Month: May

Legal Requirement
The
Companies Act, 2013 has recognised the long felt need for having a
structured process for evaluation of the performance of the Board of
Directors. Section 178(2) of the Companies Act, 2013 mandates that the
Nomination and Remuneration Committee constituted by the Board shall
carry out an evaluation of the performance of every Director. In
addition, the Code for Independent Directors mandates that the
Independent Directors of a Company shall hold at least one meeting, in
which the performance of the non-independent directors and the Board as a
whole, shall be reviewed. Further, the quality, quantity and timeliness
of the flow of information between the Management and the Board shall
be evaluated. The performance of the independent directors shall also be
done by the entire Board excluding the director being evaluated. Based
on such evaluation, the Board’s report shall contain a statement
indicating the manner of evaluation and the conclusions thereof.

Evaluation Process
Typically,
the performance evaluation of the Board would be on the basis of a
benchmark which could be decided upfront and used for the purpose of
this exercise. The evaluation can also be carried out on specific
matters relating to each committee and those which would apply only at a
Board level as well.

With respect to the evaluation of the
individual directors, the performance evaluation could be done on the
basis of the following macro aspects:

-Allocated Roles and Responsibilities
-Strategic Thinking
-Risk Management
-Core Governance and Compliance Management
-Independence & Ethics
-Corporate Culture
-Compliance with the Code of Conduct of Directors
-Industry/Entity Knowledge
-Talent Management
-Leadership Style
-Unbiased Approach
-Effectiveness of Decision Making
-Entity Performance

In addition, the following specific aspects could also be considered for performance evaluation:

-Attendance and contribution to the meetings
-Application of financial/technical/legal/treasury/other expertise on specific matters
-Quality of debate
-Extent of communications with executive management
-Relationship with other Board members
-Personal eminence and the reputation
-Quality of the feedback provided to the management

The
Act does not stipulate the timing or the period for evaluation of the
Board. Hence, a company could either decide to do the evaluation on an
annual basis similar to the policy followed for its employees or deal
with it by having any other review period on a systematic basis. Each
company needs to assess the specific aspects applicable to it and then
consider the frequency/ periodicity of the evaluation. The review could
be done at a pre-determined frequency or could be performed on an “as
needed” basis. The “as needed” approach may work in situations where the
Board has a clear policy on the triggers that would prompt an
evaluation. However, in situations where such guidelines are not
available, then it is possible that the need for performance evaluation
may be overlooked. Performing the evaluation on an annual basis is the
most common frequency as this in line with the annual planning cycle
and, therefore, useful in adapting the performance expectations with the
strategic needs of the organisation. However, a predictable frequency
could result in the evaluation becoming mundane and routine.

On
an overall level, the performance evaluation should be an ongoing
process and not just an annual event. One of the best practices is to
devise other mechanisms in addition to the annual review to ensure
ongoing performance improvement. Irrespective of the period chosen, the
same may be followed in letter and spirit and on a consistent basis.

Attributes
of a Successful Governance Oversight Model Identifying an appropriate
governance oversight model is the basic starting point for having a
robust evaluation platform. All the subsequent activities will be driven
by this. In general, a successful governance oversight model should
encompass the following attributes:

-Competence – skills required for the Board to effectively execute its responsibilities
-Understands corporate governance and its application to Board structure, operations, processes, and procedures
-Understands the organisation, its businesses, and underlying drivers
-Has relevant, recent experience in the industry, adjacent industries and markets, or competitors
-Has knowledge of the interests and priorities of stakeholders
-Process – processes required for the Board to both understand and properly oversee the activities of the entity
-Understands the risks inherent in the organization’s governance programmes
-Selects qualified, independent Board members, aligning overall Board composition with the organization’s strategy
-Establishes and periodically reaffirms Board leadership
-Establishes and ensures compliance with Board operating principles and governance policies
-Designs and implements a committee structure that complements and enhances the work of the Board
-Assesses and continually improves the Board, its leaders, and committees
-Engages with stakeholders
-Oversees public disclosures related to Board operations
-Information – information required by the Board adequate to support effective oversight and decision making
-Receives verbal and/or written feedback and development plans resulting from periodic assessments
-Receives Board governance documents and related tools (e.g., Board calendars, planning tools) for review and improvement
-Receives thought leadership or continuing education related to Board governance developments
-Behaviour – Board’s behaviour to support and reinforce strong oversight
-Displays ownership and commitment to governance excellence and continuous improvement
-Creates a culture of collaboration, engagement, and healthy tension among Board members
-Holds Board members accountable for their behaviour.

Techniques of Evaluation
The
evaluation can be done by using qualitative techniques such as
interviews, feedbacks, etc. or through quantitative techniques such as
surveys, scorecards, questionnaires etc. A typical questionnaire/
scorecard would cover the aspects indicated under “what will be
evaluated?” and in particular the following aspects:
–
Composition and Quality
-Understanding the business and risks
-Process and procedures
–    Oversight of the financial reporting process and internal controls
–    assessing related party transactions
–    understanding competitive landscape
–    understanding risks relating to management override, including significant judgements, assumptions and estimates.
–    fair compensation.
–    Communication with employees, vendors and customers
–    adequacy and effectiveness of Board initiated/ monitored mechanisms such as Code of Conduct, Whistle Blower Policy, PTR, CSR Policy, etc.
–    oversight of the audit function
–    ethics and compliance
–    monitoring activities
–    Strategy effectiveness
–    management relationship
–    Succession Planning & training.

Further,   this   could   be   done   through   face   to   face discussions, telephonic conversations, e-mails, web based scoring modules etc. Irrespective of the evaluation technique used, due care should be taken in documenting the process and the conclusions reached.

The next step in the process is to decide who will perform the evaluation – whether internally (by the nomination and remuneration Committee) or using specialist consultants or external experts. the decision regarding the same will need to be taken after considering the following factors:
–    autonomy of the Board
–    Board Culture and dynamics
–    Confidentiality
–    Perception of Bias
–    need for transparency and objectivity
–    Skills and experience of Performing evaluations
–    time and Cost.

The  general  process  to  be  followed  could  be  to  obtain the self-evaluation from the individual directors about the individual and also about the Board which forms the basis for an independent evaluation by the designated person/ committee/authority.

Evaluation Feedback
The  feedback  to  the  Board  could  be  provided  not  only by the members of the Board, but to make it more transparent and comprehensive, the participant base could be extended to cover the internal and external stakeholders  as  well.  Typically,  the  internal  participants who could be consulted for obtaining the feedback on the performance of the Board could be the CEO and other key managerial personnel who interact with the Board on various matters. Similarly, the external participants could range from the shareholders, key customers & suppliers, internal & external auditors. Whilst the internal participant could provide a more specific feedback, the external participants could provide a general feedback about the company/culture which would reflect the performance of the Board.

The  Board  should  agree  upfront  the  required  actions that it can take to improve governance. the performance assessment of the Board would typically be discussed by the Board collectively. With respect to the performance assessment of the individual director, generally the same will be discussed by the Chairman of the Board with the concerned member/director. The practice of releasing the summary of the results of the Board’s performance to the entire organisation is also considered as one of the best practices in connection with the Board evaluation process worldwide.

Whilst section 134 (3)(o) of the Companies act, 2013 requires only a statement indicating the manner in which the formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors and the results of the individual evaluation, distribution of the results of the evaluation to stakeholders would be decided by each company based on various factors including the governance model followed, expectations, complexities, culture etc. Irrespective of the method adopted and the regulatory provisions, the Board should keep in mind that the process of performance evaluation, providing the required feedback and the extent of sharing such feedback with others would reflect its commitment to the entire governance process!

Conclusion
Performance evaluation is very important for the Board for not only in meeting the regulatory requirement but also in setting the right tone at the top. This is one of the key mechanisms for the Board to demonstrate its commitment to continuing improvement. It would be a great value multiplier tool for the company, directors and all those stakeholders who will be impacted by the functioning of the company.

When the Board recognises the importance of this process and attributes sanctity and importance to this process, and implements it with all vigour, this would help in building a sound corporate structure which can avert governance failures. Whilst the process is new to india, the experience gained in implementation would help Indian corporates in fine-tuning it on a continuous basis.

