Acceptance of Deposit by Companies

Every Company in India need to comply with the Companies Act, 2013 (hereinafter called “the Act”) to do any activity, whether it is to Appoint a Director or to fulfil the need of Capital, in the same scenario whenever a Company need to raise Deposits the Company need to Comply with the Chapter V Acceptance of Deposit by Companies containing Section 73 to 76A read with The Companies (Acceptance of Deposit) Rules, 2014 (hereinafter called “ Rules”).

As we all know the Act had giving more powers to Rules framed thereunder and its not just to amend the law in the first place but to counter the issues faced in the Corporate world by the professionals like us, there are many definitions and procedures defined under Rules and so in our concern Topic, the Conditions, procedures, Definitions are defined under the rules farmed.

Definition of Deposit

The definition of Deposit is given under the Rules framed and it is an inclusive definition i.e., any receipt of money taken by the Company is considered as Deposit if it does not fall into the List of Excluded transactions provided to us.

Now, let us read the definition provided in the Rule 2(1)(c) define deposits as-

“deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

1. any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government, or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature,
2. any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under,
3. any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934),
4. any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934),
5. any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India,
6. any amount received by a company from any other company,
7. any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for.
   Explanation – For the purposes of this sub-clause, it is hereby clarified that –
   1. Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.
      Provided that unless otherwise required under the Act, 1956 (l of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or rules or regulations made thereunder to allot any share, stock, bond, or debenture within a specified period, if a company receives any amount by way of subscriptions to any shares, stock, bonds or debentures before the lst April,2014 and disclosed in the balance sheet for the financial year ending on or before the 3lst March,2014 against which the allotment is pending on the 3lst March,2015, the company shall, by the lst June 2015, either return such amounts to the persons from whom these were received or allot shares, stock, bonds or debentures or comply with these rules
   2. any adjustment of the amount for any other purpose shall not be treated as refund.
8. any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company, Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report;
9. any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years,
   Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
10. any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognized stock exchange as per applicable regulations made by Securities and Exchange Board of India,
11. any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit,
12. any non-interest bearing amount received and held in trust,
13. any amount received in the course of, or for the purposes of, the business of the company,-
    1. as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty-five days from the date of acceptance of such advance:
       Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty-five days shall not apply,
    2. as advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against such property in accordance with the terms of agreement or arrangement,
    3. as security deposit for the performance of the contract for supply of goods or provision of services,
    4. as advance received under long term projects for supply of capital goods except those covered under item (2) above,
    5. as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less,
    6. as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government,
    7. as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications,
       Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules:
       Explanation.- For the purposes of this sub-clause the amount Omitted shall be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.
14. any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely:-
    1. the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance,
    2. the loan is provided by the promoters themselves or by their relatives or by both; and
    3. the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;
15. any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act.
    Explanation.– For the purposes of this clause, any amount.-
    1. received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or
    2. any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer shall be considered as deposits unless specifically excluded under this clause.”

After the scam of Sahara Group Companies, the Ministry had increased the level of pre and post Compliance for the Deposits.

The Deposits under Act can be raised by both Private as well as Public Company, However the procedure and conditions which they need to comply has been provided as under,

Procedure for raising the Deposits from Public

Private Company

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As per Section 76, only a Public Company is allowed to accept deposits from public, thus a Private Company is not allowed to accept deposits from general public.

Public Company

Section 76 of the Act has given an opportunity to Eligible Public Companies (defined under Rule 2(1)(d)) to accept Deposits from Public by complying the following provisions,

• The Company needs to conduct the duly called Board Meeting.
• E-Form- MGT-14, required to be filed within 30 days from passing the Board Resolution.
• It can raise deposits upto the limit of 25% of paid- up capital, free reserve and security premium account, together with any other deposit.
• It needs to pass a Resolution in General Meeting.
• Tenure of Deposits will be Minimum 6 months and Max- 36 months, however, companies can accept deposits to fulfil the short term requirement of funds, for a minimum period of 3 months and upto the 10% of paid-up, free reserve and security premium.
• Before issuing a circular or advertisement it needs to appoint a Trustee of Depositors, the Trust deed need to be executed in DPT-2.
• A circular in Form-DPT-1 including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company is required to be submit to Registrar within thirty days before the date of issue of the circular.
• Then the Circular need to be issue to Public.
• A requirement of certificate is also there that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company made good the default and a period of five years had lapsed since the date of making good the default.
• The Intended Depositor need to submit an Application prescribed by the Company.
• It needs to obtain a rating from recognized Credit Rating Agency at the time of invitation and subsequent on yearly basis.

Post Compliance

• The Company must provide all the Depositors a receipt of amount received by them within 21 days from the receipt of funds.
• The Deposits issued to be fully secured within 30 days of such acceptance.
• Trustee of Deposits need to fulfils his / their duties.
• If 1/10 Depositors in value or happening of any event, which constitute a default or which in his opinion affect the interest of the depositors, then the Trustee of Depositors is required to call the meeting of Depositors.
• The Depositors are allowed to appoint nominee.
• On or before 30^th April each year, not less the 20% of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called Deposit Repayment Reserve account.
• Register of Depositors is also required to be maintained with all the particulars provided under Rule 14.
• Return of Deposit in E-Form- DPT-3 is required to be filed on or before 30^th June of every year.

Note: The Company need to Comply with Regulations and Circulars issued by Security Exchange Board of India.

Procedure for raising the Deposits from Members

Private Company

Section 73(2) of the Act, provides for the Acceptance of Deposits by Private Company from its Members.

Following is the step-wise procedure,

• Board Meeting- A Notice along with Agenda and all necessary documents is required to be sent to all the members of the Board for the approval of Issuance of General Meeting Notice, finalisation of Form of Application to be submitted by Depositor.
• General Meeting- A Resolution is required to be passed in the General Meeting.
• Creation of Security- If the Company is providing secured deposits, then it shall be secured by way of charge on its assets.
• Trustee and Trust Deed- If the Deposits to be issued are secured in nature then as per the provisions of Rule 7, it must appoint one or more Trustee and execute a Trust Deed in Form DPT-2.

Furthermore, the he need to comply with the duties assigned and also need to conduct the meeting of Depositors on written request of 1/10 Depositors in value or happening of any event, which constitute a default or which in his opinion affect the interest of the depositors.

• Circulation of Application to Members- As per Rule 10, The Board need to circulate an Application which need to be submitted by Depositors containing a declaration by them that they had not borrowed any money.
• Limits-
  • 35% of Paid-up Capital, Free Reserve and Security Premium of the Company.
  • 100% Paid-up Capital, Free Reserve and Security Premium if it is not Subsidiary / associate of any other company, borrowing of such company from bank and financial institution or any body corporate is less than twice of its paid-up capital or fifty crore rupees (whichever is less) and not defaulted in the repayment of subsisting deposits.
  • 100% Paid-up Capital, Free Reserve and Security Premium if it is a start-up Company for 7 years of its incorporation

Public Company

Section 73(2) of the Act, 2013, provides that a Public Company can raise deposits from its member, however all the conditions are same as Accepting Deposit from Public but here the Company can issue unsecure deposits which leads to no requirement for appointing Trustee of Depositor and the requirement of taking yearly credit rating is not applicable here.

Moreover, the post- compliances are also same as stated above for the Deposits accepted by Private as well Pubic Company.

Penal Provisions

The Act has came up with many severe penal provisions for the Defaulters.

Section 76A of the Act provides that,

Where the Company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified then,

(a) the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less thanone crore rupees or twice the amount of deposit accepted by the company, whichever is lowerrupees but which may extend to ten crore rupees; and

(b) every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years and with finewhich shall not be less than twenty-five lakh rupees but which may extend to two crore rupees,

Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.

Moreover, Rule 17 provides a provision for penal interest of 18% p.a. for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

CONCLUSION: The Act has stringent the provisions of Accepting deposits for Company and made may provisions to increase the transparency to Deposit holders.

Presented By

Jitesh Gupta

Practicing Company Secretary

J. K. Gupta & Associates.