A small employee loan is not enough: every exception condition must hold
Section 67(2) of the Companies Act, 2013 restricts a public company’s direct or indirect financial assistance for acquiring shares in itself or its holding company. Clause (3)(c) provides an exception for loans to employees other than directors or key managerial personnel, not exceeding their salary or wages for six months, to buy or subscribe for fully paid-up shares in the company or its holding company, held by the employees beneficially. Read section 67(2) and (3)(c) in the Government-hosted Act.
This article addresses that direct employee-loan route, checked on 25 October 2026. It does not treat the separate employee-trust funding route under clause (3)(b) as identical, or apply the public-company prohibition indiscriminately to every private company without checking its legal position and applicable exemptions. The numerical examples concern public-company assistance within the stated restriction.
Confirm the employee is eligible before calculating a cap
Check current employment status and whether the person is a director or KMP. Salary on the payroll does not make a whole-time director or CFO eligible under this clause. An excluded person does not qualify merely because the proposed loan is below six months’ remuneration. Record the status decision alongside the payroll evidence, not after a board-approved payment has already been made.
Determine the legally supportable salary or wages base. Cost to company, reimbursement budgets, employer contributions, unearned variable pay and the statutory salary-or-wages measure should not be equated without analysis. The examples stipulate an established constant monthly salary or wages figure; they do not decide disputed payroll components or prescribe an averaging rule for changing remuneration.
Six months measures amount, not a mandatory loan tenure
For the constant monthly-base model, the amount limit is six times that established monthly figure. The clause does not say that every eligible loan must be repaid within six months. Repayment terms, interest, security, employment exit and default controls need appropriate approval and documentation, while other applicable legal requirements remain separate.
Apply the cap employee by employee. A group budget below the sum of all employee limits does not cure one employee’s excess. Retain the disbursement and outstanding-loan trail and do not create separate nominal tranches to evade the relevant amount condition. Where earlier assistance or changed circumstances affect the assessment, document the actual legal and financial position before releasing more funds.
Verify the shares and beneficial holding
The clause concerns fully paid shares of the lending company or its holding company. It is not a general permission to finance any listed stock or any entity described loosely as a group company. Trace the approved purchase or subscription, consideration and fully paid status. Retain the evidence of the employee’s beneficial ownership; payments to a broker or issuer alone do not establish all the conditions.
The exception removes the specified section 67(2) restriction only where its conditions hold. It does not itself issue shares, determine the valuation, waive securities-law requirements, settle employee perquisite taxation or replace the company’s authority and other applicable lending-compliance analysis. A share option promise is also not proof that a completed fully paid share transaction has occurred.
Keep the direct-loan route distinct from an employee trust scheme
Clause (3)(b) has its own special-resolution and prescribed-scheme requirements. Do not import a trust-funding percentage into clause (3)(c) or assume that calling a direct loan an employee scheme bypasses the six-month amount test. Review the voting-right disclosure proviso and any applicable requirements for the actual arrangement without inventing a universal filing form for every employee loan.
A defensible file links employee eligibility, the salary base, amount, approvals, loan terms, share acquisition and beneficial ownership. Common failures are using CTC without support, pooling caps, including KMP, buying partly paid shares and treating the six-month phrase as a repayment deadline rather than an amount measure.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Individual cap and excess
Assume eligible salary is ₹50,000 per month. Six months equals ₹3,00,000. A proposed ₹3,20,000 loan exceeds that amount by ₹20,000, so the proposal cannot rely on clause (3)(c) unchanged.
Illustrative example 2: Use the established base
Assume payroll analysis establishes salary or wages of ₹60,000 per month, while headline CTC is ₹90,000. The stipulated salary-based cap is ₹3,60,000, not ₹5,40,000. The ₹1,80,000 difference shows why the base must be supported rather than selected from a convenient headline.
