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

[Mr. M. GOVINDARAJAN]

In this part the other provisions relating to acceptance of deposits are discussed .

Circular or advertisement

Section 73(2)(a) requires the eligible company to issue circulars to its members.   Rule 4 provides for the form and particulars of advertisement or circulars.   Every eligible company intending to invite deposit from its members shall issue a circular to all its members by registered post with acknowledgement due or speed post or by electronic mode.   The circular shall be in Form DPT – 1.  The circular may be published in English language in an English newspaper and in vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated.  The circular shall also be uploaded in the web site of the company, if any. 

The company shall not  allow any other person to issue or cause to be issued on its behalf, any circular or a circular in the form of advertisement, unless such circular or circular in the form of advertisement is issued on the authority and in the name of the Board of Directors of the company.

A copy of the circular, duly signed by a majority of the directors of the company as constituted at the time the Board approved the circular or circular in the form of advertisement, or their agents, duly authorized by them in writing, shall be delivered to the Registrar for registration, thirty days before the issue of the circular.

The circular or circular in the form of advertisement shall be valid until the expiry of six months from the date of closure of the financial year in which it is issued or until the date on which the financial statement is laid before the company in annual general meeting or, where the annual general meeting for any year has not been held, the latest day on which that meeting should have been held in accordance with the provisions of the Act, whichever is earlier, and a fresh circular or circular in the form of advertisement, shall be issued, in each succeeding financial year, for inviting deposits during that financial year.

The date of issue of the newspaper in which the advertisement appear shall be taken as the date of issue of the advertisement and the effective date of issue of circular shall be the date of dispatch of the circular.

Section 73(2)(d) provides that  the company issuing deposit shall provide such deposit insurance in such manner and to such extend as prescribed in the rules.

Rule 5 provides for the manner and extent of deposit insurance.  Rule 5(1) provides that an eligible company, inviting deposits, shall enter into a contract for providing deposit insurance at least 30 days before the issue of circular or advertisement or at least 30 days before the date of renewal, as the case may be.   The proviso to this rule provides that the companies may accept the deposits without deposit insurance contract till 31.03.2015. The amount specified in the deposit insurance contract shall be deemed to be the amount in respect of both the principal amount and interest due thereon.

Rule 5(2) provides that the deposit insurance contract shall specifically provide that in case the company defaults in repayment of principal amount and interest thereon, the depositor shall be entitled to the repayment of principal amount of deposits and the interest thereon by the insurer up to the aggregate monetary ceiling as specified in the contract. The proviso to this rule provides that in the case of any deposit and interest not exceeding ₹ 20,000/- the deposit insurance contract shall provide for payment of the full amount of the deposit and interest and in the case of any deposit and the interest thereon in excess of ₹ 20,000/- the deposit insurance contract shall provide for payment of an amount not less than ₹ 20,000/- for each depositor.

Rule 5(3) provides that the amount of insurance premium paid on the insurance of such deposits shall be borne by the company itself.  The same shall not be recovered from the depositors by deducting the same from the principal amount or interest payable thereon.

Rule 5(4) describes the consequences if any default is made in complying with the terms and conditions of the deposit insurance contract.   If there is any default is made in complying with the contract which makes the insurance cover ineffective, the company shall either rectify the defect immediately or enter into a fresh contract within 30 days.  In case of non compliance the amount of deposits covered under the deposit insurance contract and interest payable thereon shall be repaid within the next 15 days.  If such a company does not repay the amount of deposits within the said 15 days it shall pay 15% interest per annum for the period of delay and shall be treated as having defaulted and shall be liable to punished in accordance with the provisions of the Act.

Section 73 (2) (e) provides that the company shall provide security including the creation of such charges on the property of the assets of the company.   Where a company does not secure the deposits or secures such deposits partially, then the deposits shall be terms as ‘unsecured deposits’.   It shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Rule 6 provides for creation of security.   Rule 6(1) provides that the company shall provide for security by way of a charge on the assets as referred to in Schedule III of the Act excluding intangible assets of the company for the due repayment of the amount of deposit and interest thereon for an amount which shall not be less than the amount remaining unsecured by the deposit insurance.  In the case of deposits which are secured by the charge on the assets, the amount of such deposits and the interest payable thereon shall not exceed the market value of such assets as assessed by a registered valuer.       Section 247 of the Act which deals with the registered valuer has not come into effect.  The Central Government clarified that pending notification of Section 247 of the Act and finalization of qualification and experience of valuers, valuation of stocks, shares, debentures, securities etc., shall be conducted an independent merchant banker who is registered with SEBI or an independent Chartered Accountant in practice having a minimum experience of 10 years. 

