Sections 185 & 186 Companies Act: Loans to Directors, Inter-Corporate Loans, Guarantees, Security, Limits, Approvals & Penalties 2026

By Adv. Govind Bali | Updated: 21 August 2026

Sections 185 and 186 of the Companies Act, 2013 regulate two overlapping but legally distinct areas of corporate lending. Section 185 is primarily an anti-conflict provision dealing with loans, guarantees and security connected with directors and persons in whom directors are interested. Section 186 is the broader capital-allocation and governance provision regulating loans, guarantees, security and investments made by a company.

A transaction may comply with one section and still violate the other. This is the central practical point. A loan to a group company may be permitted under Section 185 after a special resolution but may still breach the monetary ceiling, board-approval, interest-rate, deposit-default, disclosure or register requirements of Section 186. Conversely, a transaction may be within Section 186 limits but still be absolutely prohibited under Section 185(1).

Quick answer: Section 185 vs Section 186

Issue	Section 185	Section 186
Primary purpose	Restricts loans/guarantees/security involving directors and connected persons	Regulates loans, guarantees, security and investments by companies generally
Absolute prohibition	Yes, for persons listed in Section 185(1), subject to statutory exemptions	No equivalent director-specific absolute prohibition; instead ceilings, approvals and conditions apply
Special resolution	Required for transactions with a “person in whom a director is interested” under Section 185(2)	Required before crossing the Section 186(2) aggregate ceiling, subject to specified exceptions
Use-of-funds condition	Borrowing company must use Section 185(2) loan for its principal business activities	Purpose must be disclosed; separate statutory conditions also apply
Board approval	Transaction must be validly approved under the Act and governance documents	Section 186(5) requires approval at a Board meeting with consent of all directors present
Interest floor	Applies through specified exceptions in Section 185(3)(b)	Section 186(7) prescribes Government Security yield floor for loans
Register	No separate Section 185 register, though other statutory registers may apply	MBP-2 register required under Section 186(9) read with Rule 12
Penalties	Company ₹5 lakh–₹25 lakh; officers/recipient may also face imprisonment/fine	Company ₹25,000–₹5 lakh; defaulting officer may face imprisonment up to 2 years plus fine

Section 185(1): loans that are prohibited

Section 185(1) provides that no company shall, directly or indirectly, advance any loan—including a loan represented by a book debt—or give any guarantee or provide any security in connection with a loan taken by:

any director of the lending company;
any director of the company’s holding company;
any partner or relative of such director; or
any firm in which such director or relative is a partner.

This is the strictest part of Section 185. A special resolution does not, by itself, cure a transaction that falls squarely within Section 185(1). The first task in every proposed director-linked loan is therefore to classify the recipient correctly.

What does “loan represented by a book debt” mean?

The provision is deliberately wider than a simple cash transfer. If an amount that is in substance a loan is left outstanding in the books as a receivable or book debt, Section 185 may still be attracted. Substance prevails over accounting labels.

However, every trade receivable is not automatically a loan. Genuine ordinary-course credit arising from sale of goods or services must be distinguished from a transaction that is effectively financing a director or connected person. Factors such as unusually long credit, lack of commercial justification, absence of ordinary credit terms, repeated roll-over, interest arrangements and the relationship between the parties become relevant.

Section 185(2): transactions with “persons in whom a director is interested”

Unlike Section 185(1), Section 185(2) does not impose an absolute prohibition. It permits a company to advance a loan, including a book-debt loan, or give a guarantee or provide security in connection with a loan taken by a person in whom a director is interested, provided two essential conditions are satisfied:

a special resolution is passed in general meeting; and
the borrowing company uses the loan for its principal business activities.

The explanatory statement accompanying the special-resolution notice must disclose the full particulars of the loan, guarantee or security, the proposed purpose and other relevant facts.

Who is a “person in whom a director is interested”?

For Section 185(2), the expression includes:

any private company of which the director of the lending company is a director or member;
any body corporate at whose general meeting at least 25% of total voting power may be exercised or controlled by such director, or by two or more such directors together; and
any body corporate whose Board, managing director or manager is accustomed to act in accordance with the directions or instructions of the Board or director(s) of the lending company.

Corporate groups should map voting rights, board control and directorships before deciding whether a proposed loan sits in Section 185(1), Section 185(2), an exemption, or outside Section 185.

Can a company lend money directly to its director?

As a general rule, a direct loan to a director falls within Section 185(1) and is prohibited unless a specific statutory or notification-based exemption applies. Shareholder approval cannot be treated as a universal cure.

Section 185(3): important statutory exceptions

Section 185(3) excludes specified transactions from the restrictions in sub-sections (1) and (2). These include:

a loan to a managing director or whole-time director as part of service conditions extended by the company to all employees;
a loan to a managing director or whole-time director pursuant to a scheme approved by members by special resolution;
loans, guarantees or security by a company whose ordinary course of business is lending or giving guarantees/security, provided the statutory minimum interest condition is satisfied;
a loan by a holding company to its wholly owned subsidiary, or a guarantee/security by the holding company in respect of a loan to its wholly owned subsidiary; and
a guarantee or security by a holding company in respect of a bank or financial-institution loan to its subsidiary.

For the holding-company/subsidiary exemptions, the loan must be used by the subsidiary for its principal business activities.

Private-company exemption from Section 185

MCA’s exemption notification for private companies remains highly relevant. Section 185 does not apply to a qualifying private company where all prescribed conditions are satisfied, including:

no other body corporate has invested money in its share capital;
its borrowings from banks, financial institutions or bodies corporate are less than twice its paid-up share capital or ₹50 crore, whichever is lower;
there is no subsisting default in repayment of such borrowings at the time of the transaction; and
the private company remains eligible for the exemption framework, including the applicable filing-compliance condition introduced through the exemption-notification regime.

This exemption must be tested on the facts as on the transaction date. A company should not assume that merely being “private limited” removes Section 185.

Nidhi and Government-company exemptions

Separate notification-based relaxations exist for Nidhi companies and Government companies. Nidhi-company treatment is linked to loans made to a director or relative in their capacity as members and appropriate disclosure. Government-company relaxation is conditional on obtaining the prescribed governmental approval. These are entity-specific exemptions and should not be applied to ordinary private or public companies.

Does Section 185 apply when the company borrows from a director?

Section 185 regulates a company advancing a loan or giving guarantee/security in connection with a loan taken by specified persons. It is not the statutory provision governing a company merely taking a loan from a director.

This distinction was recognised in KPA Apparels Private Limited v. ITO (ITAT Delhi, 14 May 2026), where, on the facts, the Tribunal noted that the company had taken a loan rather than advanced one and Section 185 was therefore not attracted. Borrowings from directors may, however, trigger other Companies Act, deposit-rule, accounting and tax consequences.

Section 186: the broader inter-corporate loan and investment framework

Section 186 regulates a company’s power to:

give loans to any person or other body corporate;
give a guarantee or provide security in connection with a loan to another body corporate or person; and
acquire securities of another body corporate by subscription, purchase or otherwise.

For Section 186(2), “person” does not include an individual who is an employee of the company.

Section 186(2) monetary ceiling: the formula

A company may make covered loans, guarantees, security and investments up to the higher of:

60% of its paid-up share capital + free reserves + securities premium account; or
100% of its free reserves + securities premium account.

The test is aggregate. Existing loans, investments, guarantees and security must be added to the proposed transaction. Companies frequently make the mistake of comparing only the new loan with the statutory ceiling.

Worked example of Section 186 limit

Suppose a company has:

paid-up share capital: ₹10 crore;
free reserves: ₹20 crore;
securities premium: ₹5 crore.

60% of ₹35 crore = ₹21 crore. 100% of free reserves + securities premium = ₹25 crore. The Section 186(2) ceiling is therefore ₹25 crore because the higher figure applies.

If the company already has ₹19 crore of covered loans/investments/guarantees outstanding, a proposed ₹8 crore transaction takes the aggregate to ₹27 crore and crosses the limit. Section 186(3) special-resolution approval is then required unless an exception applies.

Section 186(3): when is a special resolution required?

Where the aggregate of existing and proposed covered transactions exceeds the Section 186(2) limit, no further investment or loan may be made, nor guarantee or security given, unless it has been previously authorised by a special resolution in general meeting.

