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CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

COMPANY LAW
Project on:ACCEPTANCE OF PUBLIC
DEPOSITS
Submitted To: Mr. Brijnath
Submitted By:
NIDHI KUMARI
Roll No.
569
Semester

: VII, 4th Year.

ACKNOWLEDGEMENT

The present project on the Acceptance of Public Deposits has been able to get its final shape
with the support and help of people from various quarters. My sincere thanks go to all the
members without whom the study could not have come to its present state. I am proud to
acknowledge gratitude to the individuals during my study and without whom the study may not
be completed. I have taken this opportunity to thank those who genuinely helped me.
With immense pleasure, I express my deepest sense of gratitude to Mr. Brijnath

, Faculty for

Company Law, Chanakya National Law University for helping me in my project. I am also
thankful to the whole Chanakya National Law University family that provided me all the
material I required for the project. Not to forget thanking to my parents without the co-operation
of which completion of this project would not had been possible.
I have made every effort to acknowledge credits, but I apologies in advance for any omission that
may have inadvertently taken place.
Last but not least I would like to thank Almighty whose blessing helped me to complete the
project.

RESEARCH METHODOLOGY

Method of Research:
The researcher has adopted a purely doctrinal method of research. The researcher
has made extensive use of the library at the Chanakya National Law University and
also the internet sources.

Aims and Objectives:


The aim of the project is to present an overview of the terms ACCEPTANCE OF
PUBLIC DEPOSITS through different writings and articles

Sources of Data:
The following secondary sources of data have been used in the project1. Books
2. Websites

Method of Writing:
The method of writing followed in the course of this research paper is
primarily analytical.

CONTENTS

ACKNOWLEDGEMENT
RESEARCH METHODOLOGY

CHAPTERISATION

INTRODUCTION
MEANING OF DEPOSITS
INVITATION AND ACCEPTANCE OF DEPOSITS
EXEMPTIONS
REPAYMENT OF DEPOSITS
ADVERTISEMENT FOR INVITING DEPOSITS
REGISTER OF DEPOSITS
RETURN OF DEPOSITS AND PENALTY
COMPARISON BETWEEN THE COMPANIES 1956 ACT AND

2013ACT
CASE LAWS

CONCLUSION
BIBLIOGRAPHY

INTRODUCTION
Public deposits are an important source of financing the medium-term and long-term
requirements of a company. The term 'public deposit' implies any money received by a company
through the deposits or loans collected from the public. The public includes the general public,

employees and shareholders of the company but excludes the money received in the form of
shares and debentures. In India, this method of raising finance has gained a lot of importance
because of the several advantages relating to public deposits:

It is an easier method of mobilising funds, especially during periods of credit squeeze.

The administrative cost of deposits for the company is lower than that involved in the
issue of shares and debentures. The procedure of inviting public deposits is also simpler
and involve lesser formalities.

The rate of interest payable by the company on public deposits is lower than the interest
on loans from banks and other financial institutions. Such an interest is a tax deductible
expense.

It helps the company to borrow funds from a larger segment of public and thus reduces
the dependence of the company upon financial institutions.

It also enables the company to create contact with a large number of investors.

It ensures the availability of funds for a longer duration and provides flexibility to the
financial structure of the company. There is no risk of over-capitalisation and the deposits
can be repaid when they are not required.

There is no dilution of shareholders' control as the depositors have no voting rights and
cannot interfere with the internal management of the company.1

But this mode of financing through public deposits has its own limitations:-

1 http://business.gov.in/growing_business/public_deposits.php as accessed on 25th


Oct, 14.

As the public deposits are more likely to be affected by the uncertain conditions in the
economy, the depositors response may vary accordingly. They may also tend to withdraw
their deposits if the company is not performing well.

Public deposits with the companies may cause a diversion of resources into non-priority
and undesirable areas.

Professional investors may not like to invest in such deposits as there is no or less chance
for capital appreciation.

As public deposits are unsecured, the depositors may have to bear the risk of loss of
money in the event of failure of the company.