Provisions relating to Trust

Rule 6(2) provides that the security, not being in nature of a pledge, for deposits shall be created in favor of a trustee for the depositors on-

• specific movable property of the company; or
• specific immovable property of the company wherever situated, or any interest therein.

Rule 7 provides for the appointment of trustees and other matters related thereto.  Rule 7(1) provides that the company has to appoint one or more trustees for depositors for creating security for the deposits, before the issue of circular or advertisement inviting secured deposits.  A written contract shall be obtained from the trustee for depositors before their appointment and a statement shall appear in the circular or advertisement with reasonable prominence to the effect that the interest for depositors has given their consent to the company to be so appointed.

Rule 7(3) provides that no person including a company, which is in the business of providing trusteeship services, shall be appointed as a trustee for the depositors, if the proposed trustee-

• is a director, key managerial personnel or any other officer or an employee of the company or of its holding subsidiary or associate company or a depositor in the company;
• is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
• has any material pecuniary relationship with the company;
• has entered into any guarantee arrangement in respect of principal debts secured by the deposits or interest thereon;
• is related to any director, key managerial personnel or any other officer or an employee of the company.

Rule 7(4) provides that the trustee shall not be removed from office after the issue of circular or advertisement and before the expiry of his term except with the consent of all the directors present at a meeting of the Board.   In case the company is required to have independent directors, at least one independent director shall be present in such meeting of the Board.

Rule 7(2) provides that the company shall execute a trust deed in Form DPT – 2 at least 7 days before issuing the circular or advertisement.    The deposit trust deed shall, inter alia, contain the following:

• Description of deposit scheme;
• Details of charge created;
• Details of deposit insurance;
• Particulars of the appointment of deposit trustee(s);
• Reporting requirements;
• Events of defaults;
• Miscellaneous.

Rule 8 provides for the duties of trustees.   The said rule provides that it shall be the duty of every trustee for depositors to-

• ensure that the assets of the company on which charge is created together with the amount of deposit insurance are sufficient to cover the repayment of the principal amount of secured deposits outsanding and interest accrued thereon;
• satisfy himself that the circular or advertisement inviting deposits does not contain any information which is inconsistent with the terms of the deposit scheme or with the trust deed and is in compliance with the rules and provisions of the Act;
• ensure that the company does  not commit any breach of covenants and provisions of the trust deed;
• take such reasonable steps as may be necessary to procure a remedy for any breach of covenants of the trust deed or the terms of invitation of deposits;
• supervise the implementation of the conditions regarding creation of security for deposits and the terms of deposit insurance;
• do such acts as are necessary in the event the security becomes enforceable;
• carry out such acts as are necessary for the protection of the interest of depositors and to resolve their grievances.

Rule 9 provides that the trustee for depositors shall call a meeting of all the depositors on-

• requisition in writing signed by at least one tenth of the depositors in value for the time being in force;
• the happening of any event, which constitute a default or which, in the opinion of the trustee for deposition affects the interest of the depositors.

Nomination

Rule 11 provides that a depositor may, at any time, nominate any person to whom his deposits shall vest in the event of his death and the provisions of Section 72 of the Act shall, as far as may be, apply to the nomination made under this rule.

Application

Rule 10 provides that a depositor is to make an application in such form as may be prescribed by the company for acceptance of deposit.  The form shall contain a declaration by the intending depositor to the effect that the deposit is not being made out of any borrowed by him from any other person.

Receipt

The company shall, on the acceptance or renewal of a deposit, furnish to the depositor or his agent a receipt for the amount received by the company, within a period of 21 days from the date of money or realization of cheque or date of renewal.  The receipt shall be signed by an officer of the company duly authorized by the Board in this behalf and shall state the date of deposit, the name and address of the depositor, the amount received by the company as deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

The company shall on or before 30^th April of each year deposit the sum with any scheduled bank and the amount so deposited shall not be utilized for any purpose other than for repayment of deposit.  The amount remaining deposited shall not at any time fall below 15%  of the amount of deposits maturing, until the end of the current financial year and the next financial year.

Registers

The company shall maintain one or more separate registers for deposits accepted or renewed at its registered office.   The entries shall be made within 7 days from the date of issuance of the receipt duly authenticated by a director or secretary of the company or by any other officer authorized by the Board for this purpose.  The Register shall be preserved in good order for a period of not less than 8 years from the financial year in which the latest entry is made in the register.

