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Companies can accept deposits from members and other than members within the limit, subject to the satisfaction of T&C. Pvt Companies can accept deposits from directors.

Introduction

In common terminology,  the ‘deposit’ has always been understood as the function of banks and financial institutions (FIs) only. However, in the corporate world, it is not only restricted to the functions of banks and FIs, but a way of complimenting the requirements of working capital or raising funds for big corporate houses.

There were a number of cases wherein companies failed to pay the deposit amount on the due date and many of them had gone to liquidation. With the view to regulate acceptance of deposits, Section 58 and 58A were inserted in Companies Act, 1956 by the Companies (Amendment) Act, 1974 which were replaced by the Chapter-V (Sections 73 to 76) of the Companies Act, 2013 and rules made thereunder from time to time.

Structure

Chapter -V deals mainly with the provisions six sections and rules made thereunder, viz.,

Section 2 (31) - Definition of Deposits

Section 73 - Prohibition on Acceptance of Deposits from  Public

Section 74 - Repayment of Deposits., etc., accepted before commencement of Companies Act, 2013

Section 75 - Damages for Fraud and

Section 76 - Acceptance of Deposits from Public by Certain Companies

Section 76A - Punishment for contravention of Section 73 or Section 76.

Companies (Acceptance of Deposits) Rules, 2014.

 

What is Deposits

Section 2 (31) of Companies Act, 2013 defines deposits.

“Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.”

It includes any receipt of money in any form whether it is deposit, loan etc. but it does not include money received from bank.

On a plain reading of this provision, deposits include loan also but not the loan taken from banks. However, when we read this provision with Companies (Acceptance of Deposits) Rules, 2014,  we will get the following list of items excluded from the definition of deposits:

1. Amount received from Central or State Government or Local Authorities.
2. Amount received from Foreign Government.
3. Loan from Bank etc., (So loan mentioned in the definition excludes the loan from banks)
4. Loan from Public Financial Institutions. (So the loan mentioned in the definition excludes the loan from Public Financial Institutions)
5. Loan received against the issue of Commercial Papers or other instruments.
6. Amount received by a company from other company.
7. Amount received in IPO & FPO or other issue of securities.
   However, within 60 days securities are not allotted and application money is not refunded within 15 days from the conclusion of 60 days, such unrefunded amount shall be treated as deposits and any adjustment of the amount shall not be treated as refund.
8. Amount received from directors. (So companies may take loans from directors).
   Provided that the director has to give a declaration that such amount has not been borrowed by him from others. (Private & Public Company both can receive an amount from director; However, Public Company cannot receive amount from relatives of director, only Private Company can)
9. Amount  raised by the issue of :
   a. 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 or
   b. bonds or debentures Compulsorily Convertible into Shares of the Company within 10 years (So company cannot issue CCDs for period of more than 10 years. Therefore, the same should be treated as the maximum period of maturity of CCDs.)
10. Amount received from employee not exceeding his annual salary under a contract of employment.
    Provided such acceptance should be non-interest bearing securities.
11. Non-interest bearing amount received or held in trust.
12. Amount received in course of business:
    a. Advance as supplier provided that such goods should be delivered within 360 days.
    b. Advance as consideration for property under agreement.
    Provided such loan should be adjusted against the consideration of property.
    c. Security deposits for performance of contract.
    d. Advance under long-term project.
    However, if the amount referred in (a), (b), (c ) and (d) becomes refundable (with or without interest) due to necessary permission required has not been granted for dealing in goods or property or services for which money has taken, after expiry of 15 days from the due date, such amount shall be treated as deposits.
13. Any amount brought in by the promoter as unsecured loan in pursuance of stipulation of lending institutions subject to fulfillment of following conditions.
    a. In pursuance of requirements imposed by lending institutions on the promoters to contribute such finance,
    b. Loan provided by promoter(s) or by their relatives or both and
    c. Such loan is exempt till repayment of loan to bank or Financial Institutions not thereafter.
14. Amount accepted from NIDHI Companies.

Therefore, not every receipt of money or loan is deposit. If amount received from above sources and on satisfaction of conditions, wherever required, such amount will not be considered as deposits in terms of Companies Act, 2013.

Chapter-V: Deposits and Rules made thereunder

Section 73: Prohibition on Acceptance of Deposits from Public

1. No company shall invite, accept and renew deposits on or after commencement of Companies Act, 2013
   a. Except in manner provided in Chapter-V.
   b. Not applicable to banking companies

2. Company (private or public) can accept deposits from members only:-

a. After passing resolution in General Meeting.
b. Subject to fulfilment of following conditions.
 

    Conditions Required to be fulfilled: 

i) Issue of circular to members by registered post with acknowledgment due or speed post or electronic mode in form DPT-1 and circular may also published in  the advertisement as per rules prescribed, 
ii) Filing of circular with RoC in form DPT-3 within 30 days from the date of issue,
iii) To open a separate a bank account called ‘Deposit Repayment Reserve Account’ with Schedule Commercial Bank and depositing amount not less than 15% of the deposit maturing during the Financial Year. 
iv) Providing deposit insurance,
v) Certificate that company has not defaulted in repayment of deposit, 
vi) Providing securities, if required, including creation of charges. (It may partly secured and partly unsecured)

3. Every deposits shall be repaid with interest in compliance of the terms and conditions of the Agreement.
4. In case of default of Sub-section-3, depositor can approach the tribunal.
5. Amount in Deposit Repayment Reserve Account shall not be used for the purpose other than repayment of deposits.

Therefore, as prohibition to accept deposit has not been included in the definition of Private Companies under Companies Act, 2013, even Private Companies can accept deposits (which were not allowed to do so under Companies Act, 1956) after fulfilling the conditions mentioned under Section 73.

Further, that the companies shall not accept deposit exceed 25% of Paid-up Capital and Free Reserves under Section 73 (2) read with Rule 3 of Companies (Acceptance of Deposit) Rule, 2014.

Section 74: Repayment of Deposits., etc., accepted before Commencement of Companies Act, 2013

The provisions of this Section requires that all the companies which have accepted deposits before commencement of the Companies Act, 2013, shall file with Registrar of Companies (RoC), a statement of all deposits and sums unpaid and interest thereon within three months from the commencement of this Act in form DPT-4.

Such accepted deposits shall had to be repaid within One Year from the commencement of Act, 2013. However, tribunal may extend such time limit.

The default of this section attracts the following actions:
a. Fine: One Crore to Rs. 10 Crore
b. Imprisonment: Upto Seven Years and/ or fine of Rs. 25 lacs to Rs.10 Crore.

Section 75: Damages for Fraud

If a company fails to repay any deposits under Section 74 and it is proved that the deposit has 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, without prejudice to the provisions contained in subsection (3) of that section and liability under section 447, 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 76: Acceptance of Deposits from Public by Certain Companies

This section specifically provides that Public Companies may accept deposits from the persons other than members on the fulfillment all of the following conditions:-

1. Conditions Required under Section 73 (2) (discussed above),
2. Eligibility to Accept deposits under this Section
   Net worth not less than Rs. 100 Crore,
   Or
   Turnover not less than Rs.  500 Crore and
3. Rating from Crating Rating Agency.

If above conditions are satisfied and company has accepted deposits from public, the company shall create charge within 30 days.

Therefore, the eligibility shall be considered only in reference of Section 76 (not in reference of Section 73(2)). Only public companies will be eligible under this section, not the private companies. However, Private Companies can accept deposits under Section 73 (2) for the members but not from public.

Section 76A :Punishment for contravention of Section 73 or Section 76.

“Where a 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 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73,—

(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 than one crore rupees 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 or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both:

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.”

Companies (Acceptance of Deposits) Rules, 2014

1. No company shall accept deposits which is (after commencement of deposits) repayable on demand.
   Within less than 6 months from the date of acceptance
   and
   More than 36 months.
   However, if company accepts deposits to meet short term requirement which is repayable within 6 months then:
   a. Such deposits shall not be exceed 10% of paid-up share capital and free reserve
   and 
   b. Such deposit shall not be repayable before 3 months.
2. Quantum of Deposits: The eligible company shall not accept deposits.

DEPOSITS	QUANTUM OR LIMIT OF DEPOSITS
From Members	Exceeding 10% of Paid-up Share Capital, Free Reserves and Securities Premium Account
From other than members	Exceeding 25% of Paid-up Share Capital, Free Reserves and Securities Premium Account

3. However, a Specified IFSC Public Company and a Private Company may accept deposits from its members not exceeding 100% of aggregate of Paid-Up Capital, Free Reserves and Securities Premium Account subject to condition that detail of such deposit shall be filed in form DPT-3 with the RoC.

4. Benefits to Certain Companies:
   The maximum limit in respect of deposit to be accepted from members, shall not be applicable to the following class of Private Companies:
    
5. (a) Start-up Private Company for Five Years from the date of incorporation; (Start-up means Start-up defined by DIPP.)
   
   (b) Private Company which fulfills the following companies:
   (i) which is not Associate or Subsidiary of any other company;
   (ii) the borrowings of such company is less than twice of its Paid-up capital or Rs. 50 Crore, whichever is less; and
   (iii) which is not defaulted in repayment of borrowing subsisting at the time of accepting deposit.
   From the text, it is clear that all three conditions required to fulfilled simultaneously in case of companies other than start-ups

6. However, Government Company shall not accept deposit exceeding 35% of Paid-up Share Capital and Free Reserves.

7. Company shall enter into agreement to provide deposit insurance for both interest and principal amount at least before 30 days from the date of circular and advertisement or before date of renewal, as the case may be.

8. Company shall create charge for the purpose of providing security.

9. Company shall appoint one or more trustees for depositor subjects to the written consent of the trustees.

10. Company shall execute a deposit trust deed in form DPT-2 at least 7 days before issue of circular or advertisement.

11. Company shall maintained a register of deposits accepted or renewed.

12. Company shall file a Return of Deposit on 31st March with RoC in form DPT-3 on or before 30th June every year.

13. Ministry of Corporate Affairs (the “MCA”) by the notification dated 22^nd of January, 2019 has inserted new sub-rule 3 in Rule 16(A) of the Companies (Acceptance of Deposits) Rules, 2014.

The new rule requires every company (except Government Company) to disclose by way of return, the outstanding receipt of money or loan by the Company but not considered as deposits.

The outstanding amount as on 22^nd of January, 2019 required to be disclosed in form DPT-3 within 90 Days to the concerned Registrar of Companies.

This disclosure is also required to be made by the companies every year on or before 30 June.

Conclusion:

Companies can accept the deposits from the members and other than members within the limit, subject to the satisfaction of terms and conditions. Private Companies, prohibited under Companies Act, 1956, can now accept deposits from members only subject to fulfillment of conditions as the provision for non-acceptance of deposits has not been incorporated under definition of private company under Companies Act, 2013. The companies, for the purpose Chapter-V, are categorised into two types i.e., eligible companies and other than eligible companies, which can accept deposits within the limit prescribed.

By these provisions, the government tries to regulate the deposits acceptable by various companies which are not banking company or non-banking financial institutions.

Certain Exemptions are also provided from Deposits to the Start-up companies as defined by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry (Click here for more)

References :

1. Companies Act, 2013
2. Companies (Amendment) Act, 2015
3. Companies (Acceptance of Deposits) Rules, 2014
4. Companies (Acceptance of Deposits) Amendment Rules, 2015

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