Acceptance of Deposits under Companies Act, 2013

Acceptance of deposits is one of the important methods through which companies raise funds. However, since deposits involve public money and investor confidence, the law imposes strict controls on how companies can invite, accept, and manage such deposits. The provisions governing deposits are primarily contained in Sections 73 to 76A of the Companies Act, 2013 read with the Companies (Acceptance of Deposits) Rules, 2014.

These provisions aim to balance two competing interests—facilitating corporate funding and ensuring protection of depositors. The law, therefore, regulates who can accept deposits, from whom they can be accepted, under what conditions, and the consequences of non-compliance.

Meaning of Deposit

The Companies Act, 2013 adopts a broad approach in defining deposits. A deposit includes any amount of money received by a company by way of deposit, loan, or in any other form as may be prescribed. However, the definition is largely clarified through exclusions, which specify what will not be treated as deposits.

Amounts Not Treated as Deposits

Certain categories of receipts are excluded from the definition of deposits to facilitate genuine business and financial transactions. These include:

• Amounts received from the Central Government, State Government, or any source where repayment is guaranteed by the government. Such receipts are considered secure and do not require the protection applicable to deposits.
• Funds received from foreign governments, international banks, or multilateral financial institutions, subject to compliance with FEMA, 1999.
• Loans or financial assistance from public financial institutions, scheduled banks, or insurance companies.
• Borrowings from banking companies, including the State Bank of India and its subsidiaries.
• Amounts received by a company from another company, commonly known as inter-corporate loans.
• Money raised through commercial papers or other instruments in accordance with RBI guidelines.
• Share application money or advance towards allotment of securities, provided that securities are allotted within 60 days or the amount is refunded within 15 days thereafter.
• Non-interest bearing deposits received from employees not exceeding their annual salary.
• Amounts held in trust or received without interest.
• Amounts received from directors, provided a declaration is given that such funds are not borrowed.
• Funds raised through secured debentures or bonds.
• Unsecured loans brought in by promoters in compliance with conditions imposed by lenders.
• Deposits accepted by Nidhi companies in accordance with Section 406.
• Advances received in the course of business, such as for supply of goods or services, provided they are adjusted within 365 days.
• Security deposits for performance of contracts.

These exclusions reflect the intention of the law to distinguish between genuine commercial transactions and deposit-like arrangements.

Applicability of Deposit Provisions

The provisions relating to deposits apply to all companies, whether private or public, except:

• Banking companies
• Non-Banking Financial Companies (NBFCs)
• Any other company notified by the Central Government in consultation with the Reserve Bank of India

These entities are governed by separate regulatory frameworks and are therefore excluded from the application of these provisions.

General Prohibition on Acceptance of Deposits

Section 73 lays down the fundamental rule that no company shall invite, accept, or renew deposits from the public except in accordance with the provisions of the Act. This establishes a general prohibition, subject to limited exceptions.

Companies are primarily allowed to accept deposits from their members, subject to strict compliance requirements. Acceptance of deposits from the public is permitted only to a specific class of public companies.

Acceptance of Deposits from Members

Both private and public companies are permitted to accept deposits from their members, provided certain conditions are fulfilled.

Essential Conditions

A company inviting deposits from its members must comply with the following:

• Approval must be obtained through a resolution passed in a general meeting. This ensures that members are informed and have consented to the acceptance of deposits.
• The company must comply with the Companies (Acceptance of Deposits) Rules, 2014, which prescribe detailed procedural and disclosure requirements.
• A circular must be issued to members containing material information, including:
  • Financial position of the company
  • Credit rating obtained
  • Total number of depositors
  • Amount due towards existing deposits
  • Nature of deposits (secured or unsecured)
  • Purpose of raising deposits
  • Details of deposit insurance
• The circular must be filed with the Registrar of Companies at least 30 days before its issue.

Deposit Repayment Reserve

A significant safeguard introduced under the law is the requirement to maintain a Deposit Repayment Reserve Account. The company must deposit at least 20% of the deposits maturing during the following financial year in a scheduled bank account before 30th April each year. This ensures that funds are available for timely repayment.

Additional Conditions

• The company must certify that it has not defaulted in repayment of deposits or interest. If a default has occurred, deposits cannot be accepted unless the default is rectified and a period of five years has elapsed.
• Deposits must be secured. If they are unsecured, this must be clearly stated in all relevant documents.

Limit on Deposits from Members

The law imposes quantitative limits to prevent excessive reliance on deposits. A company cannot accept deposits from its members exceeding 25% of the aggregate of its paid-up share capital and free reserves.