Despite the problems that will be discussed in the following paragraphs the, initiative taken by the government is to be appreciated and we hope that the proper implementation of the same benefits the public at large. As the name suggests, CSR is a corporate’s responsibility and initiative towards upliftment of society and social welfare. In India, we look to the government and public authorities when it comes to spending towards social welfare. Internationally it is an accepted practice, but India is the first country to introduce statutory provisions with respect to CSR.

The Ministry of Corporate Affairs through the Companies Act 2013 (‘the Act’) has prescribed the provisions of CSR. Section 135 of the Act prescribes the basic provisions for the applicability and other requirements. CSR Rules 2014 contain the procedural part. Schedule VII to the Act prescribes list of activities on which amount can be spent to comply with the provisions of CSR. :

• Effective date

On 27th February 2014, the Ministry of Corporate Affairs (MCA) has notified section 135, Schedule VII of the Act and Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘Rules’). As per the notification, CSR provisions will be effective from 1st April 2014.

• Applicability

Every company including its holding or subsidiary, and a foreign company having branch/project office in India, which fulfills any of the following criteria in any of the financial years will have to comply with the provisions of CSR.

Further, every company which does not meet the criteria for three consecutive financial years is not required to (a) constitute a CSR Committee and (b) comply with the CSR provisions till such time it meets the below criteria. Criteria are as under:

1. Net worth of Rs. 500 crore or more, or
2. Turnover of Rs. 1,000 crore or more, or
3. Net profit of Rs. 5 crore or more

‘Net profit’ is defined in the CSR Rules as tabulated below

B – For a Foreign company

‘Net profit’ for a foreign company means the net profit as per profit and loss account prepared in terms of Clause (a) of s/s. (1) of section 381 read with section 198 of the Companies Act, 2013.

Issues which may have to be clarified by MCA

• For the purpose of deciding the applicability of CSR provision, the net profit after tax would be considered. Net profit as per financials would normally be understood as profit after tax.

• Since only profit of overseas branch is mentioned, in our view, loss of overseas branch will not be added for determining net profit criteria.

• According to Section 135, the criteria for applicability of CSR are to be applied to each company. However, as per CSR Rules, it could be interpreted that if CSR is applicable to parent company then it would automatically apply to its subsidiary or vice versa even though those entities do not meet the criteria.

• For reducing the dividend received from Indian companies from Net profit, practical difficulty will arise in determining whether such companies are complying with the provisions of section 135 or not.

• CSR Contribution

Company covered under the CSR provisions will have to spend, in every financial year, at least 2% of ‘average net profits’ of last 3 financial years on CSR activities. In the event such a company fails to spend such amounts in pursuance to its CSR Policy, the Board is required to provide reasons for not spending the specified amounts in the Board’s annual report. The ‘average net profit’ shall be calculated in accordance with section 198 [i.e., calculation of net profit prescribed for the purpose of determining the maximum managerial remuneration]

Issue which may have to be clarified by MCA

Since ‘average net profit’ is to be computed as per section 198, the definition of ‘net profit’ as given in the CSR rules will not apply i.e., profit of overseas branch and dividend from other companies in India complying with CSR provisions will not be reduced for calculation of ‘average net profit’.

• Schedule VII of the Companies Act, 2013

CSR policy relates to activities to be undertaken by the Company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of the Company. Following CSR activities are specified in Schedule VII.

1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

2. Promotion of education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources & maintaining quality of soil, air & water;

5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

6. Measures for the benefit of armed forces veterans, war widows and their dependents;

7. Training to promote sports [rural, nationally recognised sports, Paralympic & Olympic sports];

8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Schedule Castes, the Schedule Tribes, other backward classes, minorities and women;

9. Contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

10. Rural development projects.

• CSR Committee and the Board of Directors

1. The companies shall constitute a CSR Committee consisting of 3 or more directors including at least 1 independent director. However, unlisted public company or a private company or foreign company shall have its CSR Committee without independent director. A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

2. The key role of the CSR Committee is to formulate and recommend CSR policy to the Board of Directors, recommend the amount of expenditure to be incurred on the CSR and monitor the Corporate Social Responsibility Policy of the company.

