loan's tenor | Interest-free group loans are non-compliant by design |
| Where is it recorded? | Sec 186(9)–(10) · Rule 12 | Register in Form MBP-2, entries within 7 days, kept at the registered office, preserved permanently | Its own default — and the first register a diligence asks for |
| Foreign parent funding its Indian subsidiary? | FEMA · ECB framework | A parallel rulebook: eligible-lender tests, minimum maturity, all-in-cost ceilings, LRN and monthly ECB-2 returns | Compounding under FEMA — separate from every penalty above |
Introduction
Group treasuries think in one sentence: cash is here, the need is there, move it. Indian company law answers with two sections that every intra-group rupee must pass through. Section 185 asks who the borrower is — and prohibits or conditions the transaction if any director stands anywhere near it. Section 186 asks how much and on what terms — and imposes an aggregate ceiling, a unanimous board, a shareholder threshold, an interest floor and a statutory register. A loan that clears one gate and not the other is unlawful all the same.
For foreign-owned subsidiaries the stakes are doubled, for a reason very few group CFOs see coming: the famous 2015 exemption that frees most Indian private companies from Section 185 does not apply to them. The exemption's first condition is that no body corporate has invested in the company's share capital — and a foreign parent is a body corporate. The result is counter-intuitive but settled: a founder-owned Indian private company may lend where a multinational's WOS may not, and structures copied from a domestic template break silently when pasted into a foreign-owned group.
And every cross-border movement of the same money answers to a second rulebook. The parent funding its Indian subsidiary by loan is an external commercial borrowing with its own eligibility, pricing, maturity and monthly reporting; the subsidiary lending upward to its parent is, in the ordinary course, simply not permitted under the exchange-control framework — the single most dangerous instruction an overseas treasury can email to Mumbai. Sections 185 and 186 govern the giver under company law; FEMA governs the border; and a compliant group funding plan is the one drafted with both books open.
This guide walks the two gates in order: the Section 185 identity tests — prohibited, conditional and exempt borrowers, including the holding-to-WOS carve-outs groups actually use; the Section 186 arithmetic — the 60%/100% ceiling, the unanimous board, the special resolution and its WOS/JV relief, the G-Sec interest floor and the MBP-2 register; the four directions of cross-border group funding under FEMA; the penalty architecture after the 2020 decriminalisation; and the mistakes that surface, with unfailing regularity, in due diligence. It belongs to the same series as our guides to the ADT-1, SH-7, PAS-3, CHG-1 and BEN-2 filings — but where those are about clocks, this one is about permissions: not when to file, but whether the transaction may happen at all.
1. The two gates — how 185 and 186 divide the work
A prohibition provision. It looks at the borrower's identity and the directors' connections, and answers never, only with a special resolution, or exempt. It covers loans, loans represented by book debts, guarantees and security — "directly or indirectly", so routing through an intermediary changes nothing.
Clears the gate: lending to an unconnected third party, or within an exemption (WOS funding, ordinary-course lending at the floor rate, MD/WTD schemes).
A regulation provision. It applies to virtually every loan, guarantee, security and acquisition of securities — whoever the recipient — and demands: the aggregate ceiling (or a prior special resolution), a unanimous board resolution at a meeting, interest at or above the G-Sec floor, disclosure in the financial statements, and the MBP-2 register within seven days.
Clears the gate: a transaction inside the limits (or blessed by SR), properly priced, properly minuted, properly registered.
Both gates operate cumulatively. A loan to a fellow group company may be permitted by Section 185(2) with a special resolution — and still breach Section 186 because the aggregate crossed the ceiling without its own SR, or because the board resolution was passed by circulation, or because the loan was interest-free. Run every transaction through both, in that order: identity first, arithmetic second.