Their widespread use restricts the growth of a healthy capital market. They also tend to
distort the interest rate pattern of the economy and may result in the dearth of sound
industrial securities.2

Regulating Public Deposits


The public deposits are regulated by the provisions of the Companies Act 1956, 2013 and the
Companies (Acceptance of Deposit) Rules, 1975 as well as of 2014.
Acceptance of public deposits and the provisions related thereto are here by discussed under the
presiding chapters.

MEANING OF DEPOSITS
2 ibid

Meaning of Deposit As per Companies Act 1956


1. As per explanation to Section 58A deposit means any deposit of money with, and includes
any amount borrowed by, a company but shall not include such categories of amount as may be
prescribed in consultation with the Reserve Bank of India.
2. Such exempted categories prescribed by the Central government in consultation with RBI
(through Companies (Acceptance of Deposit Rules), 1975) are as follows:

Amounts Received from the Government/Foreign Sources

Loans from Banking company/Financial Institution

Inter company deposits

Amount Received from Employee by way of Security Deposit, Amount from Agents

Advances against Orders (for supply of goods etc.)

Subscriptions to Securities

Calls in Advance of Shares

Trust Moneys

Amount Received from Directors or his relative

Amount Received from Members (only in case of Private co.)

Secured Bonds or Debentures, Convertible Bonds or Debentures

Promoters Unsecured Loans pursuant to stipulations laid down by the financial


institutions for granting the loan. Also, section 3 (1)(iii) of the Companies Act, 1956
prohibits a private company from the inviting and accepting any DEPOSIT from
person other than its members, directors or their relatives.3

3 http://taxguru.in/company-law/acceptance-deposit-section-73-76-simplified.html
as accessed on 25th Oct, 14.

As per Section 2(31) of the Companies Act, 2104:- Deposit 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 as may be prescribed in consultation with the Reserve Bank of India4;
Amounts which are not considered as deposits (Rule 2 of Companies (Acceptance of
Deposits) Rules, 2014)

any amount received from the Central Government or a State Government, or any amount
received from any other source whose repayment is guaranteed by the Central
Government or a State Government, or any amount received from a local authority, or a
statutory authority constituted under an Act of Parliament or a State Legislature.

any

amount

received

from foreign

Governments,

foreign

or

international

banks, multilateral financial institutions.

any amount received as a loan or facility from any banking company or from the State
Bank of India or any of its subsidiary banks or from a banking institution

any amount received as a loan or financial assistance from Public Financial


Institutions notified by the Central Government in this behalf

any amount received against issue of commercial paper or any other instruments issued in
accordance with the guidelines or notification issued by the Reserve Bank of India

any amount received by a company from any other company

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

4 http://taxguru.in/company-law/acceptance-public-deposits-companies-companies-act2013-provisions.htmlAs accessed on 25th Oct, 14.

any amount received from a person who, at the time of the receipt of the amount, was
a director of the company

any amount raised by the issue of bonds or debentures secured by a first charge or a
charge ranking pari passu with the first charge on any assets referred to in Schedule III of
the Act excluding intangible assets of the company or bonds or debentures compulsorily
convertible into shares of the company within five years:

any non-interest bearing amount received or held in trust;

any amount received in the course of, or for the purposes of, the business of the company
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 three hundred and sixty five days from the date of
acceptance of such advance:

Provided that in case of any advance which is subject matter of any legal proceedings before any
court of law, the said time limit of three hundred and sixty five days shall not apply:

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
fulfillment of the following conditions, namely
o the loan is brought in pursuance of the stipulation imposed by the lending
institutions on the promoters to contribute such finance;
o the loan is provided by the promoters themselves or by their relatives or by both;
o the exemption under this sub-clause shall be available only till the loans of
financial institution or bank are repaid and not thereafter;

any amount accepted by a Nidhi company in accordance with the rules made under
section 406 of the Act.5

5 Ibid

INVITATION AND ACCEPTANCE OF DEPOSITS


Eligible company which can receive deposits from public:
Eligible Company means a public company as referred to in sub-section (1) of section 76,
having a net worth of not less than Rs. 100 Crores or a turnover of not less than Rs. 500 Crores
and which has obtained the prior consent of the company in general meeting by means of a
special resolution and also filed the said resolution with the Registrar of Companies before
making any invitation to the Public for acceptance of deposits.
Provided that an eligible company, which is accepting deposits within the limits specified under
clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary
resolution6;
Quantum of deposits that can be accepted:
A. From members

No Eligible company shall accept or renew 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 and

No other company shall accept or renew any deposits 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.