3.    The Board of Directors shall approve the CSR policy after considering recommendations from CSR Committee and disclose contents in Directors Report forming part of the annual report and also place it on the company’s website. Further, the Board shall ensure that the activities as are included in CSR Policy of the company are under- taken by the company.

4.    The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR.

5.    The format for the annual report on CSR activi- ties to be included in the Board’s report is also given. This has to be certified by the Director and Chairman of CSR Committee. In case of foreign company, the authorised representative resident in India shall also certify.

•    Other key points as per the CSR Rules

1.    CSR expenditure includes all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity with Schedule VII of the Act.

2.    A company may carry out CSR activities, through registered trust or society or a company estab- lished by the company or its holding or subsidiary or associate company. The following 2 CONditions are prescribed

a.    If trust, society, or company is not established by the company, etc., it shall have an established track record of 3 years in undertaking CSR activities.

b.    Company has specified the project or programmes to be undertaken through these entities, the mo- dalities of utilisation of funds on such projects and programmes and the monitoring and reporting mechanism.

3.    A company may also collaborate with other companies for undertaking CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such activities.

4.    The CSR expenditure has to be only on projects/ programmes undertaken in India only.

5.    CSR projects or programmes that benefit only employees of the company or their families is not considered as CSR activities.

6.    Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least 3 financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.

7.    Contribution to any political parties directly or indirectly is not considered as CSR activity.

8.    The CSR policy of the company shall specify that the surplus arising out of the CSR activities shall not form part of the business profit of the com- pany.

•    Substantial changes compared to draft rules:

Significant changes in final rules/schedule has been made as compared to the draft CSR rules and Schedule VII. Notably amongst them are as under:

(i)    removal of 3 year block period concept,

(ii)    hitherto programs integrating business models with social and environmental priorities and processes in order to create shared value was covered,

(iii)    restricting expenses on personnel engaged in CSR to not more than 5% of CSR spend,

(iv)    removing contribution to fund set up by State Government for socio economic development and relief and welfare of the SC/ST/BC, minorities and women,

(v)    restricting the health care initiative to prevention

(vi)    expanding the applicability of Section 135 to Foreign Companies having branch/project office in India (though section 135 only refers to Companies (which as per definition will include companies incorporated in India only),

(vii)    removing the enabling clause in Schedule VII for notifying any other activities as part of CSR and substituting business social projects with rural social project.

•    Conclusion

There is no clarity on tax treatment of amount spent on CSR. In the draft CSR rules it was specified that tax treatment will be in accordance with the Income Tax Act as may be notified by CBDT. However in the Rules notified, this para is removed. Clarity is also required in respect of accounting treatment for the unspent amount on CSR especially in view of expert advisory  opinion  issued  by  ICAI  in  June  2013  which opined  that  provision  may  not  be  required  where there is no present obligation.

Key challenges for corporates would be where they are already spending money on the general welfare of the employees per se like housing, education, medical facilities etc. and now they will also have to spend on CSR as spending on employee welfare is not covered. So for such corporates this will be an additional financial outflow. To conclude, in India CSR would be successful only if it is implemented   in its true spirit. It should be noted that there are  no penal consequences for not spending on CSR in a particular year, however there is an indirect pressure on corporates to spend on CSR. We hope that CSR results in overall development of the society and general public at large and CSR becomes the game changer in terms of transforming India from  a developing country to a developed nation.

The Companies Act, 2013 (Act) has been in vogue since August, 2013. Out of 470 sections, 98 sections have been notified since 12th September, 2013. Recently, vide notification dated 26th March,2014, 183 sections have been notified and they are in force from April 01,2014. Thus in all today 281 sections are in operation. The Ministry of Corporate Affairs have notified the Rules in matters covered by the sections which are in force and these Rules have come into force on 01-04-2014. This Act and Rules replace the Companies Act, 1956 (old Act) and the Rules made there under.

