Introduction

With the various changes incorporated in the Companies Act, 2013, one of the major changes is the mechanism for acceptance of deposits. While earlier these laws applied only to a public company, under the Companies Act, 2013, they shall be applicable to public as well as private companies.  This article discusses the provisions of the Companies Act, 2013 regarding Acceptance of Deposits.

What is a “Deposit”?

A Deposit has been defined in the rules to include any receipt of money by way of deposit or loan or in any other form by a company. However certain exclusions have been made from the definition of Deposit. The following shall not be considered as deposits

• Amount received from the government, guaranteed by the government, foreigner, foreign body corporate, foreign government, etc.,
• Any amount received as a loan or credit facility from the Bank or Financial Institutions,
• Any amount received against issue of commercial paper or any other instrument,
• Any amount of inter corporate loans,
• Share/security application money provided that the securities are allotted within 60 days.
• Any amount received from the directors, provided that such amount should not be borrowed by them,
• Amount received by issuance of secured bonds and debentures,
• Amount received from the employee as a security deposit provided that such amount does not exceed his/ her annual salary,
• Non-interest bearing amount received in trust,
• Amount bought by the promoters by way of unsecured loans in pursuance of the stipulation of any lending financial institution or bank,
• Amount received by a Nidhi Company,
• Amount received in the ordinary course of business,

To whom shall the provisions with regards to acceptance of deposits not apply?

• Banking Company,
• Non- Banking Financial Company, and
• Such other company as the Central Government, in consultation with the RBI, specifies.

What is to be done with the deposits accepted before 31st March, 2014?

• The company should file with the Registrar, a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayments in Form DPT-4, till 30th June, 2014.
• The company should repay all the deposits or part thereof or any interest due therein remaining unpaid till 31st March, 2015 or within 1 year from the date on which such payments are due, whichever is earlier.
• In case of an Eligible Company that has accepted public deposits under Companies Act, 1956 and has been repaying the deposits and interest thereon in accordance with the relevant provisions, the above provisions with regards to repayment of deposits and interest before 31st March, 2015 shall be deemed to have been complied with if:
  • The company complies with the requirements under the Companies Act, 2013 and its Rules, and
  • Continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposits.
• On an application made by the Company, the Tribunal, after considering the financial position of the Company, may allow additional time as considered reasonable to the company for repayment of the deposits. (Not notified yet)
• Penalty for non-compliance with the above requirements (Not notified yet):
  • In addition to the payment of the deposit or part thereof and the interest due, the company shall pay a fine >=Rs. 1 crore, but not more than Rs. 10 crore.
  • Every officer in default shall be punishable with
    • Imprisonment < 7 years, or
    • Fine > Rs 25 Lakhs, but <=Rs 2 crores

From whom can the company accept deposits?

• Private Companies can accept deposits only from Shareholders subject to certain conditions.
• A public company having a networth >= Rs 100 crore or turnover >= Rs 500 crore, which has obtained prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the RoC before making invitation to public for acceptance of deposits (“Eligible Company”), may accept deposits from persons other than its members subject to certain conditions

Procedure for acceptance of deposits

• Shareholder’s Resolution
  • For issue of deposits to the members by a company: Passing of a resolution in general meeting.
  • For issue of deposits to public by an Eligible Company: Passing of a special resolution in general meeting.
• Issuance of circular to its members
  • When issuing deposits to members, the circular shall be issued to the members in Form DPT-1 by registered post with acknowledgement due or speed post or by electronic mode. It may be published in English and vernacular language newspapers.
  • When Eligible Company is issuing deposits to public,
    • The circular shall be issued in form of an advertisement in Form DPT-1 in English and vernacular language newspapers.
    • The company shall upload a copy of the circular on its website.
  • The circular shall be issued on the authority and in the name of the Board of Directors of the company.
  • The circular shall contain
    • A statement showing the financial position of the company,
    • The credit rating of the company

In case of an Eligible Company,

• The rating should include the company’s networth, liquidity and ability to pay its deposits on due date,
• The rating should be from a recognized credit rating agency,
• The rating shall be obtained for every year during the tenure of deposits.

