The Companies Act 2013(“Act”) Learning – Borrowing of money from Directors and shareholders

Fact of the case:-

ROC has passed the order on suo moto application filed by the applicant company for default in converting the loan borrowing from directors and shareholders through right issue under section 62(1)(a) of the Act instead of following section 62(3) of the Act.

Adjudicating officer has taken stricter view that the company has defaulted the Section 42 and 62 of the act compliances and levied the penalty accordingly.

A small company had taken loan of Rs.17 lacs from two promoter directors (Rs.8.50 lacs each) and no resolution was passed for conversion of loan into equity.

Subsequently in Nov. 2017 company converted Rs.7 lacs into rights issue (Rs.3.50 lacs each  director) u/s 62(1)(a) instead of private placement/ preferential offer u/s 62(1)(c) read with Sec.42 of the Act.

Company suo-moto made application with ROC for adjudication of penalty. Being small company, ROC vide order dated 8.9.2023 asked Company and its 2 directors to pay penalty of Rs.15,000/- for default u/s 62(1)(c) and Rs.3,50,000/- (being 50% of amount raised) for default u/s 42.


  • It is important for the company and professional to check if the company is borrowing the money from any shareholders or directors and whether relevant resolution has been passed and relevant forms has been filed with ROC;
  • Any amount borrowed from directors and shareholders can’t be adjusted through right issue as per the said order and need to follow the preferential issue process this will increase the cost of compliances to small, medium and start up companies.

Disclaimer:This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement