Guest Post: Deposits – Issues Under the Companies Act, 2013 – Part 1

[The following post is contributed
by Madhusudan Bose, who is a lawyer
and company secretary by profession, at PRA Law Offices, New Delhi]

1.         Introduction
1.1       The company law in India prescribes
stringent conditions for acceptance of deposits by any company. In the
interests of the ordinary depositor, “deposits” are expansively defined to include
any “receipt of money by way of deposit
or loan or in any other form by a company”
UNLESS the category of amount
received is expressly excluded from the scope of “deposits” under the
Rules. 
1.2       The list of excluded categories was
conveniently broad under the Companies Act, 1956, and kept out most ordinary
business transactions and financing arