FAQs on Loan from Directors

12 January 2022 • Muskan Sinha


FAQs on Loan from Directors

12 January 2022 • Muskan Sinha

There is no explicit section under the Companies Act, 2013 (“the Act”) which specifically deals with the provisions concerning the loan from directors. However, the subject needs to be understood and manoeuvred through restrictions that the law imposes on borrowings by the company. Most of the borrowings by the company which are unsecured are seen as deposits and there are stringent provisions prescribed. Therefore, the important question, in this case, would be whether the loan from directors is a deposit as per the Act? There are other aspects, let’s find out.



1. Will the loan from Directors be treated as a deposit?

Loans from Directors are not considered as deposits [Rule 2(1) (vii) of the Companies (Acceptance of Deposits) Rules, 2014].Amount received as a loan from a director of the company is not considered as a “deposit” as the same is covered under the list of exempted deposits.

2. Can the Company accept loan from a relative of a Director?

The loan from relatives of the director is exempted only in the case of a private company. However, the money given by the relative of a Director should not be out of borrowed funds.

3. What are the reporting requirements for loan from Directors?

As per Explanation to Rule 16 of the Companies (Acceptance of Deposits) Rules, 2014, a company shall be required to file e-form DPT-3 for the transactions not considered as deposits i.e. “Exempted Deposits”. Since, loan from Directors is not considered as deposit, same needs to be reported as Exempted Deposits.

4. What are the other disclosures applicable to the company accepting a loan from Directors or relative of Directors?

A company accepting a loan from directors of the company or a relative of the director shall comply with the following:

  • The Director of the company or his/her relative, shall furnish in writing a declaration to the effect that the amount is not being given out of borrowed funds; and
  • Disclosure of the details of money so accepted by the Company in the Board’s Report.
  • Disclosure in its financial statement, by way of notes, about the money received from the directors, or relatives of directors.

5. Is there any limit upto which monies can be borrowed from the Director?

The law has prescribed an overall limit up to which money can be borrowed by a company under Section 180(1) (c) of the Act and not any specific limit for loan from directors. The board would be required to take consent of the members of the company by way of Special resolution if the money to be borrowed, together with the money already borrowed by the company exceeds the aggregate of:

  • its paid-up share capital,
  • free reserves, and
  • securities premium


6. Is the borrowing limits as stated above is applicable to a Private Limited Company?

Pursuant to Notification by the Ministry of Corporate Affairs dated 05th June, 2015, provisions of Section 180 of the Companies Act, 2013 do not apply to a private company. For other companies (public limited), this limit plays out only in terms of additional requirement of shareholders’ approval by way of special resolution.

7. Can the resolution to borrow funds be passed by circulation?

Borrowing Power is to be exercised by the board in the Board meeting only [Section 179(3)].The Board can exercise the power to borrow monies only in a duly convened board meeting. This implies that the resolution according the consent of directors cannot be passed through circulation.

8. What is the step-by-step procedure to accept a loan from Director or his /her relative?

The step-by-step procedure to accept a loan from Director or his / her relative is as follows:-

  1. Board meeting to pass the resolution for accepting a loan and approval of limit.
  2. Get a signed declaration from the Director or his / her relative that the money given is not out of borrowed funds. Get the loan agreement with all terms and conditions signed.
  3. File e form DPT-3.
  4. Disclose the details of such amount in the Board’s Report.
  5. Disclosure of amounts received from relatives of directors out of their own funds, in Financial Statements (in Notes to the Accounts).

9. Is a loan from a Director considered as a Related Party Transaction (RPT)?

A Director or a KMP is considered as a related party in terms of Section 2(76) of the Act and hence any transaction with the director or KMP shall be regarded as a related party transaction.

However, only those transactions are considered as related party transactions that are enumerated in Section 188(1) of the Act. The transactions specified in Section 188 are primarily in the nature of sale and purchase of goods, properties and services. Since the borrowing of money is not covered under Section 188 of the Act, the acceptance of a loan from the director shall not be considered as RPT.

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    1. Dear Reader,

      Please be apprised that as per the Companies Act 2013 and the relevant rules, it is permissible for private limited companies to acquire interest-free loans from their directors. The Companies Act 2013 does not explicitly restrict interest-free loans, provided that directors do not extend loans from borrowed funds. A written declaration confirming adherence to this condition is required from the directors.

