"It's my company — can't I just take the money out?"
It is the single most common thing a founder assumes about a private limited company, and one of the most expensive to get wrong. The company has cash in the bank, you own it, so surely you can lend some of it to yourself, or to your other firm, or use it to guarantee a loan for a group company. The Companies Act treats that instinct with deep suspicion — because a director quietly moving company money to himself is exactly the abuse it was written to stop. Two sections govern this: Section 185 (lending to directors and people connected to them) and Section 186 (lending to and investing in other companies). Between them they decide what your company can and cannot do with its own money.
Section 185 — the loan your company generally cannot give you
Section 185(1) is a flat prohibition. A company cannot, 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, to any of its directors, to a director of its holding company, or to a partner or relative of such a director, or to any firm in which such a director or relative is a partner. In plain terms: the company cannot lend to you, to your spouse or other relatives, or to your partnership firm. There is no special-resolution route that unlocks this category — it is simply not allowed.
The conditional door — lending to a company you are interested in
Section 185 is not an absolute wall against every connected party. Section 185(2) permits a company to advance a loan, guarantee or security to a body corporate in which a director is interested — for example another private company in which you are a director or member, or a body corporate in which your director group controls at least 25% of the voting power — but only on two strict conditions: a special resolution is passed in general meeting (with the explanatory statement disclosing full particulars of the loan and the purpose it will be used for), and the loan is utilised by the borrowing company for its principal business activities. This is the route real group structures use, and it is the difference between the two subsections that trips people up: to you, no; to a company you are interested in, yes — with a special resolution and a genuine business purpose.
The exemptions that make ordinary business possible
Section 185(3) carves out the situations that would otherwise be caught but are perfectly legitimate:
- A loan to a managing or whole-time director as part of the conditions of service extended to all employees, or under a scheme approved by the members by special resolution.
- A company that in the ordinary course of its business provides loans, guarantees or securities — provided it charges interest at a rate not less than the prevailing yield of the Government security closest to the tenor of the loan.
- A loan, guarantee or security by a holding company to its wholly owned subsidiary, and a guarantee or security by a holding company for a loan made by a bank or financial institution to its subsidiary — provided the loan is used by the subsidiary for its principal business activities.
Outside these lanes, Section 185(1) bites. And the penalty is not a token fee: under Section 185(4) the company is liable to a fine of ₹5,00,000 up to ₹25,00,000, every officer in default can face imprisonment of up to six months or a fine of ₹5,00,000 to ₹25,00,000, and the director or other person who actually received the loan is exposed to the same imprisonment or fine. This is one of the few company-law defaults that carries a jail exposure — a strong signal of how seriously it is treated.
Section 186 — the ceiling when your company lends to or invests in other companies
Where Section 185 asks who is on the other side, Section 186 asks how much. When a company gives a loan or a guarantee, provides security, or acquires the securities of any other body corporate, Section 186(2) caps the aggregate at 60% of its paid-up share capital, free reserves and securities premium account, or 100% of its free reserves and securities premium account, whichever is higher. Cross that ceiling and you need prior approval by special resolution under Section 186(3). The board resolution authorising any such loan or investment must be passed with the consent of all the directors present at the meeting, and where the company has a subsisting term loan from a public financial institution, its prior approval may be needed too.
Two more rules sit inside Section 186. First, any loan the company gives must carry interest at a rate not lower than the prevailing yield of a one-, three-, five- or ten-year Government security closest in tenor to the loan — a company cannot lend at a soft or zero rate. Second, Section 186(1) restricts a company to making investment through not more than two layers of investment companies, a rule aimed at opaque holding structures. Every company must record its loans, guarantees, securities and investments in a register in Form MBP-2. The one significant relief: the special-resolution requirement does not apply to a loan, guarantee or security given by a company to its wholly owned subsidiary or a joint venture, or to the acquisition of the shares of a wholly owned subsidiary.
Where this sits in the company's compliance life
Sections 185 and 186 are the outbound side of the company's money — what it can do with cash it already holds. They pair naturally with the inbound side, deposits and the DPT-3 return, which governs money the company takes in from directors and others. Both matter most in group structures, where the same ownership chain that creates a significant beneficial owner also decides who counts as a "person in whom a director is interested". Group lending is an event-based compliance item on the Private Limited compliance calendar, and the special resolutions it needs are the same machinery you use to issue shares — and how you structure your entities in the first place, from the setup stage, decides how often you will run into these limits.
How we handle it at RDA, Baner
At RDA Advisory, Baner, we keep founders on the right side of Sections 185 and 186 before the money moves — not after an auditor flags it. We tell you plainly when a proposed loan is simply not allowed, structure the ones that are through the correct special resolution and end-use conditions, size group lending against the Section 186 ceiling, set the interest rate to the Government-security benchmark, and maintain the MBP-2 register — so intra-group funding holds up when a lender, an investor or an auditor looks at it. Office No. 102, Snehraj Apartment, Baner, Pune 411045 · call +91 77570 45059.
Moving money between your companies? Let's check it first
Planning to lend company funds to yourself, a group company, or to guarantee a loan across your entities? RDA tells you what Section 185 allows, runs the special resolutions Section 185(2) and 186 require, sets the right interest rate and keeps the register — so the transaction is clean rather than a penalty waiting to surface. Book a consult at rdatax.in or call +91 77570 45059, or see our ROC and secretarial service. RDA Advisory, Baner, Pune.
Verification note: The requirements described here are based on the Companies Act, 2013 and the rules made under it, as administered by the Ministry of Corporate Affairs (mca.gov.in). Section 185(1) prohibits a company from directly or indirectly advancing any loan (including a loan represented by a book debt), or giving any guarantee or providing any security in connection with a loan, to any of its directors, to a director of its holding company, to a partner or relative of such a director, or to any firm in which such a director or relative is a partner. Section 185(2) permits such a loan, guarantee or security to a body corporate in which a director is interested, subject to a special resolution in general meeting and the loan being utilised by the borrowing company for its principal business activities. Section 185(3) exempts a loan to a managing or whole-time director as part of conditions of service or under a members-approved scheme, a company providing loans in the ordinary course of its business at interest not below the prevailing Government-security yield, and loans, guarantees or securities by a holding company to or for its wholly owned subsidiary used for the subsidiary's principal business activities. Section 185(4) provides for a fine on the company of five lakh to twenty-five lakh rupees, and imprisonment up to six months or a fine of five lakh to twenty-five lakh rupees for the officer in default and for the director or person to whom the loan was advanced. Under Section 186(2), the aggregate of loans, guarantees, securities and investments is limited to sixty per cent of paid-up share capital, free reserves and securities premium, or one hundred per cent of free reserves and securities premium, whichever is more, beyond which a special resolution is required under Section 186(3); any loan must carry interest not lower than the prevailing yield of a Government security closest to its tenor; investment is restricted to two layers of investment companies; and a register is maintained in Form MBP-2. The special-resolution requirement does not apply to loans, guarantees, securities or share acquisitions in respect of a wholly owned subsidiary or a joint venture. Forms, fees, thresholds and penalties are periodically revised by the MCA; confirm the current requirements for your company with your CA or company secretary. This is general information, not legal or professional advice.
