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Learning no. 8| Month: May, 2020
MIBS
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ACCEPTANCE OF DEPOSITS BY CORPORATES – A REVIEW (PART
- A)
INTRODUCTION
The concept “Deposit”
comes under the genre of borrowing. But both these concepts are different in
nature. From the layman point, it is defined as something which is received from
another with an intention or promise to repay it or its equivalent in time
bound manner. If borrowed thing is money, there normally exists an agreement to
pay interest for its use. In simple words, deposit is an agreement for using
the money.
HISTORY OF
CORPORATE FIXED DEPOSIT
There has been a
practice that many big corporates raise funds from the public by way of
deposits at a higher rate of interest. Such fund raising is over and above traditional
source of financing like share capital, debt capital, bank loan, bill
discounting etc.
In the recent past,
the company used to raise fund by way of deposit by offering higher interest
rate compared to banker’s FD rate. In most of the cases, such companies were
not in position to repay the principle and interest amount to the public due to
various reasons like company became sick or liquidated. The need was felt to regulate
the acceptance of deposits by the body corporates. Accordingly, Reserve Bank of
India (“RBI”) had taken initial step to amend RBI Act, 1934 by amending Banking
laws (Miscellaneous Provisions) Act, 1963 to provide power on RBI to regulate
the acceptance of deposit by non banking institutions w.e.f. 01.02.1964. As a
result of that, provision mandating advertisement in a prescribed form stating
financial position of the Company seeking deposits from the public. Such statute
also provides the central government to make rules in consultation with RBI in this
regard.
Company prefer to accept
deposit from the public due to various reasons like less interest, simple mode
of raising funds, no securities need to be given. Accordingly, banking
companies and NBFCs accepting deposits shall be regulated by RBI whereas Non
Banking Non Finance Companies are regulated by Ministry of Corporate Affairs.
DIFFERENCE
BETWEEN LOAN AND DEPOSIT
As per sec 143 of
the Companies Act, 2013 (“the Act”), auditors shall inter-alia enquire upon “whether
loans and advances made by the Company have been shown as deposits”. From these
provisions, it is clear that both loans and deposits are different in nature and
should be shown separately. As per definition under the Act, the term
“Deposits” includes loan. So the deposit is exhaustive in nature.
There is a thin
deviation between the concepts “Loan” and “Deposit”. The Company accept deposit
at the instance and for the benefit of the person who deposit the money. Here,
it is depositors who primarily the mover. Not only that, the deposit is re-payable on
demand of the depositor viz., pre-payment of deposits.
Loan is taken at
the instance or for the benefit of the person requesting the money. Here,
primary movers would be the borrowers. Loan is re-payable only when the
obligation to repay the amount arises, as per the loan agreement. So there exists
relationship between debtors and creditors.
REGULATORY
FRAMEWORK GOVERNING ACCEPTANCE OF DEPOSIT
Sec 73 to 76A in
chapter V of the Act deals with the acceptance of deposits and has to be read
along with Companies (Acceptance of Deposits) Rules, 2014 (“Deposit Rules”). Before
proceeding to understand the concept “Acceptance of Deposits”, we must first know
the definition “Deposit”. The definition is exhaustive in nature which excludes
certain items.
As per Rule 2 (1)
(c) of the Deposit Rules, the term “Deposits” have been defined to include any
receipt of money by way of deposit or
loan or in any other form by a company. It does not include such categories of
amount as may be prescribed in consultation with the RBI. The above definition
is inclusive definition and can be secured or unsecured.
Please note that
private company can accept deposit from its members only. Whereas eligible public
company can accept deposit from its members and public if it fulfills certain
parameters, the details of which will be learned later in this article.
It was clarified
through general circular no. 05/2015 that amounts received by private companies
prior to 16th April, 2O14 shall not be treated as 'deposits' under
the Companies Act, 2013 (“the Act”) and Deposit Rules subject to the condition
that relevant private company shall disclose, in the notes to its financial
statement for the financial year commencing on or after 1st April,
2014, the figure of such amounts and the accounting head in which such amounts
have been shown in the financial statement. Any renewal or acceptance of fresh
deposits on or after 1st April, 2014, shall, however, be in
accordance with the provisions of the Act and rules made thereunder.
THE AMOUNT
THAT SHALL NOT BE CONSIDERED “DEPOSITS”:
The following categories
of amount excluded from the definition “Deposit” (Rule 2 (1) (c) of Deposit
rules):
i. any
amount received from the Central Government or a State Government or local
authority or statutory authority constituted under Act of Parliament/ state
legislature, or any amount from any resources whose repayment is guaranteed by
the Central Government or a State Government;
ii. any
amount received from foreign Governments, foreign or international banks, multilateral
financial institutions, foreign Governments owned development financial
institutions, foreign export credit agencies, foreign collaborators, foreign
bodies corporate, foreign citizens, foreign authorities or persons resident
outside India;
iii. any
amount received as a loan from any banking company;
iv.
any amount received as a
loan or financial assistance from public financial institutions or any regional
financial institutions or insurance companies or scheduled banks;
v. any
amount raised by issue of commercial paper or any other instruments in
accordance of RBI guidelines or notifications;
vi.
any amount received by a
company from any other company;
vii. any
amount received and held pursuant to an offer towards subscription to any
securities, including share application money or advance towards allotment of
securities pending allotment. Such amount so received shall be appropriated
only against the amount due for allotment of the securities.
Please note that
securities for which such amount was received, can’t be allotted within 60 days
from the date of receipt of application money and such application money is not
refunded within 15 days after expiry of 60 days, then such amount received
shall be treated as deposit under deposit rules.
viii. Any
amount received from the person who is a director of the company or a
relative of director of private company at the time of receipt of money subject
to the declaration that the amount so deposited has been given from own’s fund
and not from borrowings.
ix.
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 (excluding intangible assets),
compulsorily convertible within 10 years;
x. Any
amount raised by issue of unsecured non-convertible debentures not constituting
charge on assets of the company and listed on the stock exchanges;
xi. Non-interest-bearing
security deposit received from employee of the company to the extent not
exceeding his annual salary under the contract of employment with the company;
xii. Any
non-interest bearing amount received and held in trust;
xiii. Any amount received in the course of business –
(a)
As an advance for the supply of goods or services provided that such
advance shall be adjusted against supply of goods or services within 365 days
of the receipt of advance.
Please
note that the said amount is a subject matter of any legal proceedings before
the court of law, the aforesaid limit shall not apply.
(b)
As an advance w.r.t. consideration for an immovable property provided
such advance is adjusted against such property in accordance with the terms of
the agreement;
(c)
As security deposit for the performance of the contract for supply of
goods or services;
(d)
As advance under long term projects for supply of capital goods except
item no. (b) above;
(e)
As advance towards consideration for providing future services in form
of warranty or maintenance contract provided period for providing such services
shall not exceed period prevalent under common business practice or 5 years
from acceptance of services whichever is less;
(f)
As advance received which is allowed by any sectoral regulator;
(g)
As advance for subscription towards publication;
Please note that
above amount received becomes refundable due to the reason that the company
accepting the money does not have necessary permission to deal in goods or
services for which amount is taken, then such receipt shall be deemed to be
treated as deposit under deposit rules.
It is clarified
that for the purpose of this sub-section, the amount shall be deemed to be
treated as deposit on expiry of 15 days from the date it may become due for
refund.
xiv.
Any amount by way of unsecured loan brought in by the promoters subject
to the fulfilment of the following conditions:
(a)
the loan is brought in pursuance of the stipulation imposed by the lending
institutions on the promoters to contribute such finance;
(b)
the loan is provided by the promoters themselves or by their relatives
or by both; and
(c)
the exemption under this sub-clause shall be available only till the
loans of financial institutions or bank are repaid and not thereafter;
xv.
Any amount accepted by a Nidhi Company under sec 406 of the Act;
xvi.
Any amount received by way of subscription in respect of a chit under
the Chit Fund Act, 1982;
xvii.
Any amount received by the company under any collective investment
scheme;
xviii. An amount of Rs. 25 lakh or more raised by a start-up company, by way of
a convertible note (convertible into equity shares or repayable within a period
not exceeding five years from the date of issue) in a single tranche, from a
person;
xix.
Any amount received by a company from registered Alternate Investment
Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts
and Mutual Funds.
DEPOSITORS
As per Rule 2 (1) (d) of
the deposit rules ‘‘depositor’’ means,
i. any
member of the company who has made a deposit with the company in accordance
with the provisions of section 73 (2) of the Act, or
ii. any
person who has made a deposit with a public company in accordance with the
provisions of section 76 of the Act;
ELIGIBLE COMPANY
As per Rule 2 (1) (e)
of the deposit rules, "eligible company"
means
·
a public company as
referred to in Section 76 (1);
·
having a net worth
of not less than Rs. 100 crores or a turnover of not less than Rs. 500 crores and
·
which has obtained
the prior consent of the company in general meeting by means of a special
resolution and
·
the said resolution
has filed with the Registrar of Companies before making any invitation to the
Public for acceptance of deposits.
