WHAT ARE DEPOSITS?[1]

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.

Deposit: It Includes any receipt of money by way of deposit or loan or in any other form by a company but does not include:[2]

  1. Any amount received by CG/SG/LA/SA
  2. Any amount received from foreign government/foreign bank/foreign company.
  3. Any amount received as a loan from any banking company/ S.B.I / P.F.I/ Insurance company/ Schedule bank.
  4. Any amount received against issue of commercial paper/Subscription to any securities/ issues of bonds or debentures.
  5. Any amount received by a company from any other company.
  6. Any amount received from a person who at time of the receipt of the amount was a director of the company or relatives of director of the private company.
  7. Any amount received from an employee of the company not exceeding his annual salary.
  8. Any amount received as advance for the supply of goods/services.
  9. Any amount bought from the promoters or Nidhi’s company.

CASE: VIJAY KUMAR GUPTA V. EAGLE PAINT 1999[3]: it was observed that the amount borrowed shall be included in definition of Deposit subject to certain exceptions.

LIMITS FOR ACCEPTING THE DEPOSITS:

  1. ELIGIBLE COMPANY: from its members upto 10% of paid-up share capital, free reserves & security premium account and from any person upto 25% of paid-up share capital, free reserves & security premium account.
  2. GOVERNMENT COMPANY upto 35% of paid-up share capital, free reserves & security premium account.
  3. PUBLIC COMPANY (NON-ELIGIBLE COMPANY) from its members upto 25% of paid-up share capital, free reserves & security premium account.
  4. PRIVATE COMPANY from its members upto 100% of paid up share capital, free reserves & security premium account.
  5. Prohibition on Acceptance of Deposits from Public[4]
  6. No company shall invite, accept and renew deposits on or after commencement of Companies Act, 2013
  7. Except in manner provided in Chapter-V.
  8. Not applicable to banking companies
  9. Company (private or public) can accept deposits from members only
  10. After passing resolution in General Meeting.
  11. Subject to fulfilment of following conditions.

Conditions Required to be fulfilled:

  1. 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,
  2. Filing of circular with ROC in form DPT-3 within 30 days from the date of issue,
  3. 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.
  4. Providing deposit insurance,
  5. Certificate that company has not defaulted in repayment of deposit,
  6. Providing securities, if required, including creation of charges. (It may partly secured and partly unsecured)
  7. Every deposit shall be repaid with interest in compliance of the terms and conditions of the Agreement.
  8. In case of default of Sub-section-3, depositor can approach the tribunal.
  9. 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.

Repayment of Deposits[5]., 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 have 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.

Damages for Fraud[6]

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.

Acceptance of Deposits from Public by Certain Companies[7]

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

Conditions Required under Section 73 (2) (discussed above),

  • Eligibility to Accept deposits under this Section
  • Net worth not less than Rs. 100 Crore,

Or

  • Turnover not less than Rs.  500 Crore and
  • 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.

Punishment for contravention of Section 73 or Section 76.[8]

“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,

  1. 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
  2. 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 willfully 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 6months then:

  1. Such deposits shall not be exceed10% of paid-up share capital and free reserve and
  2. Such deposit shall not be repayable before 3 months.
  3. Quantum of Deposits: The eligible company shall not accept deposits.
  4. From Members: Exceeding 10% of Paid-up Share Capital, Free Reserves and Securities Premium Account
  5. From other than members: Exceeding 25% of Paid-up Share Capital, Free Reserves and Securities Premium Account
  6. 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.
  7. 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:
  8. (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. 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

Not Every loan is Deposit:

Though definition of ‘deposit’ is very wide, there is clear distinction between a ‘loan’ and deposit.

  1. The terms ‘deposits and ‘loan’ may not be mutually exclusive, but nonetheless, in each case, intention of parties and circumstances must be considered. Distinction between deposit and lending has been made in Limitation Act. Hence, distinction between loan and deposit is fine but appreciable.[9]
  2. In both borrowing and deposit, there is relationship of debtor and a creditor. But in case of a deposit, delivery of money is usually at the instance of giver and it is for the benefit of the person who deposits the money. In the case of loan, however, it is the borrower at whose instance and for who’s need the money is advanced.[10]
  3. Deposit is something more than a mere loan of money. It will depend on facts and circumstances of each case.[11]

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.

he companies, for the purpose Chapter-V, are categorized 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.

REFERENCES:

  1. https://ca2013.com/section-231-deposit
  2. https://www.compliancesupport.in/deposits-under-companies-act-2013-blog-details/MjJjaE4xbzFIU1REQjdlc3sydzozeG1UcG0
  3. https://taxguru.in/company-law/deposit-companies-act-2013.html
  4. https://www.bcasonline.org/referencer2015-16/other%20laws/Company%20Law/acceptance_of_deposits_for_company.htm
  5. https://virtualaw.in/2020/06/22/dissecting-the-deposits-under-companies-act/
  6. https://www.taxmann.com/bookstore/bookshop/bookfiles/1-Company%20Law%20RR%20(Datey)%20Title%207th%20Sep19%20-%20sample%20chapter.pdf

[1] By Vaishali Bhugra, 4th year B.COM L.L.B, University of Petroleum and Energy Studies Dehradun.

[2] Section 2(31) of The Companies Act 2013.

[3] (1999) 95 comp cas 810 (CLB)

[4] Section 73 of The Companies act 2013.

[5] Section 74 of the Companies Act 2013.

[6] Section 75 of The Companies Act 2013.

[7] Section 76 of The Companies Act 2013.

[8] Section 76A of The Companies Act 2013.

[9] Durga Prasad Manderia v. Registrar (1987) 61 Comp Cas 479 (Bom HC).

[10] Ponnwatt India Ltd. v. Registrar (1987) 62 Comp Cas 112 (Bom HC).

[11] Ram Janki Devi v. Juggilal Kamlapat AIR 1971 SC 2551 (1971) 1 SCC

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