B. From public
6 Bhandari, M.C., Guide to Memorandum, Articles and Incorporation of Companies 4 th
edition, Nagpur, Wadhwa Publishers, 2005. Pg.no. 37.

No eligible company shall accept or renew any deposit from public, if the amount of such
deposit other than the deposit received from members, together with the amount of
deposits outstanding on the date of acceptance or renewal exceeds 25% of aggregate of
the paid-up share capital and free reserves of the company.

No Government company eligible to accept deposits under section 76 shall accept or


renew any deposit, if the amount of such deposits together with the amount of other
deposits outstanding as on the date of acceptance or renewal exceeds 35% of the paid-up
share capital and free reserves of the company.

Conditions to be satisfied for accepting deposits:o Resolution to be passed by company in general meeting.
o Rules as may be framed by RBI to be complied with.
o Circular to be issued to members showing financial position of the company, the credit rating
obtained, details of outstanding deposits, if any, and other particulars as given below.
o Deposit Repayment Reserve Account to be opened with a scheduled bank and atleast 15% of
amount of deposits maturing during the current and next financial year to be deposited in the
account. This account cannot be used for any other purpose.
o Deposit insurance to be provided in the manner prescribed below:
-Every company referred to in sub-section (2) of section 73 and every other eligible company
inviting deposits 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
-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 the interest thereon by the insurer up to the
aggregate monetary ceiling as specified in the contract.7
7 http://taxguru.in/company-law/acceptance-public-deposits-companies-companiesact-2013-provisions.html#sthash.0i3VqYVP.dpuf as accessed on 25th Oct, 14.

-In the case of any deposit and interest not exceeding twenty thousand rupees, the deposit
insurance contract shall provide for payment of the full amount of the deposit and interest and in
the case of any deposit and the interest thereon in excess of twenty thousand rupees, the deposit
insurance contract shall provide for payment of an amount not less than twenty thousand rupees
for each depositor
- The amount of insurance premium paid on the insurance of such deposits shall be borne by the
company itself and shall not be recovered from the depositors
- If any default is made by the company in complying with the terms and conditions of the
deposit insurance contract which makes the insurance cover ineffective, the company shall either
rectify the default immediately or enter into a fresh contract within thirty days and in case of
non-compliance, the amount of deposits covered under the deposit insurance contract and
interest payable thereon shall be repaid within the next fifteen days and if such a company does
not repay the amount of deposits within said fifteen days it shall pay fifteen per cent interest per
annum for the period of delay and shall be treated as having defaulted and shall be liable to be
punished in accordance with the provisions of the Act.
o Certificate to be provided regarding absence of any default by the company in repayment of
deposit or interest thereon, either before or after the commencement of this Act.
o Repayment of deposit and interest may also be secured by creation of charge on the assets and
property of the company in compliance with rules in this regard.
o Deposits which are unsecured or partially secured shall be so mentioned in all documents
related to invitation or acceptance of deposits.
o Credit rating should be obtained for accepting deposits from public. Every deposit accepted
by a company under this section shall be repaid with interest in accordance with the terms and
conditions of the agreement entered between the company and depositor. In case of failure of
company to repay deposits or interest thereon, the depositors can approach the Tribunal to obtain
necessary orders for the company to make the payment or for any loss or damage incurred.8
8 Majumdar, A.K., Kapoor, G.K., Company Law, Taxmanns Publications Ltd., 16 th Edition,
2013. Pg. no. 152.

