185 (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:

Provided that nothing contained in this sub-section shall apply to—
(a) the giving of any loan to a managing or whole-time director— 
     (i) As a part of the conditions of service extended by the company to all its employees; or 
     (ii) Pursuant to any scheme approved by the members by a special resolution; or 

(b) A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or 

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company: 

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

Explanation.—for the purposes of this section, the expression “to any other person in whom director is interested” means— (a) Any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; (b) Any firm in which any such director or relative is a partner; (c) Any private company of which any such director is a director or member; (d) Anybody corporate at a general meeting of which not less than twenty- five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or (e) Anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

NON APPLICABILITY OF SECTION 185:

Below mention Companies by fulfilling the given condition can give loan, make investment and made guarantee respectively without restriction under section 185.

• NOTIFICATION NO. GSR 463(E)[F.NO.1/2/2014-CL-V], DATED 5-6-2015:
  

• NOTIFICATION NO. GSR 464(E) [F.NO.1/1/2014-CL-V], DATED 5-6-2015:

1. In whose share capital no other body corporate has invested any money;
2. If the borrowings of such a company from banks or financial institutions or any body corporate is less than [lower of (i) Two times of paid up share capital or (ii) Rs. 50 Crore]; and
3. Such a company has no default in repaymnt of such borrowings subsisting at the time of making transactions under this section.

• NOTIFICATION NO. GSR 465(E)[F.NO.2/11/2014-CL.V], DATED 5-6-2015:

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• Loan Holding – Wholly Own Subsidiary

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• Guarantee/ Security Holding –Subsidiary

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• Loan to Managing Director & Whole Time Director:

• Loan in Ordinary Course of Business:

• Section 185 completely ruled out the possibility of giving any loan (including a loan representing a book debt), a guarantee or a security, either directly or indirectly, to any director or to any other pension in whom Director is interested.

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• Interest Rate:

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• Allowable Loan Foreign Holding to Indian Subsidiary.

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• Restriction applies only at the time of entering into the transaction.
• If a Private limited Company has given loan/ guarantee or security which was exempted under Section 295 of the Companies Act, 1956 shall continue to be exempted under Section 185.
• If a person only an employee of the Company and later he becomes director of the Company, section 185 would not apply.