  1. Can a Director/relative take a personal loan from a bank and lend it to the company without violating the deposit rules? Is there any exception to the declaration requirement in case of a borrowing from a bank?

    1. Dear Reader,

      Shortest answer is NO. If the funds are out of borrowed funds, then it will be treated as deposit and the company will have to comply with the deposit rules.

  2. For Private limited company, taking a loan from Director, he must be a share holder or Additional Director who is not a shareholder can also give loan?

    1. Dear Reader,

      As per Rule 2(1)(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014, “any amount (loan) received from a director or relative of the director of the private company shall be considered as ‘exempt deposit’ if such amount is given out of own funds and a declaration affirming the same has been submitted by him”

      In case the loan qualifies as an “exempt deposit”, the Company needs to disclose the same in its financial statements and in its annual return for deposits i.e. e-form DPT-3.

      Please note that the aforementioned provision does not mandate such director to be a shareholder in the Company.

      However, kindly note that if the amount (loan) is given out of borrowed funds, it shall be considered as “Deposit” and accordingly provisions governing the same shall be applicable.

      In case of further clarification, you may seek our professional advice in this matter.

  3. Very nice explanation.
    I have a question.
    Can the private limited company pay interest to the Director from whom the loan is accepted / received?
    If yes, what is the maximum rate of interest at which the private limited company can pay interest to the said director?

    1. Dear Reader,

      Please note that there are no explicit provisions under the Companies Act, 2013 concerning the interest on loan from directors or the maximum amount of Interest.

      Hence, as per our understanding, interest on such loan can be as per the mutually agreed terms of the loan.

  4. Hello Sir,
    Thank for such elaborative useful info. I have few question.
    1. Can a Director give Secured Loan to Company? If yes, what can be the Security of the loan? Can the Company hypothecate?
    2. If in case of Secured Loan to Company by Directors and from Bank as well, whose right will come first?
    3. How a Loan from Directors can be secured?


    1. Dear Reader,

      Please find below our replies to your queries:

      1) Since there is no explicit section under the Companies Act, 2013, which deals with the provisions concerning the loan from directors, thus general provisions of loan shall apply in case of a loan extended by a director. Therefore, per our understanding, the loan from director(s) can be secured or unsecured.

      2) It will depend upon the terms and conditions of the loan agreement.

      3) A loan from director can be secured by the company against its fixed assets as may be mutually agreed and decided by the director and company.

      For assistance in this regard, you may seek professional advice in this matter.

  5. Thanks for such information. Can you also elaborate, in case company is not able to pay back the director the loan he/she has given over years because the firm is in losses and wants to close. Its a private limited firm and Director is also a shareholder from day 1.

  6. Dear Author,
    Thanks to enlighten us… But still, I have a question. Can you please enlighten it further, please?

    1. Is it possible for the director to give a loan out of the borrowed funds with any exception or condition?
    2. What if a directors give a loan to the company out of the borrowed funds???

    1. Dear Reader,

      As per Rule 2(1)(c) of Companies (Acceptance of Deposits Rules), 2014, any amount received from the director shall not be treated as deposits if he/she furnishes a declaration that the amount is not out of borrowed funds.

      In view of this you may form an opinion that if the amount given by the director or his relative is out of borrowed funds, and declaration is received by the company to that effect then the transaction would fall under the category of “Deposits” and the company must comply with Deposit Rules.

      1. Dear Sir
        Can you further elaborate the audit procedure which as an article i can follow?
        If a director who have majority shares (Owner of Company) also provided on demand loan to the company and also explain the reason behind this practice of many company.
        Note: I just demanded DPT-3 and declaration about funds are not from borrowed funds from the management of the company.
        Sumit Prajapati

        1. Dear Reader,

          Kindly note the audit method for the Loan by Directors to Company necessitates the verification of a number of documents as stated hereinbelow.

          • The loan agreement signed by the director and the company,

          • Bank statements, accounting documents, and ledger entries pertaining to the director’s loan.

          • Director’s declaration that the money was not borrowed

          • Company’s filing of Form DPT-3.

          • Verify that the shareholders or board of directors gave their proper approval for the loans.

          • Any additional records that the auditor could request.

          Considering the information provided by you, we state that you have already reviewed the basic required documents. However, you can also review further documentation to confirm that the transaction entered into by the company with the director is in compliance with the applicable laws and regulations .

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