Loan from Shareholders to Private Limited Company: Legal Framework and Compliance Requirements Under Companies Act 2013

Overview : Shareholder loans to private limited companies represent a significant funding mechanism that has undergone substantial legal evolution under the Companies Act 2013. When properly structured within prescribed limits and conditions, these transactions provide essential capital flexibility while maintaining regulatory compliance. Understanding the specific conditions, limits, and procedural requirements becomes crucial for private companies seeking to leverage shareholder funding effectively while avoiding deposit-related complications and ensuring transparent corporate governance practices.

Historical Legal Evolution

The treatment of shareholder loans under the Companies Act 2013 has undergone significant transformation, reflecting the legislature's evolving understanding of private company funding needs and the balance between regulatory oversight and business practicality.

Initial Prohibition Phase (2014-2015) When the Companies Act 2013 came into force, it created unprecedented challenges for private companies by treating all shareholder loans as regulated deposits. This meant that private companies could not accept funding from their own shareholders without complying with stringent deposit acceptance norms designed for public companies soliciting funds from the general public. The prohibition severely impacted the traditional funding mechanisms of private companies, particularly family-owned businesses and start-ups that relied heavily on promoter funding.

First Relief Phase (2015-2017) Recognising the practical difficulties, the MCA issued GSR 464(E) dated 5th June 2015, providing the first exemption. This notification allowed private companies to accept shareholder loans up to 100% of their aggregate paid-up share capital, free reserves, and securities premium account without complying with the procedural requirements of Section 73(2) clauses (a) to (e). While this provided relief, it was still restrictive for growing companies requiring larger capital infusions from shareholders.

Current Comprehensive Framework (2017-Present) The landmark GSR 583(E) dated 13th June 2017 revolutionised the framework by introducing three distinct exemption pathways. This amendment recognised that different types of private companies have varying funding needs and risk profiles, providing tailored solutions for start-ups, independent companies, and standard private companies while maintaining appropriate safeguards against potential misuse of the exemption framework.

Current Legal Framework - Loan by shareholders

The Companies Act, 2013, treats amounts received by a company from its members as "deposits." The governing provision is Section 73 of the Act. However, the Ministry of Corporate Affairs has provided significant relief for private companies. Through specific exemption notifications, such companies are not required to comply with the procedural conditions laid out in clauses (a) to (e) of Section 73(2) when accepting funds from their members, provided they meet certain prescribed criteria.

Specific Conditions for Exempted Shareholder Loans

It is important to understand that loans from shareholders are technically considered as "deposits" under the Companies Act 2013, but private limited companies can accept such deposits with exempted compliance requirements if they meet specific conditions. The 2017 amendment established three distinct pathways for private companies to accept shareholder loans without full deposit regulation compliance:

Category A: Standard Limit Companies Companies accepting from members money not exceeding 100% of the aggregate of paid-up share capital, free reserves, and securities premium account qualify for automatic exemption from clauses (a) to (e) of Section 73(2). This category provides the broadest applicability and requires minimal additional compliance beyond standard filing requirements.

Category B: Start-up Companies As per the MCA's notification, a private company recognised as a "start-up" is granted a significant exemption for ten years from its incorporation date. During this period, it can accept shareholder loans without being subject to the 100% limit of capital and reserves, facilitating crucial early-stage funding without the procedural complexities of deposit regulations.

Category C: Qualifying Independent Companies. This category requires companies to satisfy all three stringent conditions simultaneously as per the 13th June 2017 notification (GSR 583(E)):

• Condition 1: Independence Requirement The company must not be an associate company or subsidiary company of any other company. This ensures that only genuinely independent private companies can avail of the broader exemption, preventing misuse by corporate groups to circumvent deposit regulations.
• Condition 2: Borrowing Limit Compliance The borrowings of such a company from banks, financial institutions, or any body corporate must be less than twice of its paid-up share capital or ₹50 crores, whichever is lower. This condition ensures that highly leveraged companies cannot exploit the exemption framework whilst maintaining financial prudence requirements.
• Condition 3: No Default Status The company must have no default in repayment of borrowings from banks, financial institutions, or body corporates subsisting at the time of accepting deposits under this section. This critical requirement ensures that only financially sound companies with clean repayment records can access the exemption benefits.

Important Clarification on Legal Treatment Despite these exemptions, it is crucial to understand that loans from shareholders are still legally classified as "deposits" under the definition in Section 2(31) of the Companies Act 2013. The exemption notifications merely waive the compliance requirements under clauses (a) to (e) of Section 73(2) rather than entirely excluding these transactions from the deposit definition. Therefore, in DPT-3 filing, such amounts should be disclosed under the "Return of Deposit" section rather than the "Particulars of transactions not considered as deposit" section.

Compliance Requirements

• Board Resolution: Section 179(3) mandates board resolution for all borrowing decisions.
• Member Approval: While MCA notifications waive the need for an ordinary resolution under Section 73(2), companies must comply with Section 180(1)(c). If a proposed loan, together with the company's existing borrowings, would exceed the aggregate of its paid-up share capital, free reserves, and securities premium, a special resolution of shareholders is mandatory to approve the borrowing.
• Shareholder's Declaration (Best Practice): While not explicitly mandated by the exemption notifications for loans from members, it is a highly recommended practice to obtain a written declaration from the shareholder at the time of receiving the loan. This declaration should state that the amount being given is from their own funds and not out of funds acquired by borrowing or accepting loans from others. This serves as crucial evidence of compliance with the spirit of the law and is a key document for audit purposes.
• DPT-3 Filing: Annual filing by 30th June under "Return of Deposit" section with statutory auditor's certificate.
• Financial Statement Disclosure: Related party transaction disclosure in notes to financial statements and the Board's report.

Conclusion

Shareholder loans to private companies evolved from complete prohibition in 2014 to a structured exemption framework today. These loans remain legally classified as deposits but enjoy exempted compliance under three categories: standard limit companies (100% of capital and reserves), start-ups (ten-year exemption), and qualifying independent companies meeting specific borrowing and default criteria. Companies must ensure proper categorisation, maintain compliance with prescribed conditions, and file accurate DPT-3 returns to leverage this essential funding mechanism whilst avoiding regulatory complications.

Author Bio

Sanjeev Kumar | in

Meet Sanjeev Kumar, a distinguished advocate before the Supreme Court of India, High Courts, and National Tribunals. Founding Partner of Juriskps Law Offices, a premier law firm, he specializes in commercial, corporate, tax, arbitration, and IPR matters. His incisive legal insights enrich Setindiabiz’s blog with expert commentary.