BOARDROOM FINANCIAL DISCIPLINE: NAVIGATING SECTIONS 185 & 186 OF THE COMPANIES ACT, 2013

Fathima Naja
CS Trainee

07-Mar-2026

In corporate compliance, Sections 185 and 186 of the Companies Act, 2013 are often regarded as the most sensitive financial governance rules. They may appear technical, but their impact on corporate decision-making is profound. These sections influence how companies structure inter-corporate loans, provide guarantees and securities, manage group financing, and handle director-related transactions. For a Company Secretary or governance professional, mastering them is not just about compliance - it’s about boardroom discipline, transparency, and strategic financial management.

Can Directors Really Take Company Loans? Understanding Section 185

Section 185 does not completely prohibit all loans connected to directors. It creates:

1️ Absolute Prohibition (Section 185(1))

A company shall not directly or indirectly advance any loan (including book debt), give guarantee, or provide security in connection with a loan taken by:

• Any director of the company

• Any director of its holding company

• Any partner or relative of such director

• Any firm in which such director or relative is a partner

These transactions are strictly prohibited.

2️ Conditional Permission (Section 185(2))

A company may give loan, guarantee, or security to any person in whom a director is interested, subject to:

•Prior Special Resolution

• Full disclosure in explanatory statement

• Loan utilised for principal business activities

The expression “person in whom director is interested” includes:

• Private company in which such director is director/member

• Body corporate where 25% or more voting power is exercised/controlled by such director(s)

• Body corporate whose Board acts as per directions of lending company’s director(s)

 Key Takeaways

Before approving any loan transaction, a Company Secretary must:

• Examine disclosures under Section 184

• Identify whether transaction falls under 185(1) or 185(2)

• Ensure compliance with explanatory statement requirements

Non-compliance attracts heavy penalties, including fine and imprisonment.

How Much Can a Company Really Lend or Invest? Understanding Section 186

While Section 185 focuses on who can receive a loan, Section 186 governs how much a company can lend or invest. It applies broadly to a company’s financial dealings, including loans to any person or body corporate, guarantees, securities, and the acquisition of securities. Essentially, Section 186 sets the financial exposure limits for the company, ensuring that investments and lending activities are conducted within a framework that promotes prudence, transparency, and compliance with corporate governance norms.

 Financial Exposure Limits

A company cannot exceed:

• 60% of Paid-up Share Capital + Free Reserves + Securities Premium

                            OR

• 100% of Free Reserves + Securities Premium

(whichever is higher)

If limits are exceeded, Prior Special Resolution required.

 Additional Compliance Requirements

• Board resolution passed at a meeting (not by circulation)

• Consent of all directors present

• Interest rate not lower than prevailing Government Security yield

• Maintenance of Register (MBP-2)

• Disclosure in financial statements

• No default in repayment of deposits

key Clarification

Even if transaction is within Section 186 limits, Section 185 must still be examined if a director-related entity is involved.

Both sections operate independently and must be read together.

 Governance Perspective

Sections 185 and 186 are not just procedural requirements; they are essential financial discipline safeguards that protect the integrity of corporate decision-making. These provisions help prevent the diversion of corporate funds, safeguard the interests of minority shareholders, promote transparency, and strengthen board accountability. For a competent Company Secretary, compliance goes beyond paperwork — it involves identifying director interests before any transaction, structuring loans and investments lawfully, ensuring full disclosure, and advising the Board on financial exposure and potential risks. In this way, mastering Sections 185 and 186 transforms compliance into a strategic tool for effective corporate governance.

Final Insights

Before approving any loan or investment, three questions must be asked:

1️Is any director interested? (Check Section 184)

2️ Is the transaction prohibited or conditionally allowed under Section 185?

3️ Are we within financial exposure limits under Section 186?

Mastering these provisions transforms compliance from paperwork into governance strategy.

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