The following particulars are to be entered in the deposit register-

• name, address and PAN of the depositors;
• particulars of guardian, in case of a minor;
• particulars of the nominee;
• deposit of receipt number;
• date and the amount of each deposit;
• duration of the deposit and the date on which each deposit is repayable;
• rate of interest or such deposits to be payable to the depositor;
• due date for payment of interest;
• mandate and instructions for payment of interest and for non deduction of tax at source, if any;
• date or dates on which the payment of interest shall be made;
• details of deposit insurance including extent of deposit insurance;
• particulars of security or charge created for repayment of deposits;
• any other relevant particulars.

Pre mature repayment of deposits

Rule 15 provides that a depositor may get refund of deposit after the expiry of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted.   In such cases the rate of interest payable shall be reduced by 1% from the original interest rate.  The company shall not pay interest more than the above said rate. 

  The proviso to this rule provides that  the provisions of Rule 15 shall not be applicable for such premature repayment, if such payment is made solely for the purpose of-

• in compliance with the provisions of Rule 3; or
• providing war risk or other related benefits to the personnel of the naval, military or air forces or to their families, on an application made by the association or societies formed by such personnel, during he period of emergency declared under Article 352 of the Constitution;

The company may permit a depositor to renew his deposit before the expiry of the period for which such deposit was accepted by the company, for availing of a higher rate of interest, the company shall pay interest to such depositor at the higher rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than the unexpired period of the deposit.  Where the period for which the deposit had run contains any part of a year, then, if such part is less than six months, it shall be excluded and if such part is 6 months or more, it shall be reckoned as one year.

Return of deposit

Rule 16 provides that the company shall on or before 30^th day of June of every year, file with the Registrar a return in DPT-3 along with the fee as prescribed and furnish the information contained therein as on 31^st day of March of that year duly audited by the auditor of the company.   This Form DPT – 3 has been newly substituted with effect from 31.03.2015 by means of amendment to this Rule.

Penalties

Section 73 (3) provides that the deposit shall be repaid by the company with interest in accordance with the terms and conditions of the agreement.  Rule 17 provides that the company shall pay a penal rate of interest of 18% per annum for the over due period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

Section 74 provides that where any deposit accepted by a company before the commencement of the Companies Act, 2013, the amount of such deposit or part thereof or any interest due thereon remain unpaid on such commencement or becomes due at any thereafter, the company shall-

• file with the Registrar a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest within a period of 3 months from such commencement or from the date of due;
• along with the statement the arrangement made for such repayment , notwithstanding anything contained in any other law for the time being in force or under the terms and conditions subject to which the deposit was accepted or any scheme framed under any law; and
• repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.
• The statement shall be in Form –DPT -4.

Section 74 (2) provides that the company may, if it is unable to pay the deposit,  file a petition before the company.   The Tribunal may, after considering the financial condition of the company, the amount of deposit or part thereof and the interest payable thereon and such other matters allow further time as considered reasonable to the company to repay the deposits.  The Companies (Removal of Difficulties) Fourth Order, 2014, issued vide Notification No. S.O. 1460(E), dated 06.06.2014 gives powers to the Company Law Board to exercise the jurisdiction powers, authority and functions of the tribunal under Section 74(2) of the Act.

Section 74(3) provides that if a company fails to repay the deposits or part thereof or any interest within the time specified or such further time as may be allowed by the Trubunal, the company shall, in addition to the payment of the amount of deposit or part thereof or interest due, be punishable with fine which shall not be less than ₹ 1 crore but which may extend to ₹ 10 crores.  Every officer of the company who is in default shall be punishable with imprisonment which may extend up to 7 years or with fine which shall not be less than ₹ 25 

Rule 21 provide that if any company contravenes of the rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to ₹ 5,000/- and where the contravention is a continuing one, with a further fine which may extend to ₹ 500/- for every day after the first day during which the contravention continues

Section 75(1) provides that where a company fails to repay the deposit or part thereof or any interest due within the time specified or such further time as may be allowed by the Tribunal and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall be personally responsible without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors. 

Section 75(2) provides that any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.

Acceptance of deposits from public by certain companies

Section 76 (1) provides that 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. 

The first proviso to this section provides that 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 of deposits.

The second proviso provides that 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.

Section 76(2) provides that the provisions of Chapter V shall, mutatis mutandis, apply to the acceptance of deposits from public under this Section.