Illustrative example 3: Employee’s own contribution
An eligible employee has a ₹3,00,000 cap and proposes to acquire qualifying fully paid shares costing ₹3,20,000. A ₹3,00,000 loan plus ₹20,000 personal funding reconciles the price. The price exceeding the loan cap does not itself make the capped loan excessive; all other conditions still apply.
Illustrative example 4: No pooling between employees
Employee A’s monthly salary is ₹50,000 and B’s ₹1,00,000, giving caps of ₹3,00,000 and ₹6,00,000. Proposed loans are ₹4,00,000 and ₹5,00,000. Although aggregate loans and aggregate caps both equal ₹9,00,000, A exceeds the individual cap by ₹1,00,000.
Illustrative example 5: Share consideration reconciliation
An eligible capped loan of ₹3,00,000 funds 300 qualifying fully paid shares at a stipulated total purchase price of ₹1,000 per share. The consideration is ₹3,00,000. Face value alone is not the purchase-price reconciliation; verify actual payment, issuer relationship and beneficial holding.
Illustrative example 6: Excluded KMP
A CFO who is KMP earns an established ₹1,00,000 monthly salary and seeks a ₹1,00,000 share loan. Six-month arithmetic would be ₹6,00,000, but clause (3)(c) eligibility is unavailable because KMP are excluded. Being ₹5,00,000 below that hypothetical amount does not cure the status condition.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm company scope | Public-company restriction and actual legal structure. |
| 2 | Identify the arrangement | Direct employee loan versus a separate trust or scheme route. |
| 3 | Screen employee status | Employment, director and KMP records. |
| 4 | Establish salary or wages | Supported payroll components and relevant amount basis. |
| 5 | Calculate each cap | Six-month amount working employee by employee. |
| 6 | Review the loan terms | Approval, amount, repayment, interest and exit controls. |
| 7 | Verify eligible shares | Company or holding-company relationship and fully paid status. |
| 8 | Trace acquisition funds | Disbursement, personal contribution and purchase/subscription evidence. |
| 9 | Confirm beneficial ownership | Holder/depository evidence and applicable disclosures. |
| 10 | Complete other-law review | Relevant corporate, securities, payroll-tax and accounting requirements. |
Sixteen practitioner FAQs
1. Which prohibition does this exception address?
The public-company financial-assistance restriction in section 67(2).
2. Is it a general rule for every private company?
No. Check the actual company classification and applicable legal position separately.
3. Can directors use this employee-loan clause?
No. Clause (3)(c) excludes directors.
4. Can KMP use it if they are salaried employees?
No. KMP are also excluded.
5. What is the amount measure?
Salary or wages for six months, with the legally appropriate base established.
6. Is CTC automatically the salary base?
No. Analyse and document the relevant components rather than assuming equivalence.
7. Must the loan always be repaid within six months?
That phrase sets the amount measure in this clause; it does not itself prescribe that universal repayment tenure.
8. Can employee limits be pooled?
No. A group total does not cure an individual excess.
9. Can a personal contribution fund the remaining price?
The model can include it, provided the actual loan and transaction satisfy all applicable conditions.
10. May the funded shares be partly paid?
The clause specifies fully paid-up shares.
11. Can the shares be in any group company?
No. The specified issuers are the company or its holding company.
12. Is a proposed share option proof of acquisition?
No. Trace the actual qualifying purchase or subscription and resulting holding.
13. Does a broker payment prove beneficial ownership?
Not by itself. Obtain the relevant holder evidence.
14. Is the trust-scheme percentage the same cap?
No. Clause (3)(b) and clause (3)(c) are separate routes with different requirements.
15. Does this exception remove every other approval or tax issue?
No. Review the other applicable corporate, securities, payroll-tax and accounting requirements.
16. What is the most important control?
A per-employee file linking status, salary base, loan amount, approved terms and qualifying beneficial share ownership.
Conclusion
Section 67(3)(c) creates a conditional employee-loan exception to the public-company financial-assistance restriction. Exclude directors and KMP, limit the loan to six months’ salary or wages, and verify fully paid shares in the company or its holding company held beneficially by the employee.