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Loans to Directors & Managerial Remuneration 💰

Loans to Directors (Section 185) ðŸšŦ

General Rule: Company CANNOT give loans to:

  1. Any Director of company.
  2. Any Director of Holding Company.
  3. Partner or Relative of such director.
  4. Firm in which such director is partner.
  5. Private Company of which director is member/director.

Punishment: Imprisonment up to 6 months OR Fine up to â‚đ5 Lakhs OR both.

Exceptions (When Loan is Allowed):

  1. Government Companies: Can give loans without limit.
  2. Housing Loans to Employees (including director-employees): As per terms of employment.
  3. Loan to Managing/Whole-time Director: Against security and approved by Special Resolution.
  4. In Ordinary Course of Business: Banks/NBFCs can give loans (their business is lending).
Why This Restriction?

Problem: Directors control company's money. They might misuse it by taking cheap loans. Solution: Law restricts loans to directors to prevent self-dealing and protect shareholders.

Example of Abuse: Director borrows â‚đ1 Crore at 2% interest (when market rate is 12%). This is loss to company!

Managerial Remuneration 💞

"Managerial Remuneration" = Salary & perks paid to Managing Director, Whole-time Directors, and Managers.

Limits on Remuneration (Section 197):

General Rule:

  • Total managerial remuneration â‰Ī 11% of Net Profits (in a year).
  • For 1 manager/MD/WTD: â‰Ī 5% of Net Profits.
  • For Multiple managers: â‰Ī 10% of Net Profits (collectively).

If Company Has NO Profits or Inadequate Profits:

  • Still can pay, but limits are specified in Schedule V (based on capital).
  • Requires Central Government approval or shareholder approval.

Components of Remuneration 📊

Managerial remuneration includes:

  1. Salary: Fixed monthly/annual pay.
  2. Perquisites: House, Car, Medical, Education allowance.
  3. Commission: On profits (if approved).
  4. Stock Options: Shares at discount (ESOPs).

Not Included:

  • Sitting fees for attending Board meetings (separate).
  • Reimbursement of actual expenses.

Approval Process 📝

RemunerationApproval Required
Within limits (11% rule)Board Resolution + Shareholders' Ordinary Resolution
Exceeds limitsShareholders' Special Resolution + (if no profit) Central Govt approval
Private CompanyOnly Board Resolution (if as per Articles)

Sitting Fees 💚

  • Directors (who are not employees) get sitting fees for attending Board/Committee meetings.
  • Limit: â‚đ1 Lakh per meeting (can be more if approved by Board).

Quiz Time! ðŸŽŊ

Test Your Knowledge

Question 1 of 5

1. Can a company give loan to its director?

Yes, freely
Generally NO (with certain exceptions)
Yes, at high interest
Only in cash

ðŸ’Ą Final Wisdom: "Salary is earned for performance. Loans to yourself from company money? That's theft, not smart!" ðŸ’ļ

Next up: Managing Director - The CEO of the company! ðŸ‘Ļ‍💞

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