2. Gate 1 in detail — Section 185's three bands
- Any director of the lending company — or of its holding company
- Any partner or relative of any such director
- Any firm in which any such director, or his relative, is a partner
- A private company in which any such director is a director or member
- A body corporate in which such director(s) control 25% or more of the voting power
- A body corporate whose Board, MD or manager is accustomed to act on the directions of the lending company's Board or any director
- Loans to a managing or whole-time director as part of conditions of service extended to all employees, or under a scheme approved by special resolution
- A company that lends in the ordinary course of its business, charging interest not below the prevailing yield of the 1, 3, 5 or 10-year Government Security closest to the tenor
- A holding company's loan, guarantee or security to its wholly-owned subsidiary
- A holding company's guarantee or security for a bank or financial-institution loan to any subsidiary
2.1 The 2015 exemption — and why foreign-owned subsidiaries do not get it
By notification dated 5 June 2015, Section 185 does not apply at all to a private company that satisfies all three of: (a) no body corporate has invested in its share capital; (b) its borrowings from banks, financial institutions and body corporates are less than twice its paid-up capital or ₹50 crore, whichever is lower; and (c) it has no subsisting default in the repayment of such borrowings. Founder-and-family companies routinely qualify, which is why so much internet commentary breezily says "private companies are exempt from 185".
2.2 "Directly or indirectly" — and the book-debt trap
Two phrases in Section 185(1) do quiet, constant work. "Directly or indirectly" catches routing: a loan to a clean intermediary that on-lends to the director's firm is the prohibited loan in two steps, and adjudicators look at substance. And "loan represented by a book debt" catches the informal version: goods supplied to a director's firm on ever-extending credit, advances that never convert to supplies, receivables from connected parties left uncollected for years — each is analysed as a loan wearing a trade costume. Group receivables ageing reports are where diligence teams go hunting for Section 185 issues that no loan agreement ever documented.
2.3 Mapping the net precisely — relatives, the 25% test, and "accustomed to act"
Gate 1 is only as good as the mapping exercise behind it, and three definitions set its edges. "Relative" carries the Section 2(77) meaning: members of a HUF, spouses, and the prescribed list — father, mother, son, son's wife, daughter, daughter's husband, brother, sister (including step-relations). The net is finite: cousins, in-laws beyond the list, and nephews are outside it — which matters, because over- and under-mapping are equally common. The 25% voting test in the conditional band aggregates: a body corporate in which "such director, or two or more such directors together, hold 25% or more of the total voting power" — so three directors at 9% each trip the test collectively even though none does alone. And "accustomed to act" is a factual doctrine, not a shareholding one: a borrower whose board routinely implements the lending company's instructions — evidenced by emails, minutes, standing approvals — is inside the band with zero common shareholding. The practical discipline: before any intra-group loan, a one-page map listing every director of the lender and its holding company, their relatives on the prescribed list, their partnerships, and their aggregate voting positions in the proposed borrower. Ten minutes of mapping is the entire difference between the exempt band and an unlawful advance.
3. Gate 2 in detail — Section 186's arithmetic and machinery
3.1 The ceiling
+ free reserves
+ securities premium account
+ securities premium account
Whichever is higher — computed on the aggregate of all loans, guarantees, securities and acquisitions of securities, existing plus proposed. Beyond the ceiling: a prior special resolution specifying the total amount up to which the Board may act.
Mind the defined terms inside the formula. "Free reserves" means reserves available for distribution as dividend per the latest audited balance sheet — so revaluation reserves and unrealised or notional gains stay out of the base, and a company rich in revalued assets can have far less lending headroom than its balance-sheet total suggests. The securities premium account counts in both limbs by express inclusion. And because the base is set by the latest audited numbers, a company whose reserves have moved materially since the last audit computes conservatively — the ceiling is not a number to argue about in an adjudication two years later.
Existing exposures count first: a company with ₹14 crore of guarantees already outstanding has ₹6 crore of headroom against this ceiling, not ₹20. The aggregate is recomputed at every fresh transaction — which is precisely what the MBP-2 register exists to make possible at a glance.
3.2 The approvals — a board that must be unanimous
Section 186(5) demands a resolution passed at a board meeting with the consent of all the directors present. Read that precisely: not a circulation resolution, not a committee, not a majority — a meeting, and unanimity among those attending. One dissenting director present at the meeting blocks the transaction at board level. Where any term loan from a public financial institution is subsisting, that institution's prior approval is also required — dispensed with only where the aggregate stays within the ceiling and there is no default in repayments to it. And Section 186(8) adds a standing disqualification: a company in default on deposits or deposit interest cannot lend, guarantee or invest at all while the default subsists.
