Deposits under Companies Act 2013
Companies (Acceptance of Deposits) Rules, 2014 made under Chapter V of the Companies Act of 2013 regulates the invitation and acceptance of deposits. The term ‘deposit’ is common terminology when it is read along with the activities of a bank or a financial institution. However, it is not limited to the operations of the bank; the term is also having significance related to the requirements of working capital or raising funds.
The principle rules have observed various amendments and the most recent one was made on 29th June 2016 and consequently the rule is termed as Companies (Acceptance of Deposits) Amendment Rules, 2016.
The sections deals with deposits in the Companies Act of 2013 are Sec 73, 74, 75 & 76 which covers situations for accepting Deposits, conditions for accepting deposits from members, conditions for accepting deposits from public, and punishment for contravention etc. Invitation, acceptance & repayment of deposits of the companies described in of the companies Act, 2013 Sec.73 to 76
Companies require funds for expanding their business activities due to comprehensive business environment.
They can raise fund from different sources i.e. borrowing from bank & financial institution leaving the company under management & control of those lending institutions.
It is worth to note here that a company incorporated as a Private Limited Company is strictly prohibited to accept deposit from public.
Deposits include any receipt of money by way of deposit or loan or in any other form by a company. It can be avail from its shareholders, Public, or from other companies. Chapter V. Sec.73 to 76a of the companies Act discuss about the acceptance of Deposits
According to the Rules
The term deposit do's not include:
1) Amount received from Central, State Govt., local authorities, body corporate, local bodies constituted under an Act of Parliament/State legislature,
2) Amount received from foreign Govt. or foreign Institution subject to Foreign Exchange Management Act 1999 and their Rules
3) Amount received as loan from Banking company, Banking Institutions, notified by the central Govt. in BRA ,1949, Scheduled Banks, Co. Op. banks, Public Financial institutions, Insurance companies defined in RBI Act.
4) Amount received against any instrument issued according to the guidelines/notification issued by RBI
5) Amount raised from Directors, or raised by issue of both equity and preference shares.
6) Amount received from Directors of the company
7) Any amount raised by issue 1st charge secured bonds / debentures
8) Any amount received from an employee not exceeding his annual salary in the nature of non- interest bearing nature.
9) Any amount accepted by a nidhi company from a person with an offer to give returns in cash or in kind and completion period specified in that promise.
As per the Act, the companies those are eligible for accepting deposits from public are only the eligible public companies, which are having net worth of minimum Rs.100 crore or a minimum turnover of Rs.500 Crore. Also, the acceptance of deposits from the public is subject to certain conditions.
Both private and public limited companies can accept deposits from its directors without any limit but will not come under the scope of the term ‘deposits’.
Both the business structures shall also accept deposits from its members subject to the conditions mentioned in the Act.
According to Section (73) of the Act, the conditions for accepting deposits from the members are described as below:
- Ordinary resolution in the General Meeting
- A circular should be given to the members. Such Circular should include information in detail regarding the financial position, total amount due along with the total number of depositors and the credit rating of the company.
- The copy of the circular to be submitted to ROC within 30 days
- A separate bank account with a scheduled bank to be maintained as deposit repayment reserve account
- Deposit insurance policy to be obtained
- Assurance by the company that NO default in repayment of deposit
- A security to be created in favor of the depositor. If it is unsecured, then it should be notified in every Circular.
According to Section (76) of the Act, the conditions for accepting deposits from the public for eligible public companies are described as below:
- A public company having net worth of Rs.100 Crore or turnover of Rs.500 Crore can only accept deposits from public
- A special resolution in the General Meeting to be passed
- Filing of the circular with ROC
- The company shall disclose the credit rating at the time of inviting deposit and the shall be obtained every year during the tenure of the deposit
- Create a charge of an amount not less than the amount of deposits within 30 days.
- Advertisement to be placed in two news papers detailing such Deposit
- Maintenance of Deposit repayment reserve account
A detailed procedure for accepting deposits by an eligible public company is described as below:
Procedure for acceptance of deposits:
- Every eligible company indenting to invite deposit from its members or from public shall issue a circular to all its members by registered post with AD or speed post or in electronic mode or publish the circular in the form of an Advt. in Form No.1
- Obtained prior consent in general meeting by a special resolution subject to the rules as may be prescribed in consultation with RBI. In other words draft circular or form of Advt. should be approved by board and must be signed by majority of directors of the company.
- Issuing Circular regarding financial statement, credit rating, total no. of deposits, amount due towards previous deposits file the said resolution with registrar of companies before inviting public for acceptance of deposits to its members.
- Filing a copy of circular with relevant statements with ROC within 30 days before the date of issue of circular.
- The circular or form of Advt. is valid until the expiry of six months from the date of closure of the financial year in which it is issued or until the date on which the financial statement laid by the company in the general meeting.
- Deposit a sum of amount not less than 15% of the deposits during current and next FY deposit in nationalized bank with a separate account called Deposit repayment reserve account
- Provide deposit insurance according to the terms and conditions
- Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act.
- Any security providing or not for the repayment of the deposit amount strictly mentioned in every circular. Forms, advertisements etc.
- Payment received before the commencement of the Act, file a statement regarding the details with register
Limits of Acceptance of deposits:
- Acceptance or renewal of deposits from members: In the case of non eligible company under Sec:73 (2) of the companies Act 2013, shall not exceeds 25% of the aggregate paid up share capital and free reserve of the company. 25% of the limit is to be computed considering such deposits along with current deposits outstanding from the members on the date of acceptance or renewal of such deposits. In case of eligible company In pursuance to sec:76, the limit is reduced from 25% to 10%.
- Acceptance or renewal of deposits from public: in the case of eligible company under Sec:76, shall not exceeds 25% of the aggregate paid up share capital and free reserve of the company. 25% of the limit is to be computed considering such deposits along with current deposits outstanding from the public on the date of acceptance or renewal of such deposits. In case of Govt. company In pursuance to sec:76, the maximum limit is increased from 25% to 35 %.
Interest and brokerage on deposit:
- Interest and brokerage to authorized person shall not exceed the maximum rate prescribed by RBI
- If any time depositer request for repayment after six month and before the maturity date, the rate of interest payable by the company shall be reduced by 1% from the contract rate
- If the company permits the depositer to renew the deposit before its maturity for availing higher interest rate the company shall pay interest at higher rate for a period longer than the un expired period of the deposit
- A panel interest rate of 18% /PA shall be payable for the overdue period in case of matured and remaining unpaid deposits
- Only authorize person will receive the deposit on behalf of the company and will be entitled to collect brokerage
Borrowers enter in to a contract at least 30days before the issue of circular/ form of Advt. for providing deposit insurance.
Insurance coverage will be full amount if the deposit amt. is less than Rs.25000/-. And in case of higher amount minimum coverage of 25000 will be provided.
Total Insurance coverage shall be updated from time to time According to the maturity or acceptance of the deposit. Insurance premium shall be incurred by the company.
Appoint one or more trustees for creating security for the deposit and execute a trust deed in form 2 at least 7days before issuing the circular/ in the form of Advt.
The advt. should contain consent of deposit trustees. The company shall not withdraw the trustees after issue the circular and before the expiry of his term otherwise make a consent of all directors in a meeting.
Punishment for Contravention
The breaking of the agreement or any conditions as per the Act shall be punishable under Section 75 of the Act.
If the company made any defaults then every officer of the company who are associated shall be liable.
The depositors are eligible to file a class action suit again the company for recovering their proceeds.