My company in Aurangabad wants to give a loan to another company in which a director has interest; is this permissible under Section 186 of the Companies Act?

Detailed Legal Analysis

Yes, your company in Aurangabad can give a loan to another company in which a director has an interest, but it must comply with the provisions outlined in Section 186 of the Companies Act, 2013.

Section 186 specifically regulates loans and investments made by companies, especially when they involve related parties. Here are the key points and requirements to consider:

• Definition of Interest: A director is deemed to have an interest in a company if he or she is a director or a member of that company, or if the director or a relative has a substantial interest in the company (as per Section 2(76) of the Companies Act).
• Limits on Loans: Under Section 186(2), a company can make loans to another company, but the amount of such loans must not exceed:
  • 60% of the paid-up share capital, free reserves, and securities premium account of the lending company; or
  • 100% of its free reserves and securities premium account, whichever is higher.
• Approval Requirements: Before sanctioning the loan, the company must seek approval through:
  • A resolution passed at a Board meeting, as per Section 186(3); or
  • In certain cases, a special resolution in the general meeting if the amount exceeds the prescribed limits.
• Disclosure of Interest: The director must disclose their interest in the other company to the Board, as required under Section 184 of the Companies Act. Failure to do so can lead to penalties.
• Documentation: Maintain proper records of the loan agreement and ensure compliance with all legal formalities, including the terms and conditions of the loan.
• Regulatory Compliance: Ensure adherence to any additional requirements from the Reserve Bank of India (RBI) if the loan involves foreign companies or cross-border transactions.

In summary, while it is permissible for your company to provide a loan to another company in which a director has an interest, strict adherence to the provisions of Section 186 and related sections of the Companies Act is essential to avoid any legal repercussions.