Taking Money from Relatives, Friends and NRIs into Your Company: What the Law Allows

In many Kerala family companies, money does not come from banks first. It comes from a brother in Dubai, an uncle who sold land, a father-in-law, a family friend, or a shareholder who is happy to lend at a good rate of interest. It is usually received by bank transfer, recorded as an “unsecured loan”, and nobody thinks about it again until an auditor, a bank, the ROC or the Income-tax department asks questions.

Under the Companies Act, 2013, a company cannot freely take money from anyone it likes. Most money received by a company, other than share capital, is a “deposit” unless it falls within a specific exemption, and accepting deposits without following the law has serious consequences. Money from NRIs adds a second layer, under FEMA.

This article explains when money from relatives, friends, shareholders and NRIs is allowed, when it becomes a deposit, and how to set it right.

The starting point: almost everything is a deposit

Section 2(31) of the Companies Act defines “deposit” very widely: any receipt of money by way of deposit or loan or in any other form. The Companies (Acceptance of Deposits) Rules, 2014 then list the receipts that are not deposits. If a receipt is not in that list, it is a deposit, and a private company can accept deposits only from its members, within limits and conditions.

So the right question is not “is this a deposit?”, but “which exemption does this fall under?”

Who can lend to a private company without it being a deposit

Source of money	Treated as deposit?	Conditions
Director of the company	No	The director gives a written declaration, at the time of giving the money, that it is not out of borrowed funds; disclosed in the Board’s report
Relative of a director (private company)	No	Same declaration by the relative; disclosed in the Board’s report
Shareholder (member) who is not a director or a director’s relative	Yes, it is a deposit from a member	Allowed for private companies only within the limits and conditions for member deposits
Friends, cousins, business associates who are not members	Yes	A private company cannot accept deposits from the public; this is not permitted
Banks, NBFCs, financial institutions	No	Regular borrowing
Another company (inter-corporate loan)	No	Subject to the lender’s own limits under Section 186
Share application money	No, if shares are allotted within 60 days	If not allotted within 60 days and not refunded within the next 15 days, it becomes a deposit
Advance from a customer for goods or services	No, if adjusted within 365 days	Otherwise it becomes a deposit
Unsecured loan from promoters required by a bank as a condition of a loan	No	Within the conditions in the Rules

Who counts as a “relative”

This is where many families go wrong. “Relative” under the Companies Act is a narrow, defined list, not the everyday meaning. Only the following are relatives of a director:

• Spouse
• Father (including step-father) and mother (including step-mother)
• Son (including step-son) and son’s wife
• Daughter and daughter’s husband
• Brother (including step-brother) and sister (including step-sister)
• Members of a Hindu Undivided Family

So money from a cousin, an uncle, a nephew, a brother-in-law, a sister-in-law or a father-in-law is not money from a relative under the Act, unless that person is also a director. In practice, a large share of “family loans” in Kerala companies fall outside the exemption for this reason.

Loans from shareholders: member deposits

A private company may accept deposits from its members (shareholders), within limits. In general:

• Deposits from members can be accepted up to 100% of the aggregate of paid-up share capital, free reserves and securities premium
• Certain private companies, including startups for a period after incorporation and companies that meet conditions on borrowings and defaults, have wider relaxations
• The company must file details of such deposits with the ROC
• Interest, terms and repayment should be documented and approved by the board

A shareholder who is not a director or a director’s relative is therefore lending as a member, and the member deposit rules apply. Making that person a director, or bringing the money in as share capital instead, are the usual alternatives.

Money from NRI relatives and friends

If the lender is a non-resident, FEMA applies in addition to the Companies Act:

• A loan from a non-resident to an Indian company is generally foreign borrowing, governed by the External Commercial Borrowing (ECB) framework. ECB has rules on who may lend, minimum maturity, cost, end use and reporting, including obtaining a Loan Registration Number before drawdown. These rules have been revised from time to time, so check the current RBI directions before accepting the money. See ECB reporting.
• An NRI director lending out of NRO or Indian funds is treated differently from fresh money brought from abroad; the bank’s view on the specific route should be confirmed in advance
• For many family companies, the simpler route is for the NRI to subscribe to shares, either on a repatriation basis (FDI, with FC-GPR reporting) or on a non-repatriation basis, which is treated like domestic investment. See FDI in private limited companies and NRIs starting a business in Kerala
• Money received from abroad without following FEMA can lead to compounding or penalties later, and banks increasingly ask for the purpose code and documents at the time of receipt

The tax side

Even where a loan is allowed under the Companies Act, the Income-tax law asks its own questions:

• Explaining the source: the company must be able to prove the lender’s identity, creditworthiness and the genuineness of the transaction. For loans, the law now also expects the company to explain the source of the lender’s own funds in many cases. A loan from an elderly relative with no visible income, or from a person who in turn borrowed the money, invites questions
• No cash: loans and deposits of ₹20,000 or more must not be taken or repaid in cash; this carries a penalty equal to the amount
• Interest: interest paid must be reasonable and supported by documents; tax must be deducted at source where applicable, including at the higher rates applicable to non-residents

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026. The principles above continue, but section numbers have changed, so check the corresponding provision when preparing replies or documents.

