Oct 04,2019 | 12 min read

Can Startups And Pvt Ltd Companies Accept Loans From Directors Or Relatives?

Author - Associate Sanjini Shah

The Government of India has relaxed norms for startup and Pvt ltd. companies via an exemption notification on 13th June 2016 by the Ministry of Corporate Affairs (New Notification). This new notification has allowed private companies to accept funds or loans from relatives of the directors.

With this exemption notification, it is anticipated that many Startup companies would do business with no difficulty.

A provision is added in the old notification related to clause 40 of Section 2 of the Companies Act 2013 as per the new notification. A startup company is not liable to prepare a cash flow statement under Companies Act 2013, as per Section 2 Clause 40 of the Companies Act 2013 states that the financial statements in relation to a Company which includes Cash Flow Statement.

In the Board’s report startup company should disclose, if they have taken a loan from the relatives of a director as per the statement of the Corporate Affairs Ministry. Thus making less complicated, the Companies (Acceptance of Deposition) Rules.

The Ministry has issued notification for executing the Companies Act, 2013

“The director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the board’s report.” 

A Private Limited Company can borrow funds from below persons or organization:

  • Director: Allowed, if a proclamation is given by the director that the amount has not been given out of funds obtained by him by borrowing or accepting loans or deposits from others.

  • Relative of Director: Allowed, vide notification of Ministry of Corporate dated 15/09/2015 has provided that private company can accept unsecured loans from relatives of directors as well as directors, presuming that relative or director from whom money is accepted, issue a declaration in writing to the cause that the amount is not being received out of funds taken by him by borrowing or accepting loans or deposits from others and company shall declare the details of money so received in the Board’s report. Relative cannot be a shareholder of the company.  

  • Share Holders: Not allowed, If the money received from members be more than 100% of the paid-up share capital and free reserves. If money received from members does not cross 100% of the paid-up capital and free reserves can be allowed on the condition that members should pass resolution and making provision for security, if any due repayment of the amount of deposit received and interest thus not less than 12.5% at present including creation of charge (Form CHG1) on the property or asset of the company. Details of money received should be filed with the register.

  • Relatives of Shareholders: Not allowed, as prescribed in Section 73 of the Companies Act 2013, borrowing may take place provided the fulfilment of condition as per Company Act 2013.

  • Director and Shareholder also: Allowed, If a declaration is given by the director that the amount has not been given out of funds received by him by borrowing or taking loans or deposits from others.

  • Employee: Allowed, the employee’s annual salary must not be more than the amount borrowed in the nature of interest-free security deposit.

Startup Company is set up by taking finance from outsiders or investors or the government so initially, there is no Flow of Cash to make Cash Flow Statements, so to carry out business with no difficulty this exemption has an amendment in Act.

As per the new notification, subsection 5 of section 173 of the Companies Act has been replaced as one-person Company, small Company, Dormant Company and Private Company (if it is startup) shall be held to have complied with the provisions of this section, instead of holding minimum four number of meetings of its board of directors in a year, they can have at least one meeting of the board of directors in each half-year and gap between two meetings is not less than 90 days.

In accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, for the purpose of Companies Act 2013, the term ‘startup’ or ‘startup company’ means a private company incorporated under the Companies Act 2013 or Companies Act 1956.

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Neeraj Dubey

Neeraj advises start-ups in structuring, funding & compliance requirements, choosing appropriate legal structures, their registration and licensing, conducting legal audits before funding/acquisition, drafting & reviewing contracts/agreements, advisory on employment laws, IP & data protection, dispute resolution & taxation.