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 [email protected]]
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.
Analysis
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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • hi,
    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

    Ashish

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics