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Category: Corporate Law Corner

Practical aspects of acceptance of deposits by Private Companies and Non-Eligible Companies1 – Part-II

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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.

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

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This article is divided into two Parts. This Part deals with conditions and restrictions on Private Companies and Non-Eligible Companies while accepting deposits from its Members. The subsequent later part will deal in acceptance of deposits by “Eligible Companies” compliance thereof and peculiar cases.

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.