The government has lifted the restrictions that barred a company from lending or providing security and guarantee to a private enterprise where the former has a common director, or where its director holds a stake. An official told  that the corporate affairs ministry has issued a notification, formalising amendments to the Companies Act that were passed by Parliament last year. 

The curbs had been put in place to check fraudulent transactions by promoters through shell companies. However, they were found to be thwarting legitimate promoters who were trying to fund their own companies. The amendment is aimed at helping promoters fund genuine businesses, even as the ministry is dealing separately on the issue of shell companies. “Earlier, loans could not be given to companies with common directors, and so far it was being done through third parties. The dilution in the law makes lending and raising money easier,” said a legal expert, who did not wish to be named. Subsequent to the changes, a company can, through a special resolution, advance loan, give a guarantee or provide security to a private company which is linked to its director as long as it is for the principal business activity of the company. The relaxation also covers any corporate body where one or more of its directors can exercise at least 25% voting power. These include public sector companies and companies registered overseas. 

The ministry has, however, stated that all such loans must be utilised by the borrowing company for principal business activities only. The Companies Amendment Bill 2017 was passed by the Lok Sabha in July 2017 and the Rajya Sabha in December. The latest amendments issued by the ministry have come into effect from May 7, 2018, the official said. 
The move is a big boost for promoters as it has made lending hassle-free. With the revised rules, the government also hopes to move up the ranks in ‘ease of doing business’.