Beyond the ceiling, the special resolution enters — with one large, deliberate carve-out inserted in 2017: no SR is required for a loan, guarantee or security to a wholly-owned subsidiary or a joint venture, or for acquiring securities of a WOS. The relief is from the shareholder vote only: the unanimous board, the interest floor, the disclosure under Section 186(4) and the register all still apply. This carve-out, stacked with the Section 185(3) exemptions, is the lawful spine of most Indian holding-structure funding.
3.3 The interest floor — why the group loan cannot be free
Section 186(7) sets a floor under every loan: interest not lower than the prevailing yield of the 1-year, 3-year, 5-year or 10-year Government Security closest to the tenor. Treasury habits from other jurisdictions — interest-free parent-affiliate advances, symbolic 1% pricing — are non-compliant in India by design. Pick the tenor, look up the matching G-Sec yield on the date of the loan, document it in the board pack, and price at or above it. (Transfer-pricing law then asks its own arm's-length question for related parties; the G-Sec yield is the company-law floor, not a tax safe harbour.)
3.4 The record — MBP-2, seven days, permanent
Every loan, guarantee, security and acquisition goes into the register in Form MBP-2, entered within seven days, kept at the registered office, preserved permanently, and open to member inspection. Section 186(4) separately requires the financial statements to disclose the full particulars and the purpose for which the recipient proposes to use each loan or guarantee — the disclosure auditors chase every March. One clarification worth knowing: ordinary employee loans given per the conditions of service and remuneration policy fall outside Section 186 altogether (MD and whole-time directors remain governed by Section 185's own scheme). And Section 186(1) adds the structural rule easy to forget between funding rounds: investment through not more than two layers of investment companies, with carve-outs for foreign acquisitions whose local law requires deeper chains and for regulatory-mandated tiers.
3.5 Drafting the resolutions so they survive diligence
Both gates fail most often not in concept but in drafting. The Section 185(2) special resolution must carry an explanatory statement disclosing the full particulars of the loan, guarantee or security — the borrower's identity and its connection to the director, the amount, the purpose, the terms — and vague omnibus wording ("such loans to group entities as the Board may decide") is precisely what adjudication orders fault. The Section 186 special resolution has its own statutory content: it must specify the total amount up to which the Board is authorised — an aggregate figure, set with headroom for the year's plan, not transaction-by-transaction scrambling. The board minutes should record four things by name: the unanimity of directors present, the ceiling computation with figures, the G-Sec yield relied on for pricing (with tenor and date), and the utilisation covenant. And interested directors have their own discipline: Section 184 disclosure on the table, and non-participation where the Act requires it — a resolution "unanimously" passed with the interested director voting is an invitation to challenge. The test for every document in the file is simple: could a diligence associate, three years from now, reconstruct the lawfulness of the transaction from the papers alone, without a single explanatory phone call? Draft to that reader.
4. The border — four directions of foreign-group funding
Everything above governs the Indian company as giver. The moment the same rupee crosses the border in either direction, the FEMA rulebook opens beside the Companies Act — and its answers differ by direction.
4.1 The repatriation menu — moving cash up lawfully
Because the upstream loan is off the table, every foreign-owned group eventually asks the same question: how does surplus Indian cash reach the parent lawfully? The menu has three standing items, each with its own machinery. Dividends — the workhorse: declared from profits under Section 123, remitted freely as current-account transactions, taxed in the shareholder's hands with treaty relief where available; interim dividends let treasuries time the flow within the year. Buy-back — Section 68's route for returning larger sums: up to the statutory limits with board or special-resolution approval, buy-back tax in the company's hands, and a strict ratio-and-cooling-period discipline. Capital reduction — Section 66's Tribunal-supervised route for structural returns of capital, slower but capable of moving what dividends and buy-backs cannot. Which item fits is a joint tax-and-corporate analysis — but the planning conversation should happen before the surplus accumulates, because the worst-run repatriations are the ones improvised in the quarter the parent needs the cash, which is exactly when the unlawful loan starts looking convenient to someone in group treasury.
4.2 One file for both rulebooks
Cross-border group funding survives scrutiny when a single closing file answers both regulators at once. For a downstream ECB, that file holds: the eligibility analysis of the parent as lender; the loan agreement with maturity and all-in-cost inside the ceilings; the end-use statement matched against the negative list; the LRN allotment; the drawdown trail through banking channels; the running ECB-2 returns; and — on the Companies Act side — the borrowing-power resolutions and any Section 180 authority, with the charge filings where security is given. For a domestic lateral loan, the file is the two-gate set from the checklist below. The organising principle is the same one running through this whole series: the transaction is only as strong as the file that proves it, and the file is cheapest to build on the day the money moves.
