No company, without obtaining the prior approval of the Central Government in this behalf, can make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person, to or to any other person by,-
1. any director of the lending company or of a company which is its holding company or any partner or relative of any such director
2. any firm in which any such director or relative is a partner
3. any private company of which any such director is a director or member
4. any body corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors together
5. any body 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.
The above provision shall not apply to any loan made, guarantee given or security provided-
1. by a banking company
2. by a private company unless it is a subsidiary of a public company
3. The above provision shall not apply to any loan made by a holding company to its subsidiary.
4. The above provision shall not apply to guarantee given or security provided by a holding company in respect of a loan made to its subsidiary.
Every person who is knowingly a party to any contravention of the aforesaid provisions, including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months:
However, where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed.
Where the loan has been re-paid in part, the maximum punishment which may be imposed by way of imprisonment shall be proportionately reduced.
All persons who are knowingly parties to any contravention of the afoesaid provisions shall be liable jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon to pay in virtue of the guarantee given or the security provided by such company.
The above provisions will also apply to any transaction represented by a book debt which was from its inception in the nature of a loan or advance.
No debt incurred by the company in excess of the limit imposed by clause by clause (d) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded