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Can Your Startup Borrow From Friends, Family or Directors? The Deposit Rules That Turn a Friendly Loan Into a ₹1 Cr Penalty
A friend offers your startup ₹15 lakh as a short loan. It feels harmless and can be illegal. The Companies Act treats most money a company receives as a deposit unless an exemption fits. Which loans are safe, and how to fix them.
Published 28 September 20264 min read
The short answer
A private limited company in India can accept money from its directors and their relatives, from shareholders within set limits, and through convertible notes of ₹25 lakh or more in a single tranche, all as exempt deposits with the right paperwork. A loan from a friend who is not a director, relative or shareholder generally counts as a deposit, which a private company cannot accept from the public. Violations can mean repayment with interest, a company fine of ₹1 Cr to ₹10 Cr and personal liability for officers.
Who this is for: Founders of private limited companies raising small bridge amounts from friends, family, directors or early angels, and anyone who has already taken such money.
Summary: what most founders miss
- Under the Companies Act, almost any money received by a company is a deposit unless it falls in a listed exemption.
- Loans from directors, and from a director's relatives, are exempt if the lender declares in writing that the money is their own, not borrowed.
- A startup that is a private company can accept loans from its members (shareholders) without the usual limit for its first 10 years, with a filing.
- Convertible notes of ₹25 lakh or more in one tranche are exempt, which is why tiny notes from many friends are a problem.
- Share application money not allotted within 60 days, and not refunded within 15 days after, becomes a deposit.
Founders borrow informally all the time: a friend's ₹10 lakh to cover payroll, an uncle's ₹25 lakh for an inventory order, an angel's advance before the round closes. Most never ask whether the company was allowed to take that money. The Companies Act asks, and the answer is often no.
Why is a loan to a company called a deposit?
Which loans can a startup take?
| Source | Allowed? | Condition |
|---|---|---|
| Director | Yes, exempt | Director gives a written declaration that the money is not borrowed or received from others; the company discloses it in the board's report |
| Relative of a director | Yes, exempt | Same written declaration, and the relative must fall within the Companies Act definition of relative |
| Shareholder (member) | Yes | Normally up to 100% of paid-up capital plus free reserves plus securities premium; a startup private company can accept from members without this limit for 10 years from incorporation, with a DPT-3 filing |
| Convertible note holder | Yes, exempt | ₹25 lakh or more in a single tranche, repayable or convertible within 10 years (for a DPIIT-recognised startup) |
| Bank, NBFC, public financial institution | Yes, exempt | Normal lending |
| Another company | Yes, exempt | Inter-corporate loan |
| Friend who is not a director, relative or shareholder | Generally no | Treated as a deposit from the public |
| Customer advance for goods | Yes, within limits | Becomes a deposit if goods are not supplied within 365 days |
| Share application money | Yes | Must be allotted within 60 days or refunded within 15 days after |
General summary of the Companies (Acceptance of Deposits) Rules, 2014 as amended. Confirm specific cases with your company secretary.
The three fixes when a friend wants to lend
- Make them a shareholder first. Even a small shareholding makes them a member, and member loans are allowed within the rules. Issue shares properly through a private placement; see Can Startups Advertise a Fundraise?.
- Use a convertible note of ₹25 lakh or more. If they want conversion rights, a single-tranche note of at least ₹25 lakh from one person is exempt for a DPIIT-recognised startup. Several ₹5 lakh notes are not.
- Route it through a director. The director can lend their own money. A director borrowing from the friend to lend to the company does not work, because the declaration requires the money to be their own.
What happens if you get it wrong?
| Who | Consequence |
|---|---|
| Company | Repay the deposit with interest; fine of ₹1 Cr to ₹10 Cr under Section 76A |
| Officers in default | Imprisonment up to 7 years, or fine of ₹25 lakh to ₹2 Cr, or both |
| In diligence | Investors will ask for repayment or regularisation before closing |
Section 76A of the Companies Act, 2013. Fraud-related provisions can add further liability.
Worked example: a ₹40 lakh bridge from four people
| Lender | Amount | As first structured | Problem | Fix |
|---|---|---|---|---|
| Co-founder and director | ₹15 lakh | Loan | None, if declaration taken | Take written declaration; disclose in board's report |
| Director's father | ₹10 lakh | Loan | None, if declaration taken | Take written declaration |
| Friend of the founder | ₹10 lakh | Loan | Deposit from a non-member | Issue equity to the friend through a proper private placement instead, or do not take the loan |
| Existing angel shareholder | ₹5 lakh | Loan | Allowed as member loan | File DPT-3; record in minutes |
Swipe the table sideways to see all columns.
Case study
The ₹12 lakh loan that delayed a Series A
Beverage brand, ₹18 Cr revenue, raising a ₹35 Cr Series A
Situation
Two years earlier, the founders took ₹12 lakh from three friends as short-term loans at 12% interest to cover a festive inventory order. None were shareholders or relatives.
What was missed
The lead investor's legal diligence flagged the loans as deposits accepted in breach of the Companies Act, and asked for repayment and a legal opinion on penalty exposure before closing.
What changed
The company repaid the loans with interest, filed missing DPT-3 returns, and sought legal advice on compounding. The investors added a specific indemnity.
Outcome
Closing moved by six weeks, and legal fees cost more than the original loan interest.
The lesson
Before taking money from anyone who is not a director, relative, shareholder or institution, check the exemption. Paperwork at the start is cheaper than fixing it in diligence.
Illustrative case. Figures are representative of patterns in Indian rounds, not a specific company.
Related: Bridge Round, Extension or Venture Debt? and CCPS, CCDs, Convertible Notes or iSAFE?. Planning a bridge? Talk to us about structuring it cleanly.
Read next: government funding still open in 2026. Preparing to raise? See how our non-dilutive funding support works.
Questions founders ask us
Can a private limited company take a loan from friends?
Generally not, if the friend is not a director, a relative of a director or a shareholder. Such a loan is usually treated as a deposit from the public, which a private company cannot accept.
Can a director lend money to a private limited company?
Yes. Loans from directors are exempt deposits if the director declares in writing that the money is their own and not borrowed from others.
Can shareholders lend to a startup?
Yes. A private company can accept loans from members up to set limits, and a startup private company can do so without the limit for 10 years from incorporation, with the required filings.
Is a convertible note a deposit?
A convertible note of ₹25 lakh or more in a single tranche, issued by a DPIIT-recognised startup and convertible or repayable within 10 years, is exempt.
What is Form DPT-3?
An annual return that companies file to report deposits and receipts of money that are not deposits, such as director and member loans. Most startups need to file it.
About the author
Written by the Alphamark Ventures team, a fundraising advisory firm helping founders raise seed, angel and pre-Series A rounds, with a focus on consumer, consumer tech and consumer AI. Figures are as of the date shown and are for general information; this is not legal, tax or investment advice.
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