5. Penalties — both gates, current law
| Provision | On the company | On officers in default | On the recipient |
|---|---|---|---|
| Sec 185(4) — unlawful loan / guarantee / security to director-connected persons | Fine ₹5 lakh – ₹25 lakh | Fine ₹5 lakh – ₹25 lakh | The director or person to whom it was advanced: imprisonment up to 6 months, or fine ₹5–25 lakh, or both — and the money is refundable |
| Sec 186(13) — breach of limits, approvals, floor or register | Fine ₹25,000 – ₹5 lakh | Fine ₹25,000 – ₹1 lakh | — |
| FEMA — an impermissible cross-border leg | Compounding proceedings measured against the amount involved — running separately from, and on top of, everything in the two columns above | ||
Note the design: Section 185 penalises three parties — lender, officers and borrower — so an unlawful group loan creates liability on both sides of its own balance sheet. And beyond the fines sits the audit trail: these transactions are specifically reported in the auditor's CARO annexure, so a breach is not a private matter awaiting discovery but a disclosure printed annually inside the company's own financial statements.
Two further features complete the risk picture. First, the loan itself does not become void — the statute penalises the parties and (in the prohibited band) requires the money back with the recipient facing the sharpest sanction, but counterparties and lenders reading the balance sheet still see the transaction, which is why the reputational finding usually outlasts the fine. Second, timing multiplies exposure: because CARO makes the auditor report on these sections every year, a non-compliant loan is re-reported annually until repaired — each year's accounts republishing the finding to every bank, investor and counterparty that reads them. The cheapest date to fix a Sections 185/186 problem is always the current financial year.
6. Three matters from practice
A European group's Indian subsidiary accumulated surplus cash. Group treasury, running a global cash-pool, instructed the Indian CFO to place ₹18 crore with the parent as a six-month intercompany deposit — standard practice in four other jurisdictions that quarter.
The problem: the overseas-lending framework offered no route for an Indian company to lend to its own parent; the "deposit" was an impermissible financial commitment the day it moved. The repair: unwinding the transfer, a FEMA compounding analysis, and a rebuilt repatriation plan through an interim dividend — with the tax cost the group had hoped to avoid. The lawful answer existed all along; it simply was not a loan.
Two Indian companies shared a common director and a common foreign parent. Company A lent ₹4 crore to Company B on a board resolution alone — the CFO reasoning that "it's all one group". Diligence for B's fundraise reconstructed the chain two years later.
The findings, stacked: B was a company in which A's director was a director — the conditional band — with no special resolution and no utilisation trail; the 2015 exemption was unavailable to A because its shares were held by a body corporate (the parent); the loan was interest-free against Section 186(7); and MBP-2 had never been written up. The repair: ratification where ratification helped, re-papering at the G-Sec floor, penalty exposure disclosed, and a warranty against the finding. Four defaults, one wire transfer.
A manufacturing company supplied components for years to a firm in which its promoter-director's brother was a partner. Credit terms drifted from 45 days to open-ended; the receivable aged past thirty months while trading continued.
The analysis: a loan represented by a book debt to a firm in which a director's relative is a partner — squarely in the prohibited band, no resolution available to cure it. The repair: recovery of the receivable on a documented schedule, interest charged, credit terms restored to arm's length, and a board-level policy putting every connected-party receivable on a quarterly ageing review. The invoice file, not the loan book, is where this band of Section 185 lives.
An offshore lender refinancing a foreign parent's facilities circulated its standard security package: upstream guarantees from "each material subsidiary", the Indian company listed among them. The Indian directors were asked to sign within the week — the deal was "already agreed at group level".
The analysis that stopped the signature: a guarantee by the Indian subsidiary for its foreign parent's debt is a restricted financial commitment under the exchange-control framework, requiring analysis and approvals nobody had sought; it would aggregate into the Indian company's Section 186 ceiling, which the amount alone would have breached without a special resolution; and the parent-side directors' positions put the transaction into the Section 185 mapping besides. The outcome: the Indian entity was carved out of the security package with a substitute cash-collateral arrangement offshore — a one-week delay against what would otherwise have been a compounding file and a guarantee of doubtful enforceability. The lesson for every Indian board inside a global group: a group-level "agreed" is not an India-level "lawful", and the signature page is the last place to discover the difference.
7. Fourteen mistakes
- Assuming "private companies are exempt from 185" — the 2015 exemption fails for every company with a body-corporate (including foreign-parent) shareholder.
- Lending to a fellow group company with common directors on a board resolution alone — the conditional band needs a prior special resolution with full particulars.
- Forgetting the utilisation condition — Section 185(2) and the subsidiary exemptions all require use for principal business activities, and the duty survives disbursement.
- Interest-free or token-rate group loans — Section 186(7)'s G-Sec floor makes them non-compliant by design.
- Passing the Section 186 board approval by circulation or committee — the statute demands a unanimous resolution at a meeting.
- Counting only the proposed loan against the ceiling — the test is the aggregate of everything outstanding plus the proposal.
- Treating guarantees as free — they aggregate into the 186 ceiling exactly like loans.
- Missing the SR carve-out's true scope — WOS/JV relief removes the shareholder vote, not the board, the floor, the disclosure or the register.
- Leaving MBP-2 unwritten — seven days, registered office, permanent; it is the first register lenders' counsel requests.
- Letting connected-party receivables age into "loans represented by book debts" — the prohibited band hides in the ageing report.
- Routing a prohibited loan through an intermediary — "directly or indirectly" reaches the substance.
- Wiring surplus cash upward to the foreign parent as a loan or deposit — the exchange-control framework offers no ordinary route for it.
- Documenting a parent loan to the Indian subsidiary as a casual payable — downstream funding is ECB or equity, each with its own reporting.
- Signing the Indian subsidiary onto a guarantee for the parent's offshore debt without the FEMA analysis — assume restricted until advised otherwise.
8. Checklist
Gate 1 — identity
- Borrower mapped against the three bands — directors, relatives, partners, firms, interested companies
- 2015 exemption tested honestly — all three conditions, remembering the body-corporate shareholder rule
- Conditional band: prior SR passed with full particulars; utilisation for principal business activities documented and monitored
- Exempt band: the WOS/guarantee conditions and the utilisation trail on file
Gate 2 — arithmetic
- Aggregate exposure computed; headroom under the 60%/100% ceiling confirmed — or a prior SR with a specified total
- Unanimous board resolution at a meeting; PFI approval where required; no deposit default subsisting
- Interest at or above the closest-tenor G-Sec yield, evidenced in the board pack
- MBP-2 written up within 7 days; Section 186(4) particulars ready for the financial statements
The border
- Downstream parent funding structured as ECB (LRN, ECB-2) or equity (PAS-3, FC-GPR) — never an undocumented payable
- No upstream loans or deposits to the parent — repatriation planned through dividend, buy-back or reduction
- Guarantees for offshore group debt cleared with the AD bank and counsel before signature
- Both rulebooks on one closing checklist, owned by one person
9. Frequently asked questions
Q1. What does Section 185 prohibit?
Loans (including loans represented by book debts), guarantees and security, given directly or indirectly, to any director of the company or its holding company, any partner or relative of such a director, or any firm in which such a director or relative is a partner. The prohibition is absolute — no resolution cures it.
Q2. Can a company ever lend to an entity its director is interested in?
Yes — the conditional band. A private company where the director is a director or member, a body corporate where such directors control 25%+ of voting power, or one whose board is accustomed to act on their directions, may be funded with a prior special resolution disclosing full particulars, provided the borrower uses the money for its principal business activities.
Q3. Is a loan from a holding company to its subsidiary allowed?
To a wholly-owned subsidiary — yes, expressly exempt under Section 185(3), along with guarantees and security; and a holding company may guarantee bank loans to any subsidiary. The condition throughout: utilisation for the subsidiary's principal business activities. Section 186's machinery still applies.
Q4. What is the 2015 private-company exemption?
A notification disapplying Section 185 to private companies meeting all three conditions: no body corporate invested in its share capital; borrowings from banks/FIs/body corporates below twice paid-up capital or ₹50 crore (whichever is lower); and no subsisting default on such borrowings.
Q5. Why doesn't that exemption help foreign-owned subsidiaries?