• Total number of depositors and amount due towards deposits in respect of previous deposits.

• Validity of the circular: The circular or the circular in form of advertisement shall be valid
  • until the expiry of 6 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 is not held, the latest day on which meeting should have been held,
  • whichever is earlier.
• Filing a copy of the circular along with such statement with the ROC within 30 days from issuance of the circular.
• On or before 30th April of each year, the company shall deposit 15% of the amount of deposits maturing during the current and next financial year in a scheduled bank in a separate bank account. This amount shall not be used by the company for any purpose other than repayment of deposits.
• Providing deposit insurance.
  • All companies shall enter into a contract for providing deposit insurance atleast 30 days prior to the issue of circular or advertisement or atleast 30 days before the date of renewal, as the case may be.
  • Amount specified in the deposit insurance contract shall include both- the principal amount and the interest due thereon.
  • The insurance company shall, on default by the company, repay the principal amount of deposit and interest thereon up to the aggregate monetary ceiling as specified in the contract to the depositor.
    • In case of a deposit and interest <= Rs 20,000, the deposit insurance contract shall provide for payment of full amount of deposit and interest
    • In case of a deposit and interest > Rs 20,000, the deposit insurance contract shall provide for payment of atleast Rs 20,000 for each depositor.
  • The insurance premium amount shall be borne by the company and shall not be recovered from the depositors.
  • In case of any default by the company that makes the deposit insurance cover in effective, the company shall either rectify the default immediately or enter into a fresh deposit insurance contract within 30 days.
    • In case of non-compliance, the deposit covered under such ineffective insurance cover will be repaid, along with interest due thereon, within next 15 days.
    • In case the company doesn’t repay within the said 15 days, it shall pay an interest of 15% p.a. for the period of delay and shall be treated as having defaulted and shall be liable to punishment accordingly.
  • Certifying that the company has not committed any default in the repayment of deposits or payment of interest on such deposits.
  • Providing security, if any.
    • Security will be provided for deposit by a company by charge on its assets excluding intangible assets. The deposit and interest payable thereon <= the market value of such assets as assessed by a registered valuer.
    • Amount of security>= amount remaining unsecured by deposit insurance
    • In case of an Eligible Company,
      • If it is accepting secured deposits from the public, then it shall create a charge on its assets of an amount >= the amount of deposits accepted, within 30 days from the acceptance in favour the depositholders
    • The security for deposits shall be created in favour of a trustee for the depositors.
    • The company shall execute the deposit trust deed in Form DPT-2 atleast 7 days prior to issuing the circular or advertisement.
    • Where the company does not secure the deposits or secures them partially, then the deposits will be termed as “unsecured deposits” and shall be quoted so in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Every deposit accepted by the company shall be repaid with interest in accordance with the terms and conditions of such deposit. Where any company fails to repay the deposit or part thereof or any interest due thereon as per the terms of the deposit, the depositor concerned may apply to the Tribunal for an order directing the company to pay such sum due or for any loss or damage incurred by him as a result of such non-payment.

Terms and Conditions of acceptance of Deposits by companies

• Term of the deposit
  • The deposit should not be payable on demand
  • The deposit should not be repayable upon receiving a notice within a period less than 6 months
  • Term of the deposit <= 36 months from the date of its acceptance or renewal
  • However, for meeting the short term requirement of funds, the company may accept or renew deposits payable before 6 months, subject to following conditions:
    • Amount of such deposits <=10% of paid up share capital & free reserves of the company
    • Such deposits are not repayable earlier than 3 months from the date of their acceptance or renewal
  • Deposits may be accepted in joint names, subject to a maximum of 3 joint names.
  • Maximum amount of deposit acceptable:
    • For companies issuing deposits to its members: Amount of deposits to be accepted + amount of other deposits outstanding as on the date of acceptance or renewal <= 25% of the paid up capital & free reserves of the company.
    • For Eligible companies:
      • If deposit is being accepted from its members, the amount of such deposits + amount of deposits outstanding as on the date of acceptance or renewal from members <=10% of the paid up capital & free reserves of the company.
      • If the deposit is accepted from persons other than members, the amount of such deposits + amount of deposits outstanding as on the date of acceptance or renewal other than deposits from members <=25% of the paid up capital & free reserves of the company.
    • For Government Companies: Amount of deposits to be accepted + amount of other deposits outstanding as on the date of acceptance or renewal <= 35% of the paid up capital & free reserves of the company.
  • For the companies accepting deposits (whether private or Eligible Companies), the rate of interest on the deposits or brokerage thereon shall be <= the maximum rate of interest or brokerage prescribed by RBI for acceptance of deposits by NBFCs.
  • The company shall not reserve to itself, either directly or indirectly, any right to alter the terms and conditions of the deposit, deposit trust deed and deposit insurance contract to the prejudice or disadvantage of the depositor after the circular or advertisement is issued and the deposits are accepted.

