In this Article, we will deal with testing a few transactions, as to whether they fall in the category of deposits, Compliance aspects of post-acceptance of deposits, penal provisions in case of violation of the provisions of Companies Act 2013 (”the Act”) and Companies (Acceptance of Deposits) Rules 2014 (“the Rules”)
1. In respect of the following transactions entered by the Company, whether the amount received can be termed as a Deposit?
a) Amount received from Foreign Company, Body Corporate, Foreign Citizen, and Foreign Collaborators in the course of business transactions;
Ans: Before one can take a shelter of any exemption available under Rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules 2014, the purpose of the transaction needs to be understood. Although in terms of Rule 2 (1) (c) (ii) of the Rules any amount received from Foreign Company, Body Corporate, Foreign Citizen, and Foreign Collaborators inter-alia is exempt from definition of deposit and thus will fall outside the purview of section 73 -76 of the Act; the amount received as a loan from a Director who is a foreign citizen will not be exempt as a deposits if brought without prior approval of Reserve Bank of India (RBI). Thus loan received from Director who is a foreign citizen out of funds maintained in the account outside India or out of funds in NR(E) or FCNR Account maintained in India without RBI approval will be termed as deposit.
b) Amount received as subscription money for allotment of securities
Ans: A Company allotting securities will have to follow the procedure for allotment of securities as envisaged in section 62 (1) or section 42 read with applicable Rules. In case the Company fails to make allotment of securities within 60 days of receipt of money the amount received will be treated as deposit and the Company will have to refund the amount within 15 days of the permissible period of 60 days to the person who has paid such subscription money. It may not thus be possible in future to keep loan or deposit from an outsider as a deposit on the ground that the shares were intended to be allotted to him.
c) Amount received from Relative of Director
Ans: Amount received from a relative of Director will be exempt in terms of recently amended2 provisions of Rule 2 (1) (c) (viii) provided the relative gives a declaration that the amount given to Company is from his own sources and not borrowed from any other source. Thus the Company’s ability to gather financial resources from close sources has increased multifold, since the amount received from following person defined as relative (Section 2 (77) of Act3) will not be treated as deposit from now:
(i) M embers of a Hindu Undivided Family of a Director (HUF);
(ii) Spouse of Director;
(iii) Father including step father;
(iv) Mother including step mother;
(v) Son, including step son;
(vi) Son’s wife
(vii) Daughter
(viii) Daughter’s Husband;
(ix) Brother including step brother;
(x) Sister including step sister;
2. What is a “ Circular and Circular in form of Advertisement (CoFA )” in terms of deposit Rules
Rule 4 of Companies (Acceptance of Deposits) Rules 2014 provides for Circular and Circular in the form of Advertisement. A Private Company, Non-Eligible Company or Eligible Company4 intending to accept a deposit is required to issue a document disclosing various details as prescribed in Form DPT-1 of the Rules. The main difference is in the mode of placing this information in public domain before issue, which is as follows:
1) Private Companies and Non-Eligible Companies issue circular since they can accept deposits only from Members and thus the circular issued, has a limited sphere of application.
2) Eligible Company who can accept deposits from outsiders (not necessarily its Members) will have to issue Circular in the form of an Advertisement in English language and vernacular language newspaper having wide circulation in the state where Company’s registered Office is situated;
Thus what is Circular in DPT-1 for a Private Company; Non-Eligible Company is a Circular in form of Advertisement in case of Eligible Company
3. Is it necessary to file the Circular/Circular in form of Advertisement with the Registrar and what is the validity thereof
The Circular/Circular in Form of Advertisement (CoFA) is required to be filed with the Registrar of Companies having jurisdiction over the Registered Office of the Company 30 days before the date of its issue to members or release in the newspaper as the case may be. Every Circular or CoFA shall remain valid till:
1) Six months from the date when Company’s financial year ends; or
2) Date of AGM when Accounts are adopted by the Members; or
3) Last date by which AGM should have been held in case the same is not held; Whichever is earlier
In every Financial Year, the Company shall issue a fresh Circular/or fresh CoFA for facilitating acceptance deposit.
4. What are the post acceptance compliances in respect of Deposits as prescribed by Deposit Rules 2014
Following are the post acceptance compliance in respect Private Companies/Non-Eligible Companies and Eligible Companies.
a) Rule 5 (1) (2) of the Rules requires that every Company including Private Company shall enter into a contract, 30 days before the date of issue of Circular or CoFA with a Deposit Insurance Service Provider for securing re-payment of deposits in case of default in re-payment by the Company. Sub- Rule (3) provides that cost of premium should be borne by the Company, and its burden should not be passed on to depositors; Sub-Rule (4) provides for penal interest payment liability on the part of Company in case of failure of Company to renew/ default in compliance with terms of contract for availing deposit insurance services and repayment of deposit in case of continuing non-compliance with terms of contract;
b) Rule 6 (1) of the Rules provides for creation of security in the form of charge on the tangible assets mentioned in Sch III of the Act for due repayment principal amount and interest thereon. At any given point of time, the value of assets charged shall not be less than the amount not covered by deposit insurance as mentioned in Rule 5; Further the amount of deposits shall not exceed the market value of assets charged as security, based on valuation made by the registered valuer. Effectively all deposits should be secured by way of either deposit insurance or by way of charge on the assets of the Company;
c) R ule 7, 8 and 9 provide for appointment of Trustee for Depositors, Duties of Trustees and Meeting of Depositors. If the Company is accepting only unsecured deposits, then appointment of Trustee is not mandatory
d) Rule 10, 11,12 14 provide for form of application for deposits; Power of depositor to nominate person in case of death of depositor; obligation of Company to provide deposit receipts and Maintenance of Register of Deposits;
e) Rule 13 provides for creation of Deposit Repayment Reserve Account and maintenance of Liquid Assets. According to this Rule, every Company shall on or before 30th April of every year, deposit an amount not less than 15% of the deposits maturing during the financial year and the financial year next following, in a separate Bank account opened with schedule bank. The amount so deposited shall always remain at least 15% of the total amount of deposits maturing during the financial year and the financial year next following
f) Rule 15-21 deals with following aspects:
(i) General provisions regarding pre-mature repayment – Rule 15
(ii) Compliance pertaining to filing of Return with Registrar of Companies – Rule 16
(iii) Penal rate of interest payable to depositor in case of overdue deposits – Rule 17
(iv) Power of Central Govt – Rule 18
(v) Applicability of section 73-74 to eligible companies – Rule 19
5. What are the Penal Provisions of the Companies Act 2013 and Companies (Acceptance of Deposits) Rules 2014?
The Companies (Amendment) Act 2015 vide section 76A has provided that, in case of violation of provisions of section 73-76 or Rules made thereunder or deposits accepted in violation of the said section or default made in repayment of the same, the Company shall be liable for the following:
(a) Repayment of entire amount of deposit, including interest remaining unpaid to the depositors; and
(b) Fine which shall not be less than Rs. 1 crore but which may extend upto Rs. 10 crore
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 Rs. 25 lakh but which may extend to Rs. 2 crore, or with both.
In case of violation of the provisions of the Companies (Acceptance of Deposits) Rules 2014 the penalties are as follows:
(a) Rule 5 (4) default in complying with terms & conditions of contract for maintaining deposit insurance cover or failure to correct the non-compliance in given time – all deposits covered under the Insurance Scheme including interest payable thereon becomes due for repayment;
(b) Failure to make repayment of such deposits as stated in (a) above, the Company shall be liable for penal interest @ 15 % p.a. for the period of delay and penalty u/s. 76A shall be attracted;
(c) Rule 17 provides for payment of interest @ 18% p.a. as penal interest in case of overdue deposits which are matured, claimed but unpaid;
(d) Rule 21 of provides that in absence of provision of any specific penalty Company and every officer in default shall be punishable with fine which may extend to Rs. 5,000/- and where the contravention is continuing one with a further fine of Rs. 500/-for every day after the first during which the contravention continues.