ACCEPTANCE OF DEPOSITS FROM PUBLIC BY CERTAIN COMPANIES- SEC-76


A public company, having net worth of not less than Rs.100 Crores or turnover of not less
than Rs.500 Crores, may accept deposits from persons other than its members subject to
compliance with the requirements provided in section 73(2) and Companies (Acceptance of
Deposit) rules,2014.
Obtain rating from Credit Rating Agency:
Every company shall be required to obtain the rating (including its net worth,
liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for
informing 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.9
Create charge on assets: Every company accepting secured deposits from the public shall within
30 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 CAD, rules 2014.
Pursuant to provisions of section 76(2) of the Act, the provisions of sections 73 and 74
shall, mutatis mutandis, apply to acceptance of deposits from public by eligible companies. In
case of a company which had accepted or invited public deposits under the relevant provisions of
the Companies Act, 1956 and rules made under that Act (hereinafter known as Earlier
Deposits) and has been repaying such deposits and interest thereon in accordance with such
provisions, the provisions of section 74(1)(b) of the Act shall be deemed to have been complied
with if the company complies with requirements under the Act and these rules and continues to
repay such deposits and interest due thereon on due dates for the remaining period of such
deposit in accordance with the terms and conditions and period of such Earlier Deposits and in
compliance with the requirements under the Act and these rules. 10 The fresh deposits by every
eligible company shall have to be in accordance with the provisions of Chapter V of the Act and
these rules.
9 ibid
10 Supra Note 3.

EXEMPTIONS
PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC- SEC.73
After the commencement of present Act of 2013, or more correctly, on issue of Notification by
Government of India making Section 73 effective; no company shall invite, accept or renew
deposits from the public except in a manner provided under Chapter V of the Act. The chapter V
has total four Sections i.e. Section 73 to 76 (both inclusive).
This prohibition does not apply to a banking company, a non banking financial company as
well as any other class of company as specified by the Central government. The Central
government may specify any company after consultation with the Reserve Bank of India.
A company may after passing a resolution in general meeting accept deposit from its members
subject to agreed terms and conditions and on following conditions, namely:
(a) Issue of a circular to its members, which includes statement of financial position, credit
rating, total number of depositors, amount due and other prescribed particulars;
(b) Filing a copy of the circular along with statement with the Registrar within thirty days before
the issue of the circular;
(c) Depositing and kept a sum not less than fifteen percent of the amount of its deposits
maturing during the current and next following financial year in a schedule bank in a separate
bank account to be called as deposit repayment reserve account;
(d) Providing a deposit insurance as prescribed;
(e) Certifying that the company has not committed any default in repayment of deposits
accepted before or after the commencement of this Act or payment of interest on such deposit;
and
(f) Providing security including the creation of charge on the property or assets of the company.
However security is not required where deposit is termed as unsecured deposits in every
circular, form, advertisement and other documents.

Every deposit accepted by the company shall be repaid with interest in accordance with the terms
and conditions of the agreement.
Where a company fails to repay the deposit or part thereof or any interest thereon, the depositor
concerned may apply to the Tribunal for an order directing the company to pay the sum due or
any loss or damage incurred by him as a result of such non payment and such other order as the
tribunal may deem fit. The deposit repayment reserve account (DRRA) shall be utilised by the
company for repayment of deposits.11

11https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CCgQFjAC&u
rl=http%3A%2F%2Fwww.icsi.edu%2Fportals%2F0%2FACCEPTANCE%2520OF
%2520DEPOSITS.pdf&ei=CY1UVNjSNsK3uQTei4HwAQ&usg=AFQjCNFsIjNd2qBJK9MP
7oDCPK8NlTk8xQ&bvm=bv.78677474,d.c2E as accessed on 25th Oct, 14.