2. Acceptance of Deposits:
Chapter V of the Act, deals with Acceptance of Deposits by companies. It contains four sections viz. sections 73 to 76. Of which, section 73, 74(1) and 76 are operative from1st April,2014. The Companies (Acceptance of Deposits) Rules, 2014 (Rules) have also been notified and they have come into force on 01-04-2014. These Rules are framed in consultation with RBI. It may be noted that these sections and the Rules apply to Public and Private Companies.

3. Deposit:
Section 2(31) of the Act, defines “deposit” which 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 received as provided in Rule 2(1)(c).

4. Exempted Deposits:
As per Rule 2(1)(c) the following amounts received by a company are not to be considered as Deposits under the above provisions.

(i) Receipt from the Central Government, or a State Government, (including from any other source whose repayment is guaranteed by the Central Government or a State Government), from a local authority , or from a statutory authority constituted under an Act of Parliament or a State Legislature;

(ii) Receipt from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of FEMA Act and rules and regulations made there under;

(iii) Any loan or facility from any banking company, from a banking institution notified by the Central Government u/s. 51 of the Banking Regulation Act, 1949, or a notified Co-operative Bank.

(iv) Any loan or financial assistance from any Public Financial Institutions notified by the Central Government;

(v) Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by RBI;

(vi) Intercorporate Deposits;

(vii) Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for. It is also provided that such allotment should be made within 60 days of receipt or refunded within 15 days on the expiry of 60 days. Adjustment for any other purpose shall not be considered as refund. It may be noted that there was no such time limit for allotment of securities under the old Companies Act or Rules. The above time limit will apply to amounts received before 01-04-2014 and outstanding as on that date;

(viii) Receipt from a person who, at the time of the receipt of the amount, was a director of the company. He should give a declaration that he has deposited the amount out of his own funds. It may be noted that under the Old Act in the case of Private Companies, exemption was given to relative of a Director and to a Member of the Company. This exemption is now withdrawn;

(ix) Any amount raised by issue of secured bonds or debentures or bonds or debentures compulsorily convertible into shares of the company within five years. It may be noted that under the Old Act there was no such time limit for conversion of debentures within 5 years;

(x) Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposits. Under the Old Act there was no limit about the amount of Security Deposit;

(xi) Any non-interest bearing amount received or held in trust;

(xii) Any amount received in the course of, or for the purposes of, the business of the company,-

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of 365 five days. There was no such limit of 365 days under the Old Act.

(b) as advance, against consideration for sale of any property;

(c) as security deposit for the performance of the contract for supply of goods or provision of services;

(d) as advance received under long term projects for supply of capital goods.

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to specified conditions.

5. Prohibition on Acceptance of Deposits from Public

(i) Section 73(1) provides that no company shall invite, accept or renew any deposit under this Act from the public except in the manner provided under this chapter.

(ii) Section 73(2) provides that a company may accept deposits from its members, subject to passing of a resolution in General Meeting, on such terms and conditions including the provision of security, if any, or the repayment of such deposits with interest as may be agreed upon between the company and its members on fulfillment of the following conditions:

(a) Issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in form DPT-1 pursuant to Rule 4.

(b) Filing a copy of the circular alongwith such statement with the ROC within 30 days before the date of issue of the circular.

(c) Depositing such sum which shall not be less than 15% of the amount of its deposits maturing during a financial year and the financial year next following and kept in a scheduled bank in a separate bank account to be called as “Deposit Repayment Reserve Account”. This reserve can be used for repayment of deposits only u/s. 73(5).

(d) providing such Deposit Insurance in such manner and to such extent as stated in Rule 5.

(e) Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits ; and

(f) In the case of secured Deposits, the company should provide for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company. The manner in which the security is to be created is stated in Rule 6. In the case of secured deposits, the company will have to appoint Trustees for Depositors as provided in Rule 7.

If in any case a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related in invitation or acceptance of deposits.

(iii)    Section 73(3) provides that every deposit ac- cepted by a company shall be repaid with interest in accordance with the terms and conditions of the agreement with the depositors.

(iv)    Section 73 (4) provides that if a  company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal as provided in that section.