This limit applies uniformly, including to private companies.

Acceptance of Deposits from Public

Section 76 permits only certain public companies, referred to as eligible public companies, to accept deposits from the public.

Eligibility Criteria

A public company must satisfy the following conditions:

• Net worth of at least ₹100 crore, or
• Turnover of at least ₹500 crore

Additionally, the company must obtain consent of its shareholders through a special resolution and file the same with the Registrar.

Additional Requirements

Eligible public companies must comply with the following:

• Obtain a credit rating from a recognised credit rating agency at the time of inviting deposits and annually thereafter.
• Inform the public about the credit rating to enable informed decision-making.
• Create a charge on its assets within 30 days of accepting deposits, where deposits are secured.

Limits on Public Deposits

The law prescribes specific limits on the amount of deposits that can be accepted:

• Deposits from members: Not exceeding 10% of paid-up share capital and free reserves.
• Deposits from the public: Not exceeding 25% of paid-up share capital and free reserves.
• Government companies: May accept deposits up to 35% of paid-up share capital and free reserves.

These limits operate at any point of time and are designed to control financial exposure.

Key Conditions Governing Deposits

Apart from eligibility and limits, certain substantive conditions govern deposits:

Period of Deposit

Deposits cannot be accepted for a period less than six months or more than thirty-six months. However, short-term deposits repayable after three months may be accepted up to 10% of paid-up capital and free reserves.

Rate of Interest and Brokerage

The rate of interest payable on deposits must not exceed the maximum rate prescribed by the Reserve Bank of India for NBFCs. Similarly, brokerage can be paid only to authorised persons and within prescribed limits.

Protection of Depositors

In case of any adverse change in the credit rating of the company, depositors must be given an option to withdraw their deposits without penalty. This provision enhances investor protection.

Non-Exempt Deposits: Important Clarifications

Certain amounts that may initially appear to be outside the scope of deposits are treated as deposits if specific conditions are not fulfilled. These include:

• Share application money not allotted within 60 days and not refunded within the next 15 days.
• Advances received for goods or services not adjusted within 365 days.
• Amounts received from relatives of directors.
• Amounts received from members by private companies.

Further, any arrangement where money is received with a promise of returns, whether in cash or kind, after a specified period is treated as a deposit. This broad definition prevents misuse of alternative structures to circumvent the law.

Repayment of Deposits

Section 74 deals with deposits accepted before the commencement of the Companies Act, 2013 where any amount or interest remains unpaid.

Obligations of the Company

• The company must file a statement with the Registrar detailing all deposits and amounts outstanding.
• Repayment must be made within three years from the commencement of the Act or before the due date, whichever is earlier.

Extension by Tribunal

If the company is unable to repay within the prescribed period, it may apply to the Tribunal for extension. The Tribunal considers factors such as financial position and quantum of deposits before granting relief.

Penalties for Non-Repayment

Failure to repay deposits attracts severe penalties:

• The company may be fined between ₹1 crore and ₹10 crore.
• Officers in default may face imprisonment up to seven years or a fine ranging from ₹25 lakh to ₹2 crore, or both.

Damages for Fraud

Section 75 imposes stringent liability where deposits are accepted with fraudulent intent.

In such cases:

• Officers responsible are personally liable without limitation.
• Punishment under Section 447 for fraud applies.
• Depositors may initiate legal proceedings, including class actions, to recover losses.

This provision underscores the seriousness of misuse of deposit funds.

Punishment for Contravention

Section 76A provides for penalties where a company contravenes provisions relating to deposits or fails to repay them.

• The company is liable to a fine of at least ₹1 crore or twice the amount of deposits accepted, whichever is lower, which may extend up to ₹10 crore.
• Officers in default are punishable with imprisonment up to seven years and fines ranging from ₹25 lakh to ₹2 crore.
• In cases involving intentional misconduct or deception, liability under Section 447 is attracted.

Conclusion

The law relating to acceptance of deposits under the Companies Act, 2013 reflects a comprehensive regulatory framework designed to ensure financial discipline and protect depositors. While deposits serve as an important source of funding for companies, the risks associated with misuse of such funds necessitate strict regulation.

The provisions strike a careful balance by allowing companies to raise funds while imposing safeguards such as disclosure requirements, limits, reserve maintenance, credit ratings, and stringent penalties for non-compliance. The emphasis on transparency, accountability, and depositor protection demonstrates the legislative intent to maintain trust in the corporate sector.