The approval is therefore prospective. Companies should avoid a “ratify later” approach where the statute expressly requires previous authorisation.

Wholly owned subsidiary and joint venture exception

The special-resolution requirement in Section 186(3) does not apply in specified cases involving:

a loan or guarantee given, or security provided, by a company to its wholly owned subsidiary;
a loan or guarantee given, or security provided, to a joint venture company; and
acquisition by a holding company of securities of its wholly owned subsidiary.

However, the company must still disclose such transactions in its financial statements as required by Section 186(4). The exception from the special-resolution requirement is not a blanket exemption from every other applicable part of Section 186.

Section 186(5): Board approval must be at a meeting

A covered loan, guarantee, security or investment cannot be made unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all directors present at that meeting.

This is important because Section 179 generally permits delegation of certain powers, but Section 186(5) imposes a specific approval standard for transactions within its scope.

Prior approval of a public financial institution

Where a term loan from a public financial institution is subsisting, prior approval of that institution is ordinarily required. However, such approval is not required where:

the aggregate of existing and proposed Section 186 exposures does not exceed the Section 186(2) limit; and
there is no default in repayment of loan instalments or interest to the public financial institution.

Section 186(7): minimum interest rate

No loan under Section 186 may be given at a rate of interest lower than the prevailing yield of the one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan.

This makes interest-free inter-corporate loans risky unless the transaction is outside the relevant statutory requirement or falls within a legally sustainable exemption. The interest benchmark should be documented on the date the loan is approved.

Loans and advances to employees

MCA General Circular No. 04/2015 clarified that loans and advances to employees other than managing or whole-time directors are not governed by Section 186 where they are made in accordance with the employees’ conditions of service and, where applicable, the company’s remuneration policy.

Managing and whole-time directors remain subject to the specific Section 185 framework.

Deposit default: Section 186(8)

A company that is in default in repayment of deposits accepted before or after commencement of the Act, or in payment of interest on those deposits, cannot give a loan, guarantee or security or make a covered acquisition while the default continues.

This prohibition should be checked independently even where shareholder and Board approvals are otherwise in place.

Section 186(4): financial-statement disclosure

The company must disclose to members in its financial statements the full particulars of loans given, investments made, guarantees given and security provided, together with the purpose for which the recipient proposes to utilise the loan, guarantee or security.

A board resolution alone therefore does not complete Section 186 compliance.

MBP-2 register under Section 186(9)

Rule 12 of the Companies (Meetings of Board and its Powers) Rules requires every company undertaking covered transactions to maintain a register in Form MBP-2.

Key compliance points include:

entries must be made chronologically;
each transaction must ordinarily be entered within 7 days;
the register must be kept at the registered office;
it must be preserved permanently;
entries may be maintained manually or electronically; and
the register must be authenticated by the company secretary or another person authorised by the Board.

MGT-14: when should it be checked?

Board resolutions under Section 179(3), including resolutions to grant loans, give guarantees or provide security, fall within the Section 117 filing framework, subject to statutory and notification-based exemptions. Special resolutions under Sections 185(2) and 186(3) are also resolutions of the type that ordinarily require filing with the Registrar.

Accordingly, the company secretary should check the current MGT-14 applicability and any private-company or sectoral exemption before closing the transaction. Where filing is required, the general statutory timeline under Section 117 is 30 days.

Section 186(1): two-layer restriction

Section 186 also restricts investment through more than two layers of investment companies, subject to statutory exceptions, including certain overseas acquisitions and a subsidiary maintaining an investment subsidiary to meet legal or regulatory requirements.

This rule must be read with the Companies (Restriction on Number of Layers) Rules and should not be confused with the monetary ceiling in Section 186(2).

Section 186(11): entities with broad exemptions

Except for the two-layer rule in Section 186(1), Section 186 does not apply in the same manner to specified regulated financial entities and financing businesses. The exemption includes, subject to the statutory language:

banking companies;
insurance companies;
housing finance companies operating in the ordinary course;
companies established with the object of and engaged in financing industrial enterprises;
companies providing infrastructural facilities; and
specified investment/lending activities of qualifying NBFCs and investment companies.

Because these exemptions are activity- and entity-specific, a company should not claim them merely because it occasionally lends money to group entities.

Important 2025 amendment to Rule 11

On 3 November 2025, the Companies (Meetings of Board and its Powers) Amendment Rules, 2025 substituted Rule 11(2). For purposes of Section 186(11)(a), the expression “business of financing industrial enterprises” now expressly includes:

for an RBI-registered NBFC, the ordinary-course business of giving loans or providing guarantees/security for repayment of loans; and
for an IFSCA-registered Finance Company, specified financing activities under the IFSCA (Finance Company) Regulations, 2021 when undertaken in the ordinary course of business.

This is a material 2026 compliance point and should be considered when analysing IFSC Finance Companies and regulated lending entities.

Section 185 vs Section 186: common group-company scenarios

Scenario	Section 185	Section 186
Company lends directly to its director	Generally prohibited under 185(1), unless a specific exemption applies	Section 186 analysis may also arise, but compliance cannot cure 185(1)
Company lends to private company in which its director is a member/director	Permitted only through 185(2) route if conditions are met, unless exempt	Ceiling, Board approval, interest, disclosure and register must also be checked
Holding company lends to wholly owned subsidiary	Statutory exemption subject to principal-business use	Special-resolution exception may apply, but other requirements must still be checked
Company guarantees bank loan of subsidiary	May fall within 185(3)(d) exemption	Section 186 exposure and special-resolution exception must be analysed separately
Company lends to employee who is not MD/WTD	Ordinarily outside director-loan restriction	MCA clarification excludes qualifying employee loans/advances from Section 186
Company borrows from its director	Section 185 does not prohibit borrowing merely because lender is director	Section 186 is about deployment of company funds, not receipt of the director loan

Related-party transaction overlap

A director-linked loan may also involve disclosure of interest under Section 184, related-party questions, accounting standards and listing regulations. However, Section 185 and Section 188 must not be mechanically conflated. A transaction can be connected to a director for Section 185 purposes without being governed in exactly the same way under Section 188.

For the separate Section 188 framework, see our detailed guide on Related Party Transactions under Section 188.

Loans tied to share subscriptions or private placements

Where group-company funding is linked with an equity issue, preference shares, convertible instruments or a private placement, Section 185/186 compliance should be analysed together with Section 42, Section 62 and applicable valuation and allotment requirements. See our guide to Private Placement under Section 42.

Section 185 penalties

If a loan is advanced, or guarantee/security given, provided or utilised in contravention of Section 185:

the company is punishable with fine from ₹5 lakh to ₹25 lakh;
every officer in default may face imprisonment up to 6 months or fine from ₹5 lakh to ₹25 lakh; and
the director or other recipient may face imprisonment up to 6 months or fine from ₹5 lakh to ₹25 lakh, or both.

The section therefore carries personal exposure; it is not merely a technical ROC filing provision.

Section 186 penalties

For contravention of Section 186:

the company may be fined from ₹25,000 to ₹5 lakh; and
every officer in default may face imprisonment up to 2 years and fine from ₹25,000 to ₹1 lakh.

Can a defective loan still be recovered?

Companies should not assume that every statutory contravention automatically destroys the underlying debt. Questions of enforceability, restitution, financial debt, illegality and corporate authority depend on the nature of the breach and the statutory scheme.

In a June 2026 NCLT Kolkata insolvency decision involving an inter-corporate loan, the Tribunal treated an inter-corporate loan as capable of constituting financial debt under the IBC where the transaction satisfied the financial-debt requirements and corporate approval documents were produced. The lesson is that Companies Act compliance and debt enforceability must be analysed carefully rather than through broad assumptions.

2026 judicial point: borrowing is not lending

KPA Apparels Private Limited v. ITO (ITAT Delhi, 14 May 2026) is useful for one recurring misconception. The Tribunal distinguished a company taking a loan from a transaction in which the company advances a loan. On the facts before it, Section 185 was held inapplicable because the company was the borrower, not the lender.

Although the decision arose in tax proceedings and should not be overextended, the statutory distinction is important for drafting audit and compliance opinions.

