Jun 15, 2014

Deposits Under Companies Act, 2013: New Rules Change the Game

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The Companies Act, 2013(“Act of 2013”), which had been in the offing for quite some time, and has seen much discussion in the recent past, has recently been notified by the Government of India. Alongside this, the Ministry of Corporate Affairs (MCA) has also notified the rules under the notified provisions of the Act of 2013. The notified sections in fact replace the corresponding sections of the Companies Act, 1956 (“Act of 1956”), although some provisions of the latter still remain in force.

This article discussed the concept of deposits as provided under Chapter V of the Act of 2013 and the Companies (Acceptance of Deposits) Rules, 2014, and how these may have an impact on the companies post the enactment.

Chapter V of the Companies Act, 2013 (sections 73 to 76), except for section 75 and provisions relating to, or involving the National Company Law Tribunal, have been notified to come into effect from 1st April 2014. The Companies (Acceptance of Deposits) Rules, 2014 (“Deposits Rules”) have been legislated thereunder, to provide for the nittygritties relating to the acceptance and treatments of deposits under the Act.

Acceptance of Deposits

Deposits as understood in general parlance, are the funds procured by any company in the form of a loan etc. for repayment with interest at a future date. The Companies Act, 2013 defines these as amounts including any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories as may be prescribed in consultation with the Reserve Bank of India. The Act of 2013, and the Deposits Rules provide for specific conditions subject to which a company may accept deposits, a detailed definition of ‘deposits’, and for specific exclusions from the definition.

 

As per the provisions of the Act, deposits may be accepted by a company either from its members or persons other than its members i.e. the general public. However, a private company cannot accept deposits from the public, being one of the very conditions to its incorporation as a private company under the Act. Further, only those public companies may accept deposits from the public in which the net worth or turnover is equal to or more than the prescribed net worth or turnover.

As per Section 73 of the Act, a company, whether public or private, may accept deposits from its members after passing of a resolution in general meeting of the company, subject to the fulfillment of the terms and conditions prescribed under the section and the Rules.

These provisions are however not applicable to:

  • banking companies
  • non- banking financial companies as defined in the Reserve Bank of India Act, 1934 registered with the Reserve Bank of India;
  • housing finance companies registered with the National Housing Bank established under the national Housing Bank Act, 1987; and
  • companies specified by the Central Government in consultation with the Reserve Bank of India (“RBI”).

Further, in accordance with the provisions of Section 76 of the Act, only a public company having a minimum net worth of Rupees One Hundred Crore and/ or a minimum turnover of Rupees Five Hundred Crore shall be eligible to accept deposits from the public, subject to the prescribed conditions with to procedure, disclosure and compliance.

Deposits Defined

The Deposits Rules provide a definition of the term ‘deposit’ as including any receipt of money by way of deposit or loan or in any other form, by a company, but not including:

Here it is important to note that while exclusions and exemptions were also provided under the Act of 1956, the Act of 2013 sees many departures from the erstwhile provisions of law relating to deposits, providing for more stringent regulations, conditionalities and penal provisions.
  • any amount received from:
    • the Central Government or a State Government,
    • any other source whose repayment is guaranteed by the Central Government or a State Government, or
    • a local authority, or
    • a statutory authority constituted under an Act of Parliament or a State Legislature ;
  •  any amount received from:
    • foreign Governments,
    • foreign or international banks,
    • multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth DevelopmentCorporation and International Bank for Industrial and Financial Reconstruction),
    • foreign Governments owned development financial institutions,
    • foreign export credit agencies,
    • foreign collaborators,
    • foreign bodies corporate and foreign citizens,
    • foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;
  • any amount received as a loan or facility from:
    • any banking company or
    • the State Bank of India or any of its subsidiary banks or
    • a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or
    • a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934)
  • any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934);
  • any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India;
  • any amount received by a company from any other company;
  • any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for; 

Here the provision consists of an explanation clarifying that:

  • if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit (without prejudice to any other liability or action)
  • any adjustment of the amount for any other purpose shall not be treated as refund
  • any amount received from a person who, at the time of the receipt of the amount, was a director of the company. Provided that the director from whom money is received, furnishes a declaration in writing to the company at the time of giving the money, to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others
  • any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking paripassu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within five years. Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
  • any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;
  • any non-interest bearing amount received or held in trust;
  • any amount received in the course of, or for the purposes of, the business of the company,-
    • as an advance for the supply of goods or provision of services accounted for provided that such advance is appropriated against supply of goods or provision of services within a period of 365 days from the date of acceptance of such advance.

Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, this time limit shall not apply

    • as advance received in connection with consideration for property under an agreement or arrangement, provided that such advance is adjusted against the property in accordance with the terms of agreement or arrangement; 
    • as security deposit for the performance of the contract for supply of goods or provision of services; 
    • as advance received under long term projects for supply of capital goods except those covered under item (ii) above:

Provided that if the amount received under items (i), (ii) and (iv) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under the Deposits Rules. For these purposes, the amount referred here shall be deemed to be deposits on the expiry of 15 days from the date they become due for refund.

  • any amount brought in by the promoters of the company by way of unsecured loan in pursuance of thestipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely:-
  • the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
  • the loan is provided by the promoters themselves or by their relatives or by both; and
  • the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;
  • any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act.

Any amount-

  • received by the company, whether in the form of installments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, shall be treated as a deposit;
  • any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer, shall be treated as a deposit.

Here it is important to note that while exclusions and exemptions were also provided under the Act of 1956, the Act of 2013 sees many departures from the erstwhile provisions of law relating to deposits, providing for more stringent regulations, conditionalities and penal provisions. For example, in the case of bonds and debentures, such instruments could not be considered as ‘deposits’ ifsuch bonds or debentures were secured by the mortgage of any immoveable property of the company. However, under the Act of 2013, the bonds or debentures issued by the company should be secured by a first charge or a charge ranking paripassuwith the first charge on the assets of the company (excluding the intangible assets) or such bonds ordebentures should be compulsorily convertible into shares of the company within 5 (five) years, for the company to exempt the amounts accepted from the category of deposits. There can also be seen, a departure in the convertibility nature of the debentures, the amounts for which they shall be exempted from being deposits. In such a scenario questions that arise are whether unsecured bonds or debentures issued by a company shall be exempt from falling under the category of ‘deposits’ under the Act of 2013? Whether the issuance of optionally convertible debentures to a company will be treated as deposits?

Another example of change in the exemptions is seen where the Act of 1956 did not provide for a time period, whereas under the Act of 2013, an amount received as securities application money by the company shall not be treated as a deposit, only if the securities are allotted within 60 days of receipt of such amount or if theamount is refunded within the period of 15 days after the completion of these 60 days. Thus the companies are now mandatorily to make allotment of securities against the share application money received by them within a maximum period of 60 days.Another ambiguity in this respect remains about whether amounts received from foreign entities, against the allotment of securities, but pending allotment beyond 60 days of receipt, will be treated as deposits under the Act of 2013.

Immediate Impending Action on Companies

Many companies have already accepted deposits and for such companies, the Act of 2013 and the Deposits Rules cast duties with respect to the amount of deposit or part thereof or any interest due on the amounts that remain unpaid on the commencement of the provisions relating to deposits under the Act of 2013, or becomes due at any time thereafter. The Act provides that such companies will now have to file a statementwith the Registrar of Companies, with respect to all deposits accepted by the company and sums remaining unpaid along with the interest payable thereon along with the arrangements made for such repayments. Additionally, it is also mandatory that such amounts shall be repaid by the company within one year from such commencement or from the date on which such payments are due whichever is earlier. However, one question that comes to the mind in such a scenario is whether the deposits accepted under the Act of 1956 shall also be treated as deposits under the Act of 2013?

Conclusion

The provisions relating to deposits as contained in the Companies Act, 2013 incorporate many changes, also including new requirements such as that for the appointment of debenture trustees and the company being required to obtain deposit insurance. Making the activity of accepting deposits more safe and transparent for investors, the Act now alters the provisions relating to this method of capital raising, nonetheless leaving some ambiguities, and confusions due to issues of interpretation, such as whether amounts accepted before 1st April 2014, not qualifying as deposits under the Act of 1956, but so qualifying as deposits under the Act of 2013, will be treated as deposits under the newAct. However the requirements for increased disclosures, credit rating, security for the deposits accepted, obtaining deposit insurance, etc. thereby making the process of acceptance of deposits costlier, as well as increased thresholds for a public company to be eligible to accept deposits, may force companies to consider other alternatives such as taking loans from banks instead of accepting deposits. Apart from including more details in the circular, a company accepting deposits is now also required to obtain credit rating at regular intervals during the tenure of the deposit.

 

Disclaimer: The views expressed in this article are solely the opinion of the author.

AUTHORED BY

Mr. Ankit Singhi

Head of Corporate Affairs & Compliances

ACS, LLB

ankit@indiacp.com

+91 9910888952

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