REPAYMENT OF DEPOSITS
REPAYMENT OF DEPOSITS ACCEPTED UNDER OLD ACT (SECTION 74):
In case company has accepted any deposit and any such deposit or its part or any interest thereon
is due at the time when this Section come into force, the company shall
(a) File a statement of all deposits and sum remaining unpaid with interest payable thereon,
arrangement for repayment with the Registrar within three months from the date of
commencement of this provision or from the date on which such deposit become due; and
(b) Repay within one year all such sums from commencement of this provision or form the date
on which such payment become due.
However, the Tribunal (NCLT) may, on application made by the company, allow further time as
considered reasonable to the company to repay the deposit. The tribunal shall consider financial
position of the company, amount of deposit and the interest thereon.
Any failure on part of company within specified time or such further time shall be punishable
with fine which shall not be less than one crore rupees but which may extend to ten crore rupees
and 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 twenty-five lakh rupees but
which may extend to two crore rupees, or with both.12
DAMAGES FOR FRAUD (SECTION 75)
Any person, group of person or any association of persons (that means anyone) who has incurred
any loss as a result of the failure of the company to repay the deposit or part thereof or any
interest thereon may initiate a suit, proceedings or any other suitable action against the company
and every officer of the company. This recourse is available to against the company in addition to
recourse available under Section 74.
12 Anantharaman, K.S., Lectures on Company Law and Company Act, Lexis Nexis
Butterworths Wadhwa Publications, 10th Edition. Pg. no. 176.

If, it is proved that the deposits had been accepted with intent to defraud the depositors or for any
fraudulent purpose, every officer of the company who was responsible for the acceptance of such
deposit shall be personally responsible, without any limitation of liability, for all or any of the
losses or damages that may have been incurred by the depositors.
This is also clear from this Section, the company and every officer of the company shall also be
liable for punishment for fraud under Section 447 of the Act.
This is very stringent punishment in case of fraudulent failure to repay the deposit or interest.
There is provision for imprisonment for up to seven year under Section 74 and up to ten year
under Section 447. Financial penalty goes as high as two crore rupees under Section 74,
unlimited amount of loss or damages under Section 75 and any amount up to three times of
amount involved in fraud. Most important thing is any person suffering from loss may file
complaint.13

13 ibid

ADVERTISEMENT FOR INVITING DEPOSITS

Advertisement details:
i.

Name of the company.

ii.

Date of incorporation.

iii.

Business of the company and of the subsidiaries, if any.

iv.

Particulars about the management of the Company.

v.

Profits of the company before and after making provision for tax for last 3
financial years.

vi.

Dividends declared for last 3 financial years.

vii.

Financial position of the Company as reflected in the last two (2) Balance sheets
before the date of the advertisement.

viii.

Other details as mentioned in the rules.14

Form and particulars of advertisements or circulars.Issue circular:


Every company referred to section 73(2) intending to invite deposit from its members shall issue
a circular to all its members by registered post with acknowledgement due or speed post or by
electronic mode in Form DPT-1
Publish Circular:
The circular may be published in English language in an English newspaper and in vernacular
language in a vernacular newspaper having wide circulation in the State in which the registered
office of the company is situated.
Every eligible company intending to invite deposits shall issue a circular in the form of an
advertisement in Form DPT-1 for the purpose in English language in an English newspaper and
in vernacular language in one vernacular newspaper having wide circulation in the State in which
the registered office of the company is situated.

14 http://rna-cs.com/acceptance-of-deposits-by-companies as accessed on 25th Oct,


14.

Upload copy of Circular:


Every company inviting deposits from the public shall upload a copy of the circular on its
website, if any.
File copy of Circular with Registrar:
No company shall issue or allow any other person to issue or cause to be issued on its behalf, any
circular or a circular in the form of advertisement inviting deposits, unless such circular or
circular in the form of advertisement is issued on the authority and in the name of the Board of
directors of the company.
No circular or a circular in the form of advertisement shall be issued by or on behalf of a
company unless, not less than thirty days before the date of such issue, there has been delivered
to the Registrar for registration a copy thereof signed by a majority of the directors of the
company as constituted at the time the Board approved the circular or circular in the form of
advertisement, or their agents, duly authorised by them in writing.
Validity of Circular:
A circular or circular in the form of advertisement issued shall be valid until

the expiry of six months from the date of closure of the financial year in which it is issued
or

the date on which the financial statement is laid before the company in AGM or,

where the AGM for any year has not been held, the latest day on which that meeting
should have been held in accordance with the provisions of the Act, whichever is earlier and
A fresh circular or circular in the form of advertisement shall be issued, in each succeeding
financial year, for inviting deposits during that financial year.
The date of the issue of the newspaper in which the advertisement appears shall be taken as the
date of issue of the advertisement and the effective date of issue of circular shall be the date of
dispatch of the circular.15

15 Supra Note 8. Pg. no. 158.

REGISTER OF DEPOSITS

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 following particulars;
Particulars of deposits:
(a) name, address and PAN of the depositor/s;
(b) particulars of guardian, in case of a minor;
(c) particulars of the nominee;
(d) deposit receipt number;
(e) date and the amount of each deposit;
(f) duration of the deposit and the date on which each deposit is repayable;
(g) rate of interest or such deposits to be payable to the depositor;
(h) due date for payment of interest;
(i) mandate and instructions for payment of interest and for non-deduction of tax at source, if
any;
(j) date or dates on which the payment of interest shall be made;
(k) details of deposit insurance including extent of deposit insurance;
(l) particulars of security or charge created for repayment of deposits;
(m) any other relevant particulars;16
The entries shall be made within seven 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 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.

16 http://rna-cs.com/acceptance-of-deposits-by-companies as accessed on 25th Oct,


14.

RETURN OF DEPOSITS AND PENALTY


Return of Deposit containing details as on 31st March of a year to be filed by every company to
which the Deposit Rules apply, within 30th June of every year. The information contained in the
return should be duly audited by the auditor of the company who shall give his report as
per Form DPT 3.
Penalty:- If any company referred to in sub-section (2) of section 73 or any eligible company
inviting deposits or any other person contravenes any provision of 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 five thousand rupees and where the contravention is a
continuing one, with a further fine which may extend to five hundred rupees for every day after
the first day during which the contravention continues. [Rule 21 of (Acceptance of Deposits)
Rules, 2014.]
Default in repayment of deposit or interest thereon within time:
If a company fails to repay the deposit or part thereof or any interest thereon within the time
specified in section 74(1) or such further time as may be allowed by the tribunal under section
74(2) the company shall liable to pay fine between Rupees 1 Crore to Rupees 10 Crores Plus
Repayment of amount of deposit/interest and Officer in Default shall be punishable with
imprisonment which may extend to seven years or with fine which shall not be less than twenty
five lakh rupees but which may extend to two crore rupees, or with both notwithstanding the
penalty mentioned above and penalty for fraud. Aggrieved party may initiate any suit or
proceedings.
Penalty for fraud:
Imprisonment for term between 6 months to 10 years and Fine ranging from amount involved in
fraud to 3 times of the amount involved (Section 447 of The Companies Act, 2103):

Provided that where the fraud in question involves public interest, the term of imprisonment shall
not be less than 3 years.17

COMPARISON BETWEEN THE COMPANIES 1956 ACT AND 2013ACT


The provisions of the new act for the acceptance of deposits by the 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
exemptions from deposits or loans taken from the 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 the recent years that some companies are defaulting in refunding the amount of
deposits and interest on due dates. Hence, such stringent provisions can be justified in the
interest of the persons who invest their hard earned monies in such public deposits. Moreover,
the penal provisions under which minimum fine can be levied for default in repayment of
deposits or interest on due dates 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.
1. Exceptions to the definition of Deposit
Under the Deposit Rules, large number of exceptions have been retained from the Companies
(Acceptance of Deposits) Rules, 1975, for example the exception for an amount received by a
company from another company, amount received from foreign investors subject to the
provisions of the Foreign Exchange Management Act, 1999 ("FEMA") etc. still continue.18
However, some additional exceptions are provided under the Deposit Rules, few of them are
discussed as follows:
17 http://aishmghrana.me/2013/10/18/deposits-companies-act-2013/ as accessed
on 25th oct, 14.