Board checklist before approving a Section 185/186 transaction

Identify the exact proposed borrower/beneficiary.
Map directors, relatives, partners, shareholding and voting control.
Classify the transaction under Section 185(1), 185(2), 185(3) or applicable notification exemption.
Calculate the Section 186(2) aggregate exposure before the new transaction.
Check whether a Section 185 special resolution is required.
Check whether a Section 186(3) special resolution is required.
Check whether public-financial-institution consent is required.
Document the Government Security yield used for interest-rate compliance.
Confirm there is no subsisting deposit default.
Approve at a properly convened Board meeting with the required consent.
Check MGT-14 applicability.
Enter the transaction in MBP-2 within the prescribed period.
Ensure financial-statement disclosure.
Track actual use of funds where principal-business-use is a statutory condition.

Audit and due-diligence red flags

large “advances” to director-controlled entities without loan agreements;
interest-free or below-benchmark loans;
book debts outstanding far beyond ordinary trade terms;
general-meeting approval obtained after disbursement;
blanket shareholder resolutions with no transaction purpose;
MBP-2 not maintained or entries made retrospectively;
loan proceeds diverted away from the borrower’s principal business;
subsidiary guarantee given without checking aggregate Section 186 exposure;
Board approval by circulation where Section 186(5) requires approval at a meeting;
deposit default ignored while fresh group-company funding is advanced;
private company claiming Section 185 exemption despite body-corporate investment, excess borrowings or filing default.

Drafting a Section 185 special resolution

The explanatory statement should identify, at minimum:

name of the borrower/beneficiary;
relationship with the interested director;
maximum amount;
nature of assistance—loan, guarantee or security;
purpose for which it will be used;
tenor, pricing and material terms;
security, if any;
director interest;
confirmation that funds will be used for principal business activities where Section 185(2) applies.

A generic “up to ₹X crore to group entities” resolution should be scrutinised carefully if it does not adequately disclose the facts required by Section 185(2).

Drafting a Section 186 special resolution

A Section 186 resolution should clearly authorise the Board to make loans, investments, guarantees or security up to a specified aggregate limit above the statutory ceiling. It should be supported by a proper explanatory statement setting out the commercial rationale and intended deployment of funds.

The special resolution does not dispense with Section 186(5), interest-rate, disclosure, register or deposit-default requirements.

Frequently asked questions

Can shareholders approve a loan to a director?

Not automatically. If the borrower is within Section 185(1), a special resolution alone does not cure the statutory prohibition. If the borrower falls within Section 185(2), a special resolution plus principal-business-use condition may permit the transaction.

Can a holding company give an interest-free loan to a wholly owned subsidiary?

Section 185 may exempt the holding-company/WOS transaction subject to the principal-business-use condition, but Section 186 must still be separately analysed, including the interest requirement and any applicable exemption. The Section 185 exemption should not be treated as an automatic exemption from Section 186(7).

Is Section 186 only for loans between companies?

No. Section 186 also covers guarantees, security and acquisitions of securities, and Section 186(2) refers to loans to any person or other body corporate, subject to the employee exclusion.

Is a Board resolution enough if the Section 186 limit is exceeded?

No. Previous authorisation by special resolution is required under Section 186(3), unless a statutory exception applies.

Can Section 186 approval be taken after the loan is disbursed?

The statutory language requires previous authorisation where the aggregate limit is exceeded. Post-facto ratification should not be treated as equivalent compliance.

Does a company have to maintain MBP-2?

Yes, where it gives covered loans, guarantees/security or makes covered acquisitions. Rule 12 requires chronological entry, ordinarily within seven days, and permanent preservation at the registered office.

Does Section 185 stop a company from borrowing from its director?

No. Section 185 concerns loans advanced by the company and guarantees/security provided by it. Borrowing from a director is governed by other provisions and rules.

What changed in 2025?

Rule 11(2) was substituted with effect from 3 November 2025 to update the meaning of “business of financing industrial enterprises” under Section 186(11)(a), expressly addressing RBI-registered NBFCs and IFSCA-registered Finance Companies.

Primary legal sources

This article is intended as a legal and compliance information resource. Section 185/186 analysis is highly transaction-specific and should be undertaken together with the company’s articles, shareholder arrangements, borrowing documents, Section 184 disclosures, related-party rules, accounting standards, FEMA/RBI requirements where applicable and listed-company regulations.

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