6.    Acceptance of Deposit from public by certain companies (eligible companies)

(i)    Section 76(1) provides that, a public company, having networth of Rs. 100/- crore or more or turn over of Rs. 500/- crore or more may accept deposits from public on the condition that the prior consent of the company in general meeting by a special resolution has been obtained and the said resolution has been filed with the ROC before making any invitation to the public for acceptance of deposit. Such company is defined as an ‘eligible company’ as per Rule 2 (1)(e) of  the  Rules. The said rule provides that an ‘eligible company’ which is accepting deposits u/s. 180 (1)( (c ) may accept deposits by means of an ordinary resolution, if the amount to be borrowed together with amount already borrowed does not exceed aggregate of paid up capital plus free reserve.

(ii)    Every such company accepting deposit shall be required to obtain rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency and the company should inform the public, the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits;

(iii)    Further, in the case of a company accepting secured deposits from the public it 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 the Rule 6 of the Rules.

(iv)    Such eligible Company has also to comply with procedure listed in Para 5(II) above.

7.    Repayment of deposits, accepted before com- mencement of 2013 Act

(i)    Section 74(1) provides that in the case of any deposit accepted by a company before 01-04-2014, if the amount of such deposit or part thereof or any interest due thereon remains unpaid on the above date or becomes due at any time thereafter the company shall

(a)    file, within a period of 3 months from 01- 04-2014 or from the date on which such pay- ments are due, with the ROC a statement of all the deposits accepted by the company and sums remaining unpaid on the above date with the interest payable thereon alongwith the arrangement made for such repayment in form DPT-4, pursuant to Rule 20 of the Rules.

(b)    repay within 1 year i.e., by 31-03-2015 or from the date on which such repayments are due, whichever is earlier.

8.    Manner and extent of deposit insurance:

As stated above, Rule 5(1) provides that every com- pany  referred  to  in  Para  5  and  6  above  shall  enter into  a  contract  for  providing  deposit  insurance  at least  thirty  days  before  the  issue  of  circular  or  advertisement or   at least thirty days before the date of renewal, as the case may be. Further, it clarifies that  amount  as  specified  in  the  deposit  insurance contract  shall  be  deemed  to  be  amount  in  respect of both principal amount and interest due thereon.

Rule  5(2)  provides  that  the  deposit  insurance  contract shall specifically  provide that in case the company defaults  in repayment of  principal amount  and interest thereon,   the depositor shall be entitled to the repayment of principal amount of deposits and interest thereon by the insurer upto the aggregate monetary  ceiling  as  specified  in  the  contract.  In case of   any deposit and interest not exceeding Rs. 20,000, the deposit insurance contract shall provide for payment of   the full amount of the deposit and in case  of any deposit and interest thereon in excess of  Rs.  20,000,  the  deposit  insurance  contract  shall provide  for payment of an amount not less than Rs. 20,000  for  each  depositor.  Rule  5(3)  provides  that the insurance premium for such deposit insurance shall be paid by the company.

9.    Limit & Terms and  Conditions of acceptance of deposits by companies:

Rule 3 of the Rules provides for limits and other terms of deposits as under:

(i)    No company referred to in section 73(2) and 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 6 months or more than 36 months from the date of acceptance or renewal of such deposit:

However, that company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of deposit or renewal subject to the conditions that-

(a)    such deposit shall not exceed 10% of the aggregate of the paid up share capital and free reserves of the company, and

(b)    such deposits are repayable not earlier than  3 months from the date of such deposits or renewal thereof.

(ii)    No company referred to in section 73(2) shall accept or  renew any deposit from its members, 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% of the aggregate of the paid up share capital and free reserves of the company. For this purpose paid up share capital shall include preference share capital also.

(iii)    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 10% of the aggregate of the paid-up share capital  and free reserves  of the company;

(b)    In the case of deposits from others, if the amount of such deposit together with the amount  of  such  other  deposits,   other  than the  deposit referred to Clause (a),  outstanding  on  the  date  of  acceptance   or  renewal exceed 25% of aggregate  of the paid-up share capital and  free  reserves  of  the  company.