Because the foreign parent is a body corporate invested in the share capital — condition one fails permanently, from incorporation. Full Section 185 applies to every foreign-owned company, which is exactly where domestic templates break when reused in multinational groups.
Q6. What are Section 186's monetary limits?
The aggregate of loans, guarantees, securities and acquisitions cannot exceed the higher of 60% of paid-up capital plus free reserves plus securities premium, or 100% of free reserves plus securities premium — unless a prior special resolution authorises a specified higher amount.
Q7. How must the board approve a loan or investment?
By a resolution passed at a board meeting with the consent of all directors present — unanimity among attendees. Circulation resolutions and committee delegations do not satisfy Section 186(5), whatever the amount.
Q8. When is a special resolution needed under Section 186?
When the aggregate would exceed the ceiling — passed in advance, specifying the total amount. The 2017 carve-out removes the SR for loans, guarantees and security to a wholly-owned subsidiary or joint venture, and for acquiring a WOS's securities; disclosure in the financial statements then suffices.
Q9. Does the WOS/JV carve-out remove all Section 186 compliance?
No — only the special resolution. The unanimous board meeting, the G-Sec interest floor, the Section 186(4) disclosures and the MBP-2 register apply in full.
Q10. What interest rate must a company charge on loans?
Not below the prevailing yield of the 1, 3, 5 or 10-year Government Security closest to the loan's tenor — Section 186(7). Interest-free intra-group loans are non-compliant by design; for related parties, transfer pricing asks its separate arm's-length question on top.
Q11. What is Form MBP-2?
The statutory register of loans, guarantees, security and acquisitions — entries within seven days of each transaction, kept at the registered office, preserved permanently, open to member inspection. It is also the working record from which ceiling headroom is computed.
Q12. What must the financial statements disclose?
Under Section 186(4): the full particulars of loans given, investments made, and guarantees or security provided — and the purpose for which the recipient proposes to use them. Schedule III adds line disclosures for loans to related parties, and CARO makes the auditor report on Sections 185/186 compliance annually.
Q13. Are employee loans caught by Section 186?
No — the MCA has clarified that loans and advances to employees per the conditions of service and remuneration policy fall outside Section 186. Managing and whole-time directors are the exception: their loans run through Section 185(3)'s own scheme.
Q14. What is the two-layer rule?
Section 186(1): investments through not more than two layers of investment companies — with carve-outs for acquiring a foreign company whose local law requires deeper chains, and for tiers mandated by regulation. It is a structural rule checked at group design, not at each loan.
Q15. What happens if the company has defaulted on deposits?
Section 186(8): while any default in repayment of deposits or deposit interest subsists, the company cannot give any loan or guarantee, provide security, or make an acquisition at all.
Q16. What are the penalties under Section 185?
Company: fine ₹5–25 lakh. Every officer in default: fine ₹5–25 lakh. The director or person to whom the loan was advanced: imprisonment up to six months, or fine ₹5–25 lakh, or both — liability lands on both sides of the transaction.
Q17. And under Section 186?
Section 186(13): the company — fine ₹25,000 to ₹5 lakh; every officer in default — fine ₹25,000 to ₹1 lakh. Smaller numbers than 185, but attached to far more frequent events: every ceiling, approval, pricing and register default.
Q18. Can a foreign parent simply lend money to its Indian subsidiary?
Only through the ECB framework: the parent as a foreign-equity-holder lender, minimum average maturity, all-in-cost ceiling, end-use restrictions, an LRN through the AD bank and monthly ECB-2 returns — or through equity instead. An undocumented intercompany payable is not a lawful third route.
Q19. Can the Indian subsidiary lend surplus cash to its foreign parent?
In the ordinary course, no — the overseas-investment framework permits lending only to a foreign JV/WOS of the Indian company, which the parent is not. Surplus cash moves upward lawfully through dividends, buy-backs or capital reduction, each with its own procedure and tax.
Q20. Can the Indian subsidiary guarantee its parent's borrowings?
Treat it as restricted: such guarantees are tightly controlled financial commitments under FEMA, on top of the Sections 185/186 analysis. They are structured with the AD bank and counsel in advance — never signed reflexively into a lender's standard security package.
Q21. Do guarantees count against the Section 186 ceiling?
