Sections 378ZK and 378ZL explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 378ZK lets the Board give financial assistance to Members in two forms, short-term credit and longer secured loans. Section 378ZL controls where the company may invest its money, whether it may buy shares in other companies or form subsidiaries, and how much it may put into them.
The Board may, subject to the articles, give a Member credit for not more than six months in connection with the company's business, or loans and advances against security specified in the articles, repayable after three months but within seven years (s.378ZK). A loan or advance to a director or his relative needs prior approval of Members in general meeting. Under s.378ZL, general reserves must be invested in prescribed-type safe avenues, investments in other companies are capped at 30% of paid-up capital plus reserves, and a register of investments must be kept. The Bill 2026 does not amend either section.
The sections at a glance
| Section | Subject | Key rule |
|---|---|---|
| 378ZK | Loans etc. to Members | Credit up to 6 months; secured loans over 3 months up to 7 years; director or relative needs Members' approval |
| 378ZL | Investments and subsidiaries | Reserves invested in safe avenues; 30% ceiling for other companies; register of investments |
Loans and credit to Members: section 378ZK
The Board may, subject to the provisions in the articles, provide financial assistance to Members in two forms.
| Form | Conditions |
|---|---|
| (a) Credit facility | To any Member, in connection with the business of the company, for a period not exceeding six months |
| (b) Loans and advances | Against security specified in the articles, to any Member, repayable within a period exceeding three months but not exceeding seven years from the date of disbursement |
The proviso adds that a loan or advance to any director or his relative may be granted only after approval by the Members in general meeting. So a loan to an ordinary Member is a Board decision, but the same loan to a director or a director's relative is not.
Two practical points follow. First, the articles need a clause on security, because clause (b) speaks of "security specified in articles". Second, the auditor reports on loans given to directors under section 378ZG(e); see sections 378ZE to 378ZG. If you want the articles and the loan policy checked together, our legal consultation team can do so.
Example. A Member who supplies vegetables needs working capital. The Board gives him credit on the company's terms for four months, which is within the six-month limit in clause (a). Later, a director asks for a loan repayable in five years. Five years is within the seven-year limit in clause (b), but because he is a director the loan cannot be granted until the Members approve it in general meeting.
Investments and subsidiaries: section 378ZL
Where general reserves go
Under 378ZL(1), the general reserves of a Producer Company are invested to secure the highest returns available from approved securities, fixed deposits, units, bonds issued by the Government or co-operative or scheduled bank, or in another prescribed mode. For how those reserves are built, see sections 378ZH to 378ZJ.
What else the company may do
| Sub-section | Permission or rule |
|---|---|
| (2) | Acquire shares of another Producer Company for promotion of its objectives |
| (3) | By special resolution, subscribe to the share capital of, or enter into an agreement or arrangement (subsidiary, joint venture or otherwise) with, any body corporate, to promote the objects of the company |
| (4) | Invest in shares of any other company (other than a Producer Company under sub-section (2), or capital under sub-section (3)), alone or with its subsidiaries, up to 30% of aggregate paid-up capital and the reserves the section counts; above that, by special resolution in general meeting and prior approval of the Central Government |
| (5) | All investments must be consistent with the objects of the company |
| (6) | The Board may dispose of investments under sub-sections (3) and (4) only with previous approval of Members by special resolution |
| (7) | Maintain a register of investments: company names, number and value of shares, date of acquisition, and manner and price of disposal |
| (8) | Keep the register at the registered office, open to inspection by any Member, who may take extracts |
Reading the 30% limit
Sub-section (4) speaks of "an amount not exceeding thirty per cent." of the aggregate of its paid-up capital and its reserves of the kind the section names. The limit applies to the company "either by itself or together with its subsidiaries", so investments through a subsidiary count toward it. The proviso lets the company go beyond the limit, but it needs both a special resolution and the prior approval of the Central Government.
Investments must fit the objects
Under 378ZL(5), every investment must be consistent with the company's objects under section 378B; see section 378B on objects. A Producer Company cannot treat its reserves as an open investment pool.
Proposed change
The Corporate Laws (Amendment) Bill, 2026 carries clauses on other provisions of Chapter XXIA (sections 378P, 378Q, 378Y, 378ZA, 378ZF, 378ZM and 378ZS), but our search found no clause amending section 378ZK or 378ZL. The Bill is pending, not law.
Need help with Member loans or investments?
Lending to Members, starting a subsidiary or putting reserves to work all need the right resolution and, in some cases, Central Government approval. To have your articles, resolutions and investment register reviewed, you can write to us through legal consultation.
Key takeaways
- Credit to a Member is limited to six months; loans and advances are over three months, up to seven years, against security in the articles.
- A loan to a director or relative needs prior approval of Members in general meeting.
- General reserves are invested in approved avenues; investments in other companies are capped at 30% of paid-up capital and reserves.
- Going beyond 30% needs a special resolution and prior Central Government approval.
- Keep a register of investments at the registered office, open to Members.
Read next
- Section 378B: objects of a Producer Company
- Sections 378ZH to 378ZJ: donations, reserves and bonus shares
- Section 378R: powers of the Board
- Annual compliance for a Producer Company
Disclaimer: Based on the Companies Act, 2013 as amended up to 1 April 2021 (official consolidated text), read with later developments noted in the article; proposals in the Corporate Laws (Amendment) Bill, 2026 are pending and not law as on 30 September 2026. Verify current notifications and rules before acting.