ACCEPTANCE OF DEPOSITS BY COMPANIES UNDER COMPANIES ACT, 2013 – PART I

[Mr. M. GOVINDARAJAN]

Chapter V of the Act deals with the acceptance of deposits by companies.  For that purpose the Central Government, in consultation with Reserve Bank of India, makes the rule namely ‘The Companies (Acceptance of Deposits) Rule, 2014.  This rule came into effect from 01.04.2014

Non applicability

The provisions relating to acceptance of deposits as in the Act and the rules made there under shall not applicable to the following companies:

• A banking company;
• A non banking financial company as defined in the Reserve Bank of India Act, 1934 registered with the Reserve Bank of India;
• A housing finance company registered with National Housing Bank established under the National Housing Banking Act; and
• A company specified by the Central Government under the proviso to Section 73(1) of the Act.

The provisions relating to acceptance of deposits are applicable to the companies other than specified above.

Rule 2(1)(e) defines the term ‘eligible company’ as a public company as referred to in Section 76(1) having a net worth of not less ₹ 100 crores or a turnover of not less than ₹ 500 crores and which has obtained the prior consent of the company in general meeting by means of a special resolution with the Registrar of Companies  before making any invitation to the Public for acceptance of deposits.

Section 76(1) provides that notwithstanding anything contained in Section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in Section 73 (2) and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India prescribe.  Such a company shall be required to obtain the rating from a recognized credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure or deposits.  The company accepting secured deposits from the public shall within 30 days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favor of the deposit holders in accordance with such rules as may be prescribed.

Definition of ‘deposit’

Rule 2(c) defines the term ‘deposit’ as including any receipt of money by way of deposit or loan or in any other form by a company.   The deposit does not include-

• Any amount received from-

• 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;

• Any amount received from-

• Foreign Governments;
• Foreign or international banks;
• Multilateral financial institutions, including but not limited to International Financial  Corporation, Asian Development Bank, Common wealth Development Corporation and International Bank for Industrial and Financial Reconstruction;
• Foreign Governments owned development financial institutions;
• Foreign export credit agencies;
• Foreign collaborators;
• Foreign corporate bodies and foreign citizens;
• Foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under;

• Any amount received as a loan or facility from-

• Any banking company or
• State Bank of India or any of its subsidiary banks ; or
• A banking institution notified by the Central Government under Section 51 of the Banking Regulation Act, 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; or in clause (b) of Section 2 of the Banking  (Acquisition and Transfer of Undertaking) Act, 1980; or
• A co-operative bank as defined in Clause (b-ii) of Section 2 of the Reserve Bank of India Act, 1934.

• 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;
• 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;
• Any amount received by a company from any other company;
• Any amount received and held pursuance 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.  For this purpose it is clarified by the Central Government that-

• Without prejudice to any other liability or section, if the securities for which application money or advance for such securities was received cannot be allotted within 60 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 15 days from the date of completion of 60 days, such amount shall be treated as a deposit under these rules. It is provided (newly inserted proviso with effect from 31.03.2015) unless otherwise required under the Companies Act, 1956 or the SEBI Act, 1992 or rules or regulations made there under to allot any share, stock, bond or debenture within a specified period, if a company had received any amount by way of subscriptions to any shares, stock, bonds or debentures before 01.04.2014 and disclosed it in the balance sheet for the financial year ending on or before 31.03.2014 against which the allotment is pending on 31.03.2015, the company shall, by 01.06.2015 either return such amounts to the persons from whom these were received or allot shares, stock, bonds or debentures or comply with these rules;
• Any adjustment of the amount for any other purpose shall not be treated as refund.

• Any amount received from a person who, at the time of receipt of th amount, was a director of the company.   The director 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;
• 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 five years.   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.
• 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;
• Any non interest bearing amount received or held in trust;
• 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 365 days from the date of acceptance of such advance.   In case any advance which is subject matter of any legal proceedings before any court of law, the said time limit of these 365 days shall not apply;
2. an advance accounted for in any manner whatsoever, received in connection with consideration for an immoveable 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 fo services;
4. as advance received from long term projects for supply of capital goods except those covered under the item (b) above.  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.

