Loans to Director and his Relatives

No company shall, without obtaining the previous approval of the Central Government directly or indirectly make any loan to or give any guarantee or provide any security in connection with a loan made by any other person to or any other person by –

1) any director of the lending company or of a company which is holding company or any partner or relative of any such director;

2) any firm in which any such director or relative is a partner;

3) any private company of which any such director is a director or a member;

4) any body corporate at a general meeting of which not less than 25 % of the total voting power may be exercised or controlled by any such director or by two or more directors together;

5) any body corporate to Board of Directors Managing Director or Manager whereof is accustomed to act in accordance with the direction or instructions of the board, or of any director or directors of the lending company.

A deposit will be a loan and therefore covered by above provisions. Deposit kept by one company with another company is loan. In both loan and deposit, relationship is one of a creditor and a debtor. However, credit given by a company cannot be considered as a loan. A sum paid by way of advance is not necessarily a loan. An advance in the nature of a loan, receivable back by the company is loan. A debt connected with the trade of the person concerned is a book debt . A book credit from the very inception in the nature of a loan or an advance will be covered by the above provisions. Prior Central Government approval is required to be obtained failing which any loan advanced shall be in breach of the above provisions. Any loan advanced contrary to the above provisions shall be void and illegal and therefore recoverable by the company

The above provisions shall not apply to –

1) any loan made, guarantee given or security provided by a private company unless it is a subsidiary of a public company or by a banking company.
2) any loan made by a holding company to its subsidiary company or
3) any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary company;
4) to a government company , in respect of which the entire paid up capital is held by –

i) the central Government and its members
ii) a state Government and its nominees ‘

in so far as it relates to making any loan or to giving any guarantee or providing any security in connection with a loan to any other Government company, whose paid up capital is so held as that of the lending company. Such a company shall obtain the approval of the Ministry of Department of Central Government which is administratively in charge of the company or as the case may be, the State Government.

Every person who is knowingly a party to any contravention including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided shall be punishable either by fine which may extend to Rs 50,000 or with simple imprisonment for a term which may extend to six months. Where any such loan in connection with which any such guarantees or security has been given or provided by the lending company has been paid in full no punishment by way of imprisonment shall be imposed. Where the loan has been repaid in part, the maximum punishment which may be imposed by way of Imprisonment shall be proportionately reduced.
Source: Business Law