Introduction

Deposits

With the tremendous growth of trade, commerce and industries, the companies needed more and more funds as the conventional methods of the raising the finance through equity shares and debentures were inadequate. Since this were inadequate, and borrowing funds from public financial institutions and banks were no longer sufficient, they had to resort to taking deposits from the public at comparatively higher rates of interest to meet the requirement of funds for expanding their financial needs.

              Experience with the deposit system initially suffered a lot. Many companies failed to repay the deposits for different reasons. Therefore in order to regulate and control the acceptance of deposits, ‘The RBI Act, 1934 was amended and a new Act called “The Banking Law (Misc. Provisions) Act, 1963 was introduced. Subsequently amendments were made in The Companies Act in 1974 supplemented by The Companies (Accepatance of Deposites)Rule, 1975.

Presently, Chapter V with Section 73 to 76 of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014 regulate the invitation and acceptance of deposits. It prohibits acceptance of deposits except from the members through ordinary resolution or acceptance deposits by ‘’eligible company’’ being a public company, subject to conditions specified in the rules. ( Rules defines ‘Eligible company’ based on net worth and turnover).

What is a deposit ?

Section 2(31) of the Companies Act defines deposit as, “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India;

Inclusive Definition of the word “Deposit” under Rule 2(c) of Companies (Acceptance of Deposit Rules), 2014 made under Chapter V is as under

“Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include-

1. Amounts received from Central or a State Government or any other source, repayment of which is guaranteed by the Central or State Governmnt.

2. Loans from Banking Company of SBI

3. Loans received from certain financial institutions like LIC ,UTI

4. Amounts received from any other company.

5. Amounts received by way of security deposita from the employees.

6. Amounts received by way of subscription to any shares, stock, bond or   debentures etc.

7. Amounts received intrust or any amount in transit.

8. Any amounts brought in by promotors by way of unsecured loans.

9. Amounts received by issue of bonds or debentures secured by mortgage

10. Amounts received from a director or a company or from its shareholders by a private company or a deemed public company.

Deposits are not to be invited without issuing an advertisement. The Central Government in consultation with The RBI of India, prescribe the limit upto which and the manner in which and the conditions subject to which deposits may be invited or aceepted by a company either from public or its members.

It s important to know the difference between deposit and loan. It all depends upon the intention of the parties. The loan is repayable as soon as it is received whereas deposit repayable only after the maturity date fixed.

Who is depositor ?

Rule 2(1)(d) under defines depositor as under

‘Depositor’ means- (i) any member of the company who has made a deposit with the company in accordance with sub-section (2) of section 73 of the Act, or (ii) any person who has made a deposit with a public company in accordance with section 76 of the Act.

Who is an Eligible Company ?

Rule 2(1)(e) of Rules defines eligible company as under :

“Eligible company” means a public company as referred to in sub- section (1) of section 76, having a net worth of not less than one hundred crore rupees or a turnover of not less than five hundred crore rupees and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies and where applicable, with the Reserve Bank of India before making any invitation to the Public for acceptance of Deposits;

Provided that an eligible company, which is accepting deposits within the limits specified under clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary resolution;

“Trustee” means the Trustee as defined in section 3 of the Indian Trusts Act, 1882.

Prohibition on acceptance of deposits from public :

Section 73(1) states that, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under Chapter V.

 Exceptions : Section 73(1) does not apply to

…..a banking company; and

…..a non- banking financial company as defined in the Reserve Bank of India Act, 1934; and……to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

Conditions for acceptance of deposits from Members :

Section 73(2) states that a company may, subject to

(i) the passing of a resolution in general meeting; and

(ii) subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of certain conditions like,

issuance of circular to its members showing the financial position,

filing a copy of the circular with the Registrar,

providing such deposit insurance as may be specified, 

certifying that company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act,

providing security if any for the due repayment of deposit or the interest.

Section 73(3) states that every deposit accepted by a company under sub-section (2) shall be repaid with interest in accordance with the terms and conditions of the agreement referred to in that sub-section.

Section 73(4) states that when a company fails to repay the deposit or part thereof or any interest thereon under subsection (3), the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such nonpayment and for such other orders as the Tribunal may deem fit.

Deposit Repayment Reserve : Section 73(5) states that the deposit repayment reserve account, shall not be used by the company for any purpose other than repayment of deposits.

Deposit accepted before the commencement of the Act :

Section 74(1) states that when, in respect of any deposit accepted by a company before the commencement of this Act, the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter. The company shall, file the details with Registrar along with the arrangements made for such repayment and repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.

Section 74(2) states that the tribunal may on an application made by the company, allow further time as considered reasonable to the company to repay the deposit.

In spite of this, Section 74(3) states that if a company fails to repay the deposit or part thereof or any interest thereon within the time specified, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine. And also, every officer of the company who is in default shall be punishable

Damages for fraud :

Section 75(1) states that when a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 within the time specified in sub-section (1) of that section or such further time as may be allowed by the Tribunal under sub-section (2) of that section, and it is proved that the deposits had 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 sub-section (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. Section 75(2) states that any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.

Acceptance of deposit from public by certain companies :

Section 76(1) states that notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe.

So, as per the provisions of Section 76. Any public company that:-

* Has a networth not less than Rs. 100 crore.

* Has a turnover not less than Rs. 500 crore.

* Has already obtained the consent via Special Resolution in the General Meeting.

* Has already filed the Special Resolution with the Registrar.

Prior to inviting deposits from the public. Certain Requirements

Every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

Terms and conditions as to acceptance of deposits :

Rule 3 of “Companies(Acceptance of Deposits) Rules, 2014” under Chapter V states that, on and from the commencement of these rules,— — No company under sub-section (2) of section 73 and no eligible company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon receiving a notice, within a period of less than six months or more than thirty-six months from the date of acceptance or renewal of such deposit.

Exceptions : A company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than six months from the date of deposit or renewal, as the case may be, subject to the condition that-

(a) such deposits shall not exceed ten per cent of the aggregate of the paid up share capital and free reserves of the company, and

(b) such deposits are repayable not earlier than three months from the date of such deposit or renewal thereof.

Rule 3(3) states that no company referred to in sub-section (2) of section 73 shall accept or renew any deposits if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25 per cent of the aggregate of the paid-up share capital and free reserves of the company.

Rule 3(4) states that no Eligible company shall accept or renew

(a) Any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds ten per cent of the aggregate of the paid-up share capital and free reserves of the company;

(b) Any other deposit, if the amount of such deposit together with the amount of such other deposits, other than the deposit referred to in (a) above, together with the amount of deposits outstanding on the date of acceptance or renewal exceeds twenty-five per cent of aggregate of the paid-up share capital and free reserves of the company.

Rule 3(5) – deposits by Government Companies

No Government company eligible to accept deposits under section 76 shall accept or renew any deposit, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds thirty five per cent. of the aggregate of its paid up share capital and free reserves of the company.

Punishment for contravention of section 73 or section 76 :

(Section 76A, Inserted by the Companies (Amendment) Act, 2015, w.e.f. 29.05.2015)

Section 76A states that, 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 sec. 73 or sec. 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 sec. 73 or sec. 76 or rules made thereunder or such further time as may be allowed by the Tribunal under sec. 73,—

(a) 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 or twice the amount of deposit accepted by the company, whichever is lower, but which may extend to ten crore rupees; and

(b) every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years and with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees.

……..Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully 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.