Guidelines framed by Reserve Bank for bank loans obtained against personal guarantee of directors of companies - Companies Law - No. F/250-A (372),

Circular Letter: No. F/250-A (372), dated 10-9-1970 issued by BCCI. Subject:- Guidelines framed by Reserve Bank for bank loans obtained against personal guarantee of directors of companies In a circular letter issued to scheduled commercial banks and term lending institutions, the Reserve Bank of India has pointed out that with the gradual rise of an entrepreneurial class in the place of the managing agency system and the professionalisation of managerial cadres and the improvements in the techniques of financial and technical appraisal of proposals for assistance, there is no longer need for taking personal guarantees as a matter of course from directors and other managerial personnel of borrowing concerns while sanctioning loans. It has been emphasized that such guarantee should be obtained only in circumstances absolutely warranted after a careful examination of the merits of each case. The Reserve Bank has stressed that where guarantees are warranted, care should be taken to ensure that, save under certain exceptional circumstances, the system is not used by the directors and other managerial personnel as a source of remuneration from the borrowing concerns. The Reserve Bank has provided broad guidelines to the scheduled commercial banks and the term lending institutions to help identify the circumstances under which a guarantee may or may not be considered necessary. Ordinarily, in the case of public limited companies, when the lending institutions are satisfied about the management, its stake in the concern, economic viability of the proposal and the financial position of the company, no personal guarantee of the directors need be insisted upon. In fact, in the case of widely owned public limited companies, which may be rated as first class and satisfying the above conditions, guarantees may not be necessary even if the advances are unsecured. Also, in the case of companies which are under professional management, guarantee may not be insisted upon from persons who are connected with the management solely by virtue of their professional/technical qualifications. The Reserve Bank has advised that where lending institutions are not convinced about certain aspects of loan proposals, they should, instead of going in for guarantees, seek to stipulate conditions to make the proposals acceptable without such guarantees. On the other hand, guarantees may be considered helpful in the case of following: - Companies where shares are held closely, - Where it is necessary to enure continuity of management or that the change in management takes place with the knowledge of the lending institutions, - Public limited companies other than those which may be rated as first class, where the advance is on an unsecured basis, - Public limited companies whose financial position is not satisfactory even though the relevant advance may be secured, - In the case of subsidiaries whose own financial position is not considered satisfactory, and - Where the balance-sheet or financial statements of a company discloses interlocking of funds between the company and other concerns, owned or managed by a group. Where guarantees are warranted, lending institutions should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether it be by way of commission, brokerage, fees, or any other form, will be paid by the former or received by the latter, directly or indirectly. The Reserve Bank has advised that this requirement should be incorporated as one of the specific conditions for granting the facility in the set of terms and conditions governing the grant of facilities.