For the purposes of this sub clause the amount referred to in the proviso shall be deemed to be deposits on the expiry of 15 days from the date they become due for refund.

• Any amount brought 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:

• The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
• The loan is provided by the promoters themselves or by their relatives or by both; and
• The exemption under this sub clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

• Any amount accepted by a Nidhi company in accordance with the rules made under Section 406 of the Act.  For this purpose any amount-

• Received by the company, whether in the form of installments or otherwise, from a person with a 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 matter whatsoever; or
• Any additional contributions, over and above the amount under above made by the company as part of such promise or offer

shall be treated as a deposit.

Conditions prescribed for accepting deposits

Section 73(2) provides that the company may, subject to=

• the  passing of resolution in general meeting; and
• such rules as may be prescribed by the Central Government in consultation with the Reserve Bank of India,

accept deposits from its members on such terms and conditions including the provision of security, if any, or for the repayment of such deposits with interest, as may be, agreed upon between the company and its members.  The acceptance of deposits under this Section is subject to the following conditions:

• a circular shall be issued to its members which include 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; and
• such other particulars in such form and in such manner as may be prescribed;

• filing a copy of the circular along with such statement with the Registrar within 30 days before the date of issue of the circular;
• depositing such sum which shall not be less than 15% of the amount of the deposit maturing during a financial year  and the financial year next following and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;
• providing such deposit insurance in such manner and to such extent as may be prescribed;
• certifying that the company has not committed in 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
• providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company.

In case where  a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as ‘unsecured deposits’ and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Rule 3 provides for the terms and conditions for acceptance of deposits by the companies.  The said Rule provides that with effect from 01.04.2014, no company under Section 73(2) and no eligible company shall-

• accept or renew any deposit whether secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposits;
• accept or renew-

• any deposit from its members, if the amount of such deposits together with the amount of deposits outstanding  as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid up share capital and free reserves of the company;
• any other deposit, if the amount of such deposit  together with the amount of such other deposit, if the amount referred to in the above clause, outstanding on the date of acceptance or renewal exceeds 25% of aggregate or the paid up share capital and free reserves of the company;

• invite or accept or renew any deposit in any form, carrying a rate of interest or pay brokerage thereon at a rate exceeding the maximum rate of interest or brokerage prescribed by the Reserve Bank of India for acceptance of deposits by non banking financial companies.  The Central Government clarified that the person who is authorized, in writing, by a company to solicit deposits on its behalf and through whome deposits are actually procured shall only be entitled to the brokerage and payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of these rules.

The other conditions are as follows:

• If the depositors wants, the deposits may be accepted in joint names not exceeding three, with or without any of the clauses, namely ‘jointly; , ‘either or survivor’, ‘first named or survivor’ ‘anyone or survivor’;
• A company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of such deposit or renewal as the case may be subject to the condition that-

• Such deposits shall not exceed 10% of the aggregate of the paid up share capital and free reserves of the company; and
• Such deposits are repayable not earlier than three months from the date of such deposits or renewal thereof;

• No Government company eligible to accept to accept deposits shall accept or renew any deposit, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the aggregate of its paid up share capital and free reserves of the company;
• The    company shall not reserve to itself either directly or indirectly a right to alter, to the prejudice or disadvantage of the depositor, any of the terms and conditions of the deposit, deposit trust deed and accept insurance contract after circular or in the form of advertisement is issued and deposits are accepted.
• Every eligible company shall obtain, at least once in a year, credit rating for deposits accepted by it with effect from 31.03.2015.

Name of agency	Minimum investment credit rating
The Credit Rating Information Services of India Limited	FA- (FA Minus)
ICRA Limited	MA- (MA Minus)
Credit Analysis and Research Limited	CARE BBB(FD)
Fitch Ratings India Private Limited	tA-(ind)(FD)
Brickwork Ratings India Private Limited	BWR F A
SME Rating Agency of India Limited	SMERA A”

A copy of the rating shall be sent to the Registrar of Companies along with the return of deposits in Form DPT – 3.