(i) It is provided that the securities application money received by a company shall not be
considered as a deposit, only if the securities are allotted within 60 (sixty) days of receipt of such
amount or if the amount is refunded within the period of 15 (fifteen) days after the completion of
this 60 (sixty) day period. Here it is pertinent to note that while FEMA provided a time limit of
180 days for allotment of securities to foreign investors, CA 1956 did not provide for any such
time period.
(ii) Under CA 1956, the amount raised by bonds or debentures was not considered as deposits if
such bonds or debentures were secured by the mortgage of any immoveable property of the
company, wherein the value of the bonds or debentures so issued shall not be more than the
market value of such immoveable property, or if such bonds or debentures had an option to
convert them into shares of the company. However, with CA 2013, an onerous requirement is
provided wherein the bonds or debentures issued by a company should be secured by a first
charge or a charge ranking pari passu with the first charge on the assets of the company
(excluding the intangible assets) or such bonds or debentures should be compulsorily convertible
into shares of the company within 5 (five) years for availing the exemption from the definition of
deposits.
2. Preconditions for accepting deposits by public companies
CA 1956 required that the company should have a net owned fund of more than INR 10 million
for accepting public deposits, however, CA 2013 provides that a public company should have a
net worth of not less than INR 1 billion or a turnover of not less than INR 5 billion. In addition,
the public company should have (i) obtained prior consent by way of special resolution for
accepting deposits and (ii) filed such resolution with the RoC. However, if the aggregate of the
amount of deposits, as proposed to be accepted and existing deposits of the company do not
exceed the aggregate of the paid-up share capital and free reserves (excluding temporary loans

18 http://www.nishithdesai.com/information/research-and-articles/nda-hotline/ndahotline-single-view/article/india-inc-hit-by-new-deposit-rules.html?
no_cache=1&cHash=6e9564302c390da10f390a2effc330c8 as accessed on 24th Oct,
14.

obtained in the ordinary course of business), the prior consent by way of an ordinary resolution is
also sufficient for accepting public deposits.19

CASE LAWS

H.H. Marthanda Varma & H.H. Bhupendra Narayana Singh v. Registrar of Companies20
Penalty for Acceptance of deposit Where the contravention relates to acceptance of any
deposit, the company may be subjected to fine which shall not be less than the amount of deposit
so accepted.
Penalty for Invitation of any deposit Where the contravention relates to the invitation of any
deposit, the company shall be punishable with fine which may extend to rupees 10 lakh but shall
not be less than rupees 50,000.
In both these cases of acceptance or invitation of deposit in contravention of the requirements of
section 58A and the rules made thereunder , every officer of the company who is in default shall
be punishable with imprisonment for a term which may extend to 5 years and shall also be liable
to fine.

In Smt. Usha D. Rohra v. Electrex India Ltd.21


Where the company has been declared as a sick company and reference has been registered with
BIFR, it was held that the company would be liable to repay deposits made by the depositors
with the company.
19 ibid
20 [1988] 64 Comp. Cas. 125.
21 [2000] 28 SCL 275 (CLB-Chennai)

While making an order for repayment, CLB( now the tribunal) should give reasonable
opportunity to all concerned including the company. As to whether the repayment should be
ordered forthwith or within the extended time and whether any conditions should be imposed, it
is necessary to keep in mind the interest of the company, the depositors and the public
interest.while permitting time for repayment, interest of small depositors have to be kept
uppermost in mind and management has to restrain its resources to give priority to small
depositors.
In Modern Denim Ltd., In re,22
It was further observed that while considering proposal for extension of time for repayment :
(i)

Needs of depositors who are in indigent circumstances like hospitalization, old age,

(ii)
(iii)

marriage in the family, etc. have to be kept in view.


No proposal for repayment can extend for a period exceeding 3 years.
The chairman of the company can be ordered to execute a personal guarantee in
favour of the secretary, CLB(now the tribunal) which shall be liable to be
implemented in case of any deviation from the schedule.