Yes — guarantees and security aggregate with loans and investments in the ceiling computation, and go into MBP-2 like any loan. A company can exhaust its headroom without a rupee leaving the bank.
Q22. What is a "loan represented by a book debt"?
Section 185's answer to trade costumes: connected-party receivables left to age indefinitely, advances that never convert to supplies, open-ended credit to a director's firm. Substance governs — the ageing report is analysed, not just the loan book.
Q23. Does "directly or indirectly" really catch routed loans?
Yes. A loan through a clean intermediary that on-lends to the prohibited borrower is the prohibited loan in two steps. The phrase exists precisely to defeat structure-by-routing.
Q24. Whose directors matter — ours or the borrower's?
The lending company's directors, and the directors of its holding company. Map their positions, partnerships, relatives and 25% voting interests on the borrower's side — that mapping is the whole of Gate 1.
Q25. Is a loan to the managing director ever lawful?
Yes — as part of conditions of service extended to all employees, or under a scheme approved by special resolution: Section 185(3)(a). Outside those two doors, a loan to any director sits in the prohibited band.
Q26. We are an NBFC / lending business — does 186 bind us?
Section 186(11) carves out banking, insurance and housing-finance companies, and NBFCs whose principal business is lending or investment, for their ordinary-course activities — along with investment companies and rights-issue acquisitions. Section 185's ordinary-course exemption similarly requires lending at or above the G-Sec floor.
Q27. Can the members ratify a Section 185 breach after the fact?
The prohibited band cannot be resolved into lawfulness before or after. For the conditional band, the statute demands a prior special resolution; late ratification may mitigate but does not rewrite the default. The clean path is always approval first, money second.
Q28. How do Sections 185/186 interact with related-party rules?
They stack. Section 188 and (for listed or large companies) audit-committee approval run their own course on related-party transactions, and transfer pricing governs the rate for tax. Clearing Sections 185/186 is necessary, never sufficient — the group loan file shows all layers.
Q29. What does the auditor report on these sections?
CARO requires the auditor to state whether loans, investments, guarantees and security comply with Sections 185 and 186, and to detail loans to related parties — terms, repayment conduct, amounts overdue. A breach therefore self-publishes in the annual report.
Q30. Does Section 186 apply to loans to individuals?
Yes — "any person or other body corporate" covers individuals, subject to the employee-loan clarification. Section 185 then overlays its bands wherever the individual is a director, relative or partner within its net.
Q31. What paperwork should exist for a compliant group loan?
The Gate 1 mapping and any special resolution with full particulars; the unanimous board minutes; the G-Sec yield evidence and the loan agreement at or above it; the utilisation covenant and its monitoring; the MBP-2 entry within seven days; and, where a border is crossed, the LRN and ECB-2 trail. One file, assembled at closing.
Q32. Who counts as a "relative" for Section 185?
The Section 2(77) list: members of a HUF, spouse, father, mother, son, son's wife, daughter, daughter's husband, brother and sister — including step-relations. The list is exhaustive; mapping beyond it over-blocks, mapping short of it creates prohibited loans nobody noticed.
Q33. Must interested directors stay out of the vote?
Yes — Section 184 disclosure goes on the table, and the interested director does not participate where the Act so requires. A Section 186(5) resolution recorded as "unanimous" with the interested director voting is structurally vulnerable; the minutes should show the disclosure and the abstention in terms.
Q34. The money has already moved and the approvals don't exist — what now?
Map the breach honestly against both gates and FEMA; stop the bleeding (interest re-papering, utilisation correction, register write-up); take the resolutions that remain available; and price the disclosure into the next audit and diligence. Repairs are possible in most cases — silence is the one strategy that always fails.
Corporate — related reading
Talk to us before the money moves
Delhi Legal Company structures and repairs group funding for Indian companies and foreign-owned subsidiaries — the Section 185 mapping and special resolutions, Section 186 ceilings, unanimous-board documentation and MBP-2 registers, G-Sec-floor pricing memos, ECB structuring with LRN and ECB-2 discipline for downstream parent funding, lawful repatriation planning where treasuries want cash upstream, and the honest repair file where a transfer has already happened.
How we usually start. Send us the group chart, the directorships on both sides, the lender's latest balance sheet and the proposed terms. We come back with the two-gate analysis, the FEMA direction, every approval and document the transaction needs — and the interest floor as it stands this week.