Here's What the Companies Act Actually Says
It sounds like the most natural thing in the world, a shareholder lending money to their own company when cash flow gets tight, and technically it is possible. But the Companies Act, 2013, does not allow doing this casually. Because any money a company takes from a member can be legally treated as a deposit, and deposits come with a rulebook that most founders don’t read till they’re already mid-transaction.
Where the restriction comes from Section 73 of the Companies Act, 2013, it prohibits a company from soliciting or accepting deposits from the public. In the absence of an exemption, any amount received from a member would be treated as a deposit under the Companies (Acceptance of Deposits) Rules, 2014. This is exactly why loans from shareholders under Companies Act rules have to be structured carefully rather than being treated as a simple internal transfer. Most confusion starts with that one classification issue.
The Route of Private Company Exemption
The MCA notification in 2017 provided meaningful breathing space to private companies here. As per Section 73(2) of the Companies Act, if a private company borrows from its members, it shall not be required to comply with the full burden of deposit if the amount does not exceed one hundred percent of its paid-up share capital, free reserves, and securities premium account together. There are, however, caveats to this exemption:
- The company shall not be a subsidiary or affiliate of any other company.
- The borrowings from banks or financial institutions should not exceed twice the paid-up capital or fifty crore rupees, whichever is less
- No existing default in repayment of any deposit or interest thereon. Public companies don’t have that cushion, which is why they need to raise money from members.
Public companies don't have that cushion. Therefore, raising money from members is far more restrictive for them, with credit rating requirements, deposit insurance, and a deposit repayment reserve that private companies claiming the exemption are not subject to.
The Simpler Way: Learning from a Director
If the lender is also a director, there’s an easier way. If a director gives a written declaration that the funds are not sourced from borrowings, the money received by the director is completely excluded from the definition of deposit. This route skips over most of the compliance layers typically required for member loans.
Pre-Requisites Before Taking the Loan
Before any money actually comes in, a company should check that its Articles of Association permit borrowing; whether the amount proposed, together with existing borrowings, exceeds the limit under Section 180(1)(c) requiring shareholder approval by special resolution; and, if the private company route is followed, whether the exemption conditions mentioned above are really applicable.
Paperwork You’ll Need
Typical papers are board resolutions approving acceptance of the loan; Special resolution when borrowing limits under section 180 are triggered; Signed loan/deposit agreement that states interest and repayment terms; Declaration from member or director in relation to the source of funds; Latest audited financials to determine the permissible limit; and The company’s latest updated register of deposits.
The Procedure Step by Step
First the board passes a resolution approving the loan and then a shareholder resolution if the borrowing is above specified thresholds. The loan agreement is signed, the money is received, and the transaction is entered into the deposit register. Regardless of the exemption route used, the company still needs to file Form DPT-3 annually with the Registrar of Companies, disclosing outstanding loans and deposits as on the reporting date.
Other Things Worth Knowing
Getting the classification wrong isn't a minor slip. Accepting deposits in violation of Section 73 can attract penalties on the company and its officers, and the Tribunal can direct repayment with interest within a set timeline. Given how easily an internal loan can be misclassified, this is one area where a quick compliance check before the transaction saves far more trouble than fixing it afterward.
Structuring a loan from shareholders correctly, whether through the private company exemption or the director route, involves getting the resolutions, declarations, and DPT-3 filings right the first time. Corpzo advises companies on structuring member and director loans in line with the Companies Act, 2013, and the Deposit Rules, handling board and shareholder resolutions, declarations, and annual DPT-3 compliance end to end.