22 [1998] 15 SCL 436 (CLB New Delhi).

CONCLUSION
Under the Companies Act and the rules framed thereunder, the invitation and acceptance of
deposits by companies is subjected to the following conditions:

Companies are not permitted to raise unlimited amounts of fund through public deposits.
The aggregate of all outstanding deposits cannot exceed certain prescribed percentage of
the paid up capital and free reserves of the company.

Invitations of deposits by a company can be made only by means of an advertisement


specifying the financial position, management structure and other particulars relating to a
company. A company which has defaulted in repayment of deposit or interest thereon is
prohibited from inviting deposits.

The depositors shall fill the application form supplied by the company. The company in
return issues a deposit receipt which is an acknowledgement of debt by the company. The
terms and conditions of the deposit are printed on the back of the receipt. The company
shall maintain a register of deposits containing the prescribed particulars and file returns
of deposits duly certified by their auditor with a Registrar on or before 30th June of every
year.

The interest to be allowed on such deposits by the company must be in accordance with
the rate fixed by the Government. The rate of interest on deposits also varies depending
upon the period of deposit and the reputation of the company.

The Companies (Amendment) Act,2000 has inserted certain new sections, in order to protect the
interests of small depositors. The expression 'small depositor' means ''a depositor who has
deposited (in a financial year) a sum not exceeding twenty thousand rupees in a company and
includes his successors, nominees and legal representatives". In case of any default by the
company in paying back to them, it shall inform the Company Law Board within sixty days from
the date of default. The Company Law Board will then direct the company to repay to small
depositors within a period of thirty days from the date of receipt of intimation of default.

On failure to comply with the orders of the Board, the company and its directors shall be
punishable with imprisonment and payment of daily fine during the period in which such noncompliance continues. However, if such a defaulting company wants to invite deposits from
small depositors, it shall state the complete nature of default in all its future advertisements and
application form.
Besides, the Reserve Bank of India issues directives from time to time for regulating public
deposits. These are aimed at safeguarding the interest of the public and to give them a feeling of
security in investing in the public deposits. These regulations pertain to:

The ratio of deposits to the paid-up capital and free reserves of the company

The maximum duration of the deposits

Obligation to invest a specified percentage of the deposit in a current or other account


with a scheduled bank free from any charge or lien, or in approved securities which shall
be used only for the repayment of deposits

The filing of periodical returns with the RBI, giving the required information about
public deposits/loans as well as furnishing of certain specified information on its financial
position and working.

BIBLIOGRAPHY

BOOKS:-

Majumdar, A.K., Kapoor, G.K., Company Law, Taxmanns Publications Ltd.,

16th Edition, 2013.


Singh, Avtar, Company Law, Eastern Book Company, 14th Edition, Lucknow,

2013.
Anantharaman, K.S., Lectures on Company Law and Company Act, Lexis

Nexis Butterworths Wadhwa Publications, 10th Edition.


Bhandari, M.C., Guide to Memorandum, Articles and Incorporation of
Companies 4th edition, Nagpur, Wadhwa Publishers, 2005.

EXTERNAL LINKS VISITED:1. http://business.gov.in/growing_business/public_deposits.php


2. http://taxguru.in/company-law/acceptance-deposit-section-73-76simplified.html
3. http://taxguru.in/company-law/acceptance-public-deposits-companiescompanies-act-2013-provisions.html

4. http://taxguru.in/company-law/acceptance-public-deposits-companiescompanies-act-2013-provisions.html#sthash.0i3VqYVP.dpuf
5. http://rna-cs.com/acceptance-of-deposits-by-companies
6. http://aishmghrana.me/2013/10/18/deposits-companies-act-2013/
7. http://www.nishithdesai.com/information/research-and-articles/ndahotline/nda-hotline-single-view/article/india-inc-hit-by-new-depositrules.html?no_cache=1&cHash=6e9564302c390da10f390a2effc330c8