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Loan to Public Companies Under Section 295 of the Companies Act, 1956 Clarification

CLR Note:  The circular regarding Loan to Public Limited Companies under Section 295 has been issued by the MCA to avoid unnecessary applications being filed by Companies for approvals even when the Act does not require approval. This circular seeks to clarify the position. Relevant extracts of Section 295 are also reproduced below for cross referencing.

General Circular No. 24/2011, Dated: 12thMay, 2011

F. No. 14/13/2011-CL-VII
Government of India
Ministry of Corporate Affairs

Subject:- Loan to Public Limited Companies under Section 295 of the Companies Act, 1956 Clarification regarding.

It has come to the notice of the Ministry that some companies are making applications for getting prior approval of Central Government when they propose to make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to a Public Limited Company of which any such Director is a Director or a member even when the proposal does not fall under Section 295(d) and Section 295(e) of the Companies Act, 1956.

2. Companies are requested to note that when the beneficiary of the loan/guarantee/security is a Public Limited Company, approval of Central Government should only be sought if the provisions of sub-Section (d) or (e) of Section 295 of the Companies Act, 1956 are attracted. The application should also clearly bring out the facts in this regard.

Yours faithfully,

Dr. T. V. Somnathan)

Joint Secretary

CLR Note: Relevant Extracts from Section 295 are reproduced below for ready reference

(1) Save as otherwise provided in subsection (2) no company (hereinafter in this section referred to as “the lending company” [without obtaining the previous approval of the Central Government in that behalf shall, 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 to any other person by,

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

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

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

(d) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director [***] or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Tag: Section 295 Companies Act

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