Trustee for depositors in case of secured deposits

• One or more trustees shall be appointed before the issue of circular or advertisement inviting secured deposits.
• A written consent shall be obtained from the trustee for depositors before their appointment and a statement shall be given in the circular or advertisement that the trustees have given their consent to be so appointed.
• Persons (including companies that are in the business of providing trusteeship services) ineligible to be trustees for depositors
  • Director, Key Managerial Personnel or any other officer or employee of the company or its holding, subsidiary or associate company or a relative of such a person,
  • Depositor in the company,
  • A person who is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company,
  • A person who has any material pecuniary relationship with the company,
  • A person who has entered into any guarantee arrangement in respect of principal debts secured by the deposits or interest thereon.
• No trustees shall be removed from office after the issuance or circular or advertisement and before the expiry of his term except with the consent of all directors present at a meeting of the Board. If the company is required to have independent directors, then atleast 1 independent director shall be present in such a meeting.

General provisions regarding premature repayment of deposits

• When on request of the depositor, the company repays the deposit after 6 months but before the expiry of the period for which the deposit was accepted, the rate of interest payable shall be reduced by 1% from the rate the company originally was to pay as per the terms of the deposit.
• However the rate of interest will not be reduced if the repayment of deposit is made solely for the purpose of-
  • Complying with the “Terms and conditions of acceptance of deposits by companies” as per Rule 3 of the Companies (Acceptance of Deposits) Rules, 2014, 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 the period of emergency declared under Article 352 of the Constitution.
• Where a company permits a depositor to renew his deposit before the expiry of the period for which such deposit was accepted by the company, for availing 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 provisions of the Companies Act, 2013 and for a period longer than the unexpired period of the deposit.

Miscellaneous

• The company shall accept or renew deposit only on submission of an application form, as specified by the company, by the intending depositors. This form shall contain a declaration by the intending depositor that the deposit is not being made out of any money borrowed by him from any other person.
• On acceptance or renewal of deposit, the company shall give a receipt to the depositor of the amount received within 21 days from the date of receipt of money or realization of cheque or date of renewal. The receipt shall be signed by the officer of the company and state the details of the depositor and terms of the deposit, along with the amount of deposit received.
• Register of Deposit
  • A company accepting deposit shall maintain a Register of Deposit at its registered office.
  • Such Register shall contain various details of the depositor, terms of the deposit, duration of the deposit, details of deposit insurance, security and charge created, etc.
  • All these entries shall be made within 7 days from the date of issuance of duly authenticated receipt of deposit by the company.
  • The register shall be maintained in good order for a period of 8 years from the financial year in which the latest entry is made in the register.
• Every company who accepts deposits and to whom the above rules are applicable shall file a return in Form DPT-3 and furnish the information contained therein as on 31st March of that year duly audited by the auditor of the company. Such return shall be filed with the Registrar on or before 30th June every year.
• Every company shall pay a penal interest of 18% p.a. for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

Penalty for contravention

If any company accepting deposits contravenes any of the above rules for which no punishment is provided, the company and every officer who is in default shall be punishable with a fine which may extend to Rs 5,000/- and where the contravention is a continuing one, with a further fine of Rs 500/- for every day after the first day during which the contravention continues.