Practical aspects of acceptance of deposits by Private Companies and Non-Eligible Companies

Background:
Every business requires funds, and all funds cannot be owned funds. Borrowing is an essential aspect of any business and debt servicing cost is a very common factor in any Company’s financial statements. A Company which is able to borrow, and is regular in servicing its debt with residual profits in its hand, can be said to be in good financial health. All forms of businesses, whether a Proprietorship or Partnership, borrow money, but the quantum of borrowing will always depend on the ability of the business to provide security for the money borrowed. In a corporate form of organisation, a deposit2 accepted by the Company is a way of borrowing money which is basically unsecured in nature. It is also an area where most violations, technical or otherwise, occur. In the following paragraphs, we have tried to answer questions pertaining to regulations on acceptance of deposits and related compliance.

1) What is a Deposit?

Section 73 of the Companies Act 2013 (Referred to hereinafter as the “Act”) has used the word Deposit but the same has been explained in Rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules 2014. (Referred hereinafter to as the “Rules”). According to the definition in the said Rule, “Deposits” includes any receipt of money by way of deposit or loan, or in any other form by a Company. From this inclusive definition it appears that, to tag any receipt of money as “deposit” the real intention of parties, the Company and person making deposit has to be ascertained. For better clarity, it is always advisable to have this understanding documented and signed as this will provide strong defence in case of objections or doubts raised in respect of such transactions. This is so because the definition in Rule 2 (1) (c) specifically excludes certain transactions described therein from the purview of deposits and thus they do not require compliance with the provisions of the Act3.

2) What are the specific pre-conditions applicable to Private Limited Companies pertaining to acceptance of Deposits:

In terms of provisions of section 73 of the Act, a Company, whether private or public, can accept deposits from its members only subject to compliance of the Rules. Deposits from persons other than members can now be accepted by “Eligible Companies” only. In terms of provisions of section 76 read with definition of an Eligible Company (Rule 2 (1) (e)), only a Public Company with net worth of Rs.100 crore or more or turnover of Rs.500 crore or more, and which has passed a Special Resolution at a meeting of its members, and has filed the same with the Registrar, may accept deposits from the public, these Companies are referred to as the Eligible Companies. Thus Private Companies and “Non-Eligible Companies” can accept deposits from members only. Pre-conditions for accepting deposits from members:

a) Amount as deposit can be accepted from person whose name appears on the Register of Members (RoM) of the Company, if a person whose name appears on RoM has transferred his shares but the transfer is pending registration, then the Company should take steps to re-pay deposits which it has accepted from such members;

b) Company must pass an ordinary resolution at a meeting of its members seeking authorisation for acceptance of deposits and should file the same with the Registrar. It is advisable that the Company should pass the res olution at every Annual General Meeting instead of a blanket resolution without any defined validity.

3) What is the quantum of amount that can be accepted as a Deposit by Private Companies and Non-Eligible Companies?

Non-Eligible Company
In terms of Rule 3 (1) (a) of the Rules, following are the limits for Companies for acceptance of deposits:

(a) D eposits which are secured or unsecured but amount accepted, is not payable on demand or is not payable before 6 months from the date of acceptance or after 36 months thereof including renewal, an amount not exceeding 10 % of the aggregate of paid up share capital and free reserves,

Provided that such deposits are not payable within 3 months of acceptance or renewal

In terms of Rule 3 (3) of the Rules, following are the limits on Companies for acceptance of deposits:

(b) Total deposits including other deposits and renewed deposits from members only shall not exceed 25% of the aggregate of the paid-up share capital and free reserves of the company;

Private Company:
(c) In terms of specific exemption vide Notification MCA GSR 464 (E) dated June 05, 2015, a Private Company can accept deposits ONLY from its Members upto 100% of its Paid up Capital and Free Reserves provided it files with the Registrar information about such acceptance.

Note: The above limit of 25% or 100% as the case may be should be reckoned on the basis of last audited Financial Statements adopted by the members

4) What are the Procedural aspects for Private Companies/ Non-Eligible Companies in the course of acceptance of Deposits?

Following are the Procedural requirements to be complied with:

(i) Hold a Board meeting for proposing acceptance of deposit and issue of notice for holding general meeting for obtaining approval of the shareholders for the proposal;

(ii) Hold general meeting and seek approval of the shareholders by means of a special or ordinary resolution for authorising the Board to accept deposits and file a copy of such resolution within 30 days of date of passing with RoC in e-Form MGT 14;

(iii) Hold the Board meeting to obtain the approval for the draft Circular in Form DPT-1 of the Rules and the get the draft Circular signed by majority of the directors of the Company, and file a copy of such signed circular with the Registrar of Companies in Form GNL-2 for registration; ensure that the circular issued for acceptance of deposits is sent by electronic mail or registered post A.D or speed post to Members only;

(iv) Appoint Deposit Trustees for creating security for the secured deposits by executing a deposit trust deed in Form DPT-2 at least seven days before issuing the circular;

(v) Enter into contract with Deposit Insurance services providers at least thirty days before the issue of the circular;

(vi) Issue deposit receipts in the prescribed format and under the signature of an officer duly authorised by the Board, within a period of two weeks from the date of receipt of money or realisation of the cheque.

(vii) Make entries in the Register of deposits accepted rules within seven days from the date of issuance of the deposit receipt and arrange to get such entries authenticated by a director or secretary of the Company or by any other officer authorised by the Board.

(viii) File deposit return in Form DPT-3 by furnishing information contained therein as on the 31st day of March, duly audited by the auditors before 30th June every year.

5) Following question was posed to us by parents of a young IIT graduate which will highlight the problem that the provision creates.

Q : My Son is an IIT graduate from IIT Powai and he has a girl friend who happens to be his classmate. They have incorporated a new private limited company in which both of them are directors. They do not have their own funds. Since it is a start-up company with a new idea, banks are not willing to finance them within their norm. Contrary to PM Modi’s pronouncement of “Make in India,” the Companies Act, 2013 is creating a hurdle because loan from either members or outsiders is not possible. What should we do to help him while ensuring that he remains within the framework of law?

Ans. : It is unfortunate that the law does not recognise the Indian tradition of family business although it is sometimes envied world over. In the circumstances of the case, both the parents, that is, yourself and your wife and the parents of your son’s girlfriend can give a loan to your son’s company as a deposit. In our opinion, in terms of banking terminology, this could be treated as “Quasi Equity” and not refundable until the repayment of loan of banks and financial institutions. You may need to obtain such a letter from the Bank as a precondition for considering their loan proposal, which in our opinion will not be difficult for the bank to issue. They would avoid possible classification of NPA in respect of the advances given by them. Please advise your son to follow this route as a matter of least resistance, precaution and still it could be argued that it is within the framework of the law and ..

Editors Note: A Company is a very important form of business organisation. Despite the advent of Limited Liability Partnerships, this form is still the most accepted one by most stakeholders. The coming into force of the Companies Act, 2013 has created a large number of problems. In this feature commencing from this issue, the authors will address them. Initially, the focus will be on problems faced by small and medium sized private limited Companies, for it is these bodies and their advisors/ consultants that need the maximum support. As the feature develops, other issues could be taken up. We welcome your suggestions.