Private Firms may be Allowed to Extend Loans to Directors

Private companies will get to extend loans to their directors if a new proposal of the Corporate Affairs Ministry gets notified.

This proposal forms part of several realistic measures taken by the Ministry to improve the working environment for private companies.

The move is significant as it would reverse a position in the new company law that barred private companies from extending loans to directors or any other person in whom the director is interested.

The breather will, however, not be available to all such companies.

Only those private companies with no or low public interest will benefit from the proposed move.

All private companies with borrowings from banks over a specified limit will not be eligible to extend loans to their directors.

“The intention is not to provide this dispensation to private companies where significant exposure to banks/public funding exists,” Aseem Chawla, Partner, MPC Legal, told Business Line.

However, Chawla suggested that all private companies, irrespective of their borrowings or shareholdings, should be allowed to extend loans to directors.

Yogesh Sharma, Partner, Grant Thornton India LLP, said the new measures are welcome as they would address the practical difficulties faced by many small and medium-sized private companies in complying with certain requirements.

It is worth citing that none of the exemptions and relaxations proposed by MCA would hamper the interest of the investors or public at large as they cover only private companies with no or low public interest, he said. 

Business Line, New Delhi, 26-06-2014

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