Thursday, March 12, 2015

Guide to Staff Loans under the Companies Act, 2013

[The following guest post is contributed by Munmi Phukon at Vinod Kothari & Co. The author can be contacted at]

One of the incogruities in the Companies Act, 2013 (Act, 2013) has been section 186 which subjected companies to certain threshold limits while giving loans to any person or other body corporate. However, the provisions were not explicit as to whether the term ‘any person’ under section 186(2)(a) of Act, 2013 also covered employees and thereby employee loans. Since the enforcement of the section 186 was followed by rules, the provisions created an ambiguous situation, thereby giving rise to doubts in the minds of those subject to the provisions.

Finally, the Ministry of Corporate Affairs (MCA) has come up with a clarification on March 10, 2015 by way of a General Circular No. 04/2015 (‘March 10 Circular’) stating that the provisions of section will not be applicable to staff loans and advances, provided the same is given in accordance with the conditions of service and remuneration policy for whom such policy is required to be formulated. Here is an analysis:

Position before the March 10 Circular

Earlier, the provisions of section 186 were applicable to loans to ‘any person’ or other body corporate. There was nothing explicitly mentioned in the said section regarding the meaning of the term ‘any person’. Thus, it was construed that any person included employees as well. Hence, loans and advances given to the employees of a company were also covered under the purview of the Section.  This had created a lot of practical difficulties in implementation since almost all companies provide loans and advances to their employees as a part of the relationship with the company. Most of the companies have also been following a practice of giving loan for various purposes or reasons like car loan, home loan, etc. Since the section is applicable to all type of companies including private limited companies irrespective of their size (except those covered under sub- section (11)) and no basic exemption limit was provided, the companies were forced to include all staff loans for the purpose of calculation of threshold limits under section 186 of Act, 2013 irrespective of the quantum of loans creating an absurd situation.  

Position after the March 10 Circular

The March 10 Circular has clarified that loans and advances given to employees in accordance with the ‘conditions of service’ and remuneration policy (for those companies which is required to formulate such policy) are not governed by the provisions of section 186.  Although, the March 10 Circular is a welcome step, the MCA has left certain terms open-ended. The use of the term ‘conditions of service’ prods one to ask: does the term mean the HR policy or HR rules formulated or followed by a company? Is it required to be documented? In this regard, it is arguable that if the staff loan given is as per the HR policy or HR rules of the company, then the same can be treated as per conditions of service.

On the other hand, what if the company is required to formulate a remuneration policy? Does the company still need to have one HR policy/ rules and separately to have a remuneration policy as well?  One may say it would be ideal to have the conditions of service as a part of the remuneration policy.

Effective Date of the March 10 Circular

It is pertinent to note here that since the March 10 Circular is merely a clarification but not an exemption/notification, hence the applicability of the same will date back to the date of enforcement of the law which is April 1, 2014.

How to obtain benefit of the March 10 Circular?

There are many companies who have provided staff loans after April 1, 2014 and were concerned about the effect of the threshold limits of section 186. The March 10 Circular actually operates as a guide to these companies considering its effective date and that it comes close to the end of the financial year.

Can ‘any’ Staff loan be exempted?

No. One should not be mistaken that all staff loans are exempted. The March 10 Circular is clear that the loans to managing director or whole time director will still be under the purview of section 186 although such loan is being given as a part of the conditions of service since the same is governed by section 185. Also, all other staff loans which are not in accordance with the HR policy/ rules are also not exempted.


Surely, the March 10 Circular will bring much needed relief to all companies. Having said so, this is another example of ameliorating concerns that ought never to have arisen under the Act, 2013 at all. Inclusion of staff loans within the ambit of section 186 with the use of the term ‘any person’ was avoidable. All the same, it appears to have received some resolution.

- Munmi Phukon

1 comment:

Ashish Parab said...

Request help on the following points
1. What is the maximum amount of loan that can be given to an employee for different reasons like, home loan, vehicle loan, medical emergency loan, marriage loan etc
2. What is the minimum and maximum tenure for different types of loans given to employees?
3. Is there any interest applicable for the loans given?

Thanks in anticipation