Compliances

Prohibition on Acceptance of Deposit as per Companies Act, 2013

After the onset of this Act, no Company can accept, invite, or renew deposit under this Act from the public, with some exceptions as mentioned under Chapter V.

Section 73 to 76 of Companies Act 2013^[1], along with Companies Rules 2014 under the Chapter V of the Act provides regulations related to the invitation and acceptance of Deposits. The provisions of Section 73 are applicable to all type of companies. After the initiation of this Act, no company is allowed to invite, accept or renew deposits under this Act from public except in a way mentioned under Chapter V.

What is a Deposit?

The term “Deposit” is generally used in financial transactions, but it can also be used in other situations as well.

Commonly there are two types of deposits in the banking world. These include Demand deposits and time deposits.

• Demand deposit: This refers to adding funds to an account from where the depositor may withdraw his money as per his convenience without any notice.
• Time deposit: This refers to an interest-bearing deposit that is held back by the bank, for a fixed period of time. This time period may vary from 30 days to 5 years. The depositor has to give prior notice to the Bank before withdrawing the funds. Banks also have the authority to charge a penalty on depositors if he asks to withdraw before the fixed period of time.

Who is Depositor?

According to Rule 2(1) (d) under chapter XV depositor means:

1. Any member of a company who has made a deposit with the company in accordance with subsection (2) of section 73 of the Act.
2. Any person who has deposited in any public company in agreement with section 76 of the Act.

Prohibition on Receiving of Deposits from Public

According to Section 73(1) no company is allowed to accept, invite or renew deposits under the Companies Act from the public except in a manner provided under Chapter V. Additionally, there are some exceptions, where Section 73(1) prohibition does not apply. This section does not apply to:

• A Banking Company
• A NBFC defined the Reserve Bank of India Act, 1934.

Exemptions

Chapter V, Clauses (a) to (e) of Section 73(2) contains the details of the exemptions related to Specified IFSC Public Company and Private Companies.

Exemptions to Private Companies

The provision of Accepting Deposits does not apply on Private Companies under the Companies Act, 2013, under the following conditions;

• A company which accepts monies not more than 100% of aggregate of Paid Up Capital plus the Free reserves and securities premium account
• Company which is in its startup phase, i.e. not exceeding 5 years after the incorporation of the company
• The company fulfilling all of the conditions mentioned below;
  • The company should not be a subsidiary or associate of any other company
  • The company’s borrowings from banks or any other financial institution should not be less than twice of its paid up share capital or Rs. 50 crore; whichever is lesser
  • Any company has not committed any default regarding such borrowings at the time of accepting deposits. It is also provided that the addressed to in the Clauses (a), (b) and (c) need to file the details of monies accepted to the Registrar in the prescribed manner

Exemptions to Specified IFSC Public Companies

Furthermore, the provision of Accepting Deposits does not apply upon a Specified IFSC Public Company that accepts from its members the amount not exceeding 100% of the aggregate of the paid up share capital and free reserves. Moreover, such a company is prescribed to file the details of monies accepted to the Registrar in the specified manner.

Conditions for Acceptance of Deposits from Members

A company may accept deposit from its members by fulfilling the requirements specified in the Act, which has been framed by the Central Government of India in consultation with Reserve Bank of India. According to Section 73(2) company may subject to:

• Passing of resolution in a general meeting.
• Issuing a circular to its  members including a statement showing the financial condition of the company, the credit rating obtained, the total number of depositors and any amount due towards deposits in respect to previous deposits accepted by the company
• Depositing an amount which shall not be less than fifteen percent of the number of its deposits maturing during a fiscal year and the year next following.
• Providing as deposit insurance as may be prescribed.
• Certifying the fact that the company has not committed any default in the repayment of deposits accepted either before or after the launch of this Act or payment of interests on such deposits.
• Providing security for the due repayment of the amount of deposit.

According to section 73(3), every acceptance of Deposits by a company under subsection (2) shall be repaid with interest in accordance with terms and conditions of the agreement referred to in that sub-section. If the company fails to repay the deposit, then according to section 73(4), the depositor concerned can apply to the Tribunal for an order directing the company to pay the due amount or any loss or damage caused due to the company’s negligence.

Benefits for the Depositors

The provisions of Companies Act 2013 read with rules made under Chapter V, has brought several spruced up aspects to protect the interest of depositors. The overall essence of the provisions discussed above is as follows:

• The company may acceptance of Deposits from its members only after passing a resolution in general meeting and subject to conditions as may be advised in the Rules including Credit rating, Deposit insurance, etc.
•  Public companies may accept deposits if it has a net worth of Rs 100crore (INR 1 billion) or turnover of Rs 500crore (INR 5billion) and which has acquired the prior consent of the Company in the general meeting by means of a special resolution.
•  No eligible company or a Company under subsection(2) of section 73 can issue a circular or advertisement regarding the invitation of secured deposits until the Company has appointed one or more deposit trustees, which will create a sense of security for the depositors.
• If the Company fails to repay the deposit, the depositor may apply to the Tribunal, for an order which will direct a Company to pay for the due money or any loss or damage caused due to the non-payment of the deposit.

Conclusion

As per this Act, no Company is allowed to acceptance, invite or renew deposits from the public. Furthermore, the commencement of this Act has brought many benefits to the depositors. It has generated a sense of security in the minds of depositors about the money they have deposited. On the other hand, companies will have to adhere to new regulations and act accordingly. If a company fails to do so, it will have to face some serious implications.