What happens if the rules are not followed

• Money accepted in breach of the deposit rules must be repaid, and the company and its officers face substantial penalties under Section 76A of the Companies Act, including large fines and, for officers in default, possible imprisonment
• Auditors are required to report on compliance with the deposit rules, so the issue often surfaces in the audit report
• Banks and investors doing due diligence will treat unexplained unsecured loans as a red flag
• For NRI money, FEMA contraventions may need compounding before the company can move on cleanly

Annual reporting: DPT-3

Companies file Form DPT-3 every year with details of outstanding money or loans received that are not deposits, as well as any deposits. Many small companies miss this form because they assume it applies only to companies taking public deposits. If your company has loans from directors, relatives or members, check that DPT-3 has been filed. See the annual compliance calendar.

How to set it right

1. List every unsecured loan in the balance sheet, with the lender’s name, relationship, residence status, date and amount
2. Classify each against the exemptions: director, relative of director (as defined), member, bank, company, or none
3. For directors and relatives, check that written declarations exist; if not, obtain them for future receipts and take advice on past ones
4. For other lenders, consider converting the loan into shares (with proper valuation and filings), making the lender a director where that is genuinely appropriate, or repaying
5. For NRI money, check how it was received and reported; regularise under FEMA where needed
6. Document every loan: board resolution, loan agreement, interest terms, repayment schedule. See drafting a loan agreement between directors and company
7. File DPT-3 and update the Board’s report disclosures

Points for Kerala family companies

• Gulf-based family members are the most common source of funds; decide early whether their money should come in as shares or as a loan, because the FEMA route differs
• Land sale proceeds lent to the family company by an elderly parent should be documented carefully, with the source of funds traceable
• Money from in-laws and cousins is a frequent problem; bring it in as share capital or through a director
• Avoid informal “chitty-style” collections from many relatives or friends; that can amount to accepting deposits from the public

Frequently asked questions

Can my brother-in-law lend money to my private company?

A brother-in-law is not a “relative” under the Companies Act. Unless he is a director, or lends as a member within the member deposit limits, the loan would be a deposit that a private company cannot accept from him.

Does the director’s declaration have to be given every time?

Yes. The declaration that the money is not out of borrowed funds is to be given at the time the money is given.

Can a shareholder’s loan be converted into shares?

Yes, by issuing shares in a manner permitted under the Companies Act, with valuation and filings, and with board and shareholder approvals as needed.

My cousin in Qatar wants to lend money to our company. What is the simplest route?

In many cases the simplest route is a share subscription rather than a loan, because a loan from a non-resident is foreign borrowing under the ECB framework. Discuss the route with your bank before the money is sent.

We have taken loans from friends for years. Is it too late to fix?

It is better to fix now than when a bank, investor or authority raises it. The usual steps are to stop further receipts, repay or convert the existing amounts, and take advice on the past position.

ചുരുക്കം (Summary in Malayalam)

Companies Act പ്രകാരം ഒരു കമ്പനിക്ക് ലഭിക്കുന്ന മിക്ക പണവും ‘deposit’ ആയി കണക്കാക്കും, ചില ഇളവുകൾ ഒഴികെ. പ്രൈവറ്റ് കമ്പനിക്ക് ഡയറക്ടർമാരിൽ നിന്നും ഡയറക്ടറുടെ ‘relative’-ൽ നിന്നും (കടമെടുത്ത പണമല്ല എന്ന declaration സഹിതം) വായ്പ സ്വീകരിക്കാം. എന്നാൽ cousin, uncle, brother-in-law, father-in-law എന്നിവർ നിയമപ്രകാരം relative അല്ല. ഓഹരിയുടമകളിൽ നിന്ന് പരിധിക്കുള്ളിൽ member deposit സ്വീകരിക്കാം. വിദേശത്തുള്ള NRI ബന്ധുക്കളിൽ നിന്നുള്ള വായ്പയ്ക്ക് FEMA/ECB നിയമങ്ങൾ ബാധകമാണ്; പലപ്പോഴും ഓഹരിയായി നിക്ഷേപിക്കുന്നതാണ് എളുപ്പം. എല്ലാ വർഷവും DPT-3 ഫയൽ ചെയ്യണം.

This article gives a general overview of the Companies Act, 2013, the Companies (Acceptance of Deposits) Rules, 2014, FEMA and related tax law. Rules, limits and procedures are revised from time to time; for accurate and current requirements, refer to the Act, the rules and RBI directions as amended. The article is not advice on any particular case.