·
such company, which
is accepting deposits within the limits specified under Section 180 (1) (c), may accept deposits by means of an
ordinary resolution;
EXEMPTED ENTITIES
Following companies
are exempted from complying with provisions of deposit rules: -
(i)
a banking company;
(ii)
a NBFC as defined
in the RBI Act, 1934 registered with the RBI;
(iii)
a housing finance
company registered with the National Housing Bank established under the
National Housing Bank Act, 1987 and
(iv)
a company specified
by the Central Government under the proviso to section 73 (1) of the Act.
Now let us understand
the provisions relating to acceptance of deposits by the Companies.
ACCEPTANCE OF DEPOSITS BY THE COMPANY FROM THE
MEMBERS
Sec 73 of the Act
says that a company (be it a private or public company) may accept or renew
deposits from its members after complying with the following the provisions as
set out below:
a.
to get approval
from its members by a resolution in a general meeting.
b.
to issue a circular
to its members including statements showing the financial position of the
company and other details in form DPT-1 (As per Rule 4 of deposit rules)
c.
file such circular
with RoC within 30 days before date of issue of circular.
d.
To deposit on or
before April 30 every year, at least 20% of the amount of its deposits maturing
during the following year and kept in a separate bank in a separate bank
account with scheduled bank to be called “deposit repayment reserve account”. Rule
13 of deposit rules states that such amount shall not at any time fall below
above percentage.
(Prior
to Companies Amendment Act, 2017 (CAA, 2017) percentage of deposit amount to be
transferred was 15% of the deposit amount maturing in a financial year and the
financial year next following).
e.
To certify that it
has not committed default in the re-payment of deposits accepted or payment of
interest on such deposits. In case a default had occurred, the company made
good the default and a period of 5 years had lapsed since date of making good
default.
f.
To provide security
if any, for the due re-payment of the amount of deposit or the interest
thereon. If security is provided, charge must be created on the assets of the
Company.
g.
To repay principle
amount and interest in accordance with terms and conditions.
h.
Such other
conditions as prescribed under deposit rules.
EXEMPTION TO PRIVATE COMPANIES
Conditions as given above as
prescribed under Sec 73 2(1) (a) to (c) and (e) of the Act w.r.t. issue of
circular, filing of the copy of such circular with RoC, depositing of certain
amount and certification as to no default committed, shall not apply to private
companies:
a.
Which accepts from
its members monies not exceeding 100% of paid up capital, free reserves and
securities premium account; or
b.
Which is a start
up, for 5 years from the date of its incorporation
c.
Which fulfills all
of the following conditions, namely:
(i)
Which is not an
associate or a subsidiary company of another company;
(ii)
Borrowings is less
than twice of its paid up share capital or Rs. 50 Crores, which is lower; and
(iii)
Such a company has
not defaulted in repayment of such borrowings subsisting at the time of
accepting deposits under this section.
APPLICATION TO TRIBUNAL IF COMPANY FAILS TO REPAY
In case a company
fails to repay deposit or part thereof or any interest thereon, concerned
depositor may apply to the Tribunal for an order directing the company to pay
the sum due or for any loss damage incurred by him as a result of such
non-payment and for such other order as the Tribunal may deem fit.
ACCEPTANCE OF DEPOSITS BY THE ELIGIBLE COMPANY
FROM THE PUBLIC
As we discussed about
the definition “Eligible company” elsewhere in this article, Sec 76 of the Act
says that such company can accept deposit from members and public subject to
the following conditions:
a. Such
company which is accepting deposit from public, is required to pass special resolution
in the general meeting and file respective form with ROC. Please note that such
company which is accepting deposits within the limit of Sec 180 (1) (c), may accept
deposits by means of an ordinary resolution.
b. Such
other conditions as prescribed under Sec 73 (2) and deposit rules.
PUNISHMENT FOR
FAILURE TO COMPLY WITH SEC 73 AND SEC 76
(write up on the subject “Acceptance of deposit by the corporates – A review (Part B)” shall be continued in learning no. 9. Enjoy learning)
*********************
owned
by CS. Mithun B Shenoy