(c)    In other words, an eligible company can accept deposits upto 35% of paid up share capital (including preference share capital) and free reserves subject to the sub-limit of 10% from members.

(iv)    No Government company eligible to accept deposit u/s. 76 shall accept or renew any deposit if the amount of such deposit together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the aggregate of its paid-up share capital and free reserves of the company.

(v)    No company referred to in section 73(2) or any eligible company shall invite or accept or renew any deposit in any form carrying a rate of interest or pay brokerage thereon at the rate exceeding the maximum rate of interest or brokerage as prescribed by RBI for acceptance of deposits by NBFC.

For this purpose, it is provided that the person who is  authorised,  in  writing,  by  a   company  to  solicit deposits on its behalf and through whom deposits are  procured  shall only be entitled to the brokerage and payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of this rule. It may be noted that Para 4 (7) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, that no NBFC shall pay more than 12.5%P.A. interest on public deposits.  Similarly,  Para 4(8) provides that the rate of Brokerage/Commission to brokers shall not exceed 2% of the deposit collected. Brokers  can  be  paid  actual  expenses  incurred  for this purpose but the same shall not exceed 0.5% of the  deposit so collected.

(vi)    The company shall not reserve to itself either directly or indirectly right to alter, to prejudice or disadvantage of the depositor any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the form of advertisement is issued and deposits are accepted.

(vii)    Deposits may be accepted in joint names, not exceeding 3, with or without any of the Clauses viz.“jointly”  “Either or Survivor” “Anyone or Survivor”.

10.    Application mandatory

As per Rule 10 of the Rules , no company shall accept, or renew any deposit, whether  secured or unsecured, unless an application, in such form   as specified by the company, is submitted by the intending depositor for the acceptance of such deposit. The form of application referred to above shall contain a declaration by the intending de- positor to the effect that the deposit is not being made out of any money borrowed by him from any other person.

11.    Furnishing of deposit receipts to depositors:

Rule  12  of  the  Rules  mandate  that  every  company shall,  on  the  acceptance  or  renewal  of  a  deposit, furnish  to  the  depositor  or  his  agent,  a  receipt for the amount received by the company, within a period of 21   days from the date of receipt of money or  realisation of  cheque or  date of  renewal.

The receipt referred to above shall be signed by  an officer of the company duly authorised by the Board in this behalf and shall state the date of deposit, the name and address of the depositor, the amount received by the company as deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

12.    Maintenance of liquid assets and creation of deposit repayment reserve account:

As per Rule 13 of the Rules, every company referred to in section 73(2) and every eligible company shall, on  or  before  30th  April  of  each  year,  deposit  the sum  not  less  than  15%  as  specified  in  Para  5  (ii)  (c) above  with  any  scheduled  bank  and  the  amount so deposited shall not   be utilised for any purpose other  than   for  the  repayment of  deposits:

Further, it also mandates that the amount remaining deposited  shall  not  at  any  time  fall  below  15  %   of the  amount  of  deposits  maturing,  until  the  end  of the current financial year and the next financial year.

13.    Registers of deposits:

As per Rule 14 of the Rules, every company accepting deposits shall maintain at its registered office one or more separate registers for deposits accepted  or renewed, in which there shall be entered separately in the case of each depositor the particulars as listed in Rule 14.

The entries specified in this Rule shall be made within 7 days from the date of issuance of the receipt duly authenticated by a director or secretary of the company or by any other officer authorised by the Board for this purpose. The register referred to above shall be preserved in good order for a period of not less than eight years from the financial year in which the latest entry is made in the register.

14.    Premature repayment of deposits:

(i)    Rule 15 of the Rules provides that, if a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by 1 % from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run and the company shall not pay interest at any rate higher than the rate so reduced:

(ii)    However, nothing contained in this rule shall apply to the repayment of any deposit before the expiry of the period for which such deposit was accepted by the company, if such repayment is made solely for the purpose of (a) complying with the provisions of Rule 3; or (b) providing  war risk  or other related benefits to the personnel of the naval, military or air forces or to their families, on  an application made by the associations or societies formed by such personnel, during the period of emergency declared under Article 352 of the Constitution:

(iii)    If a company referred to in section 73(2) or any eligible company permits a depositor to renew his deposit, before the expiry of the period for which such deposit was accepted by the company, for availing of a higher rate of interest, the company shall pay interest to such depositor at the higher rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than the unexpired period of the deposit.

(iv)    Further, the Rule provides, where the period for which the   deposit had run contains any part   of a year then, if such part is less than 6 months,     it shall be excluded and if such part is 6 months or more, it shall be reckoned as 1 year.

15.    Return of deposits to be filed with the Registrar:

Rule 16 of the Rules requires that the company shall on or before 30th June, every year, file with the ROC a return in Form DPT-3 along with the prescribed fee and furnish the information contained therein as on 31st March, of that year duly audited by the auditor of the company.

16.    Penal rate of interest:

Rule 17 of the Rules provides that every company shall pay a penal rate of interest of 18 % per annum for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

17.    Penalty of Default

Sections 74(2), 74(3) and 75 of the Act, which have not yet been brought into force, provide as under.

(i)    If the company fail to repay any existing deposit or interest due to depositors within the time allowed u/s. 74, the following penalties can be levied.

(a)    The company shall be punishable with minimum fine of Rs. 1 crore which may be extend to Rs. 10 crore. This will be over and above the amount of Deposit and interest in respect which default is made for repayment.

(b)    Every defaulting Officer shall be punishable with imprisonment which may extent to 7 years or with minimum fine of Rs. 25 lakh which may extend to Rs. 2 Crore or with both.

(ii)    It may be noted that in both the above cases, the amount of minimum fine has no relationship with the amount in respect of which the  default  in repayment of deposit or interest is made. It may so happen that the default may be in respect of deposit of Rs. 25 lakh, against which minimum fine payable by the company is Rs. 1 crore. To this extent, the above provision is very harsh.

(iii)    If it is found that there is default in repayment of outstanding Deposit or  interest u/s. 74  and it  is proved that such Deposit was accepted by the Company with intent to defraud the depositors or that the same was accepted for fraudulent purpose, every defaulting officer shall be personally responsible for any loss or damage that is incurred by the depositor. It may be noted that this penal action is without prejudice to the penalty leviable u/s. 74(3) as stated in (i) above. Further, the defaulting Officer will also be punishable u/s. 447 which provides for the following penalties.

(a)    Imprisonment for minimum period of 6 months which may extend to 10 years.

(b)    If the fraud involves Public interest, the mini- mum imprisonment can be for 3 years.

(c)    Minimum fine will be of amount involved in the fraud which may extend to 3 times the amount involved in the fraud.

(iv)    Rule 21 of the Rules provides that if any com- pany referred to in section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 25,000 and where the contravention is a continuing one, with a further fine which may extend to Rs. 500 for every day after the first day during which the contravention continues.

18.    To Sum Up:

The above provisions for acceptance of deposits by Companies are very stringent as compared to the provisions under the Old Act. Considering these requirements, it will be difficult for some companies to comply with these provisions and will have to find alternate source of funds. In particular these provisions are very harsh for private companies as exemption for deposits or loans taken from members has now been withdrawn. The exemption is now given to deposits or loans from directors only. Under the Old Act exemption was given to deposits or loans from relatives of directors of private companies. This is not given under the New Act.

It is true that these provisions are made in the New Act in view of the fact that the Government has noticed in recent years that some Companies are defaulting in refunding the amount of deposits and interest on the due dates. Hence, such stringent provisions can be justified in the interest of persons who invest their hard earned monies in such public deposits. The provisions for Deposit Insurance, Credit Rating, Creation of Deposit Repayment Reserve Account, Creation of Security, appointment of Trustees for secured deposits etc. are provisions made to safeguard the interest of small depositors. However, it appears that there is no justification to rope in Private Companies which get deposit or loan from their members or their relatives.

Moreover, the penal provisions under which minimum fine can be levied for  default in  repayment of deposits or interest on due date are very harsh. The said fine can be levied on the Company and defaulting officer irrespective of the amount of the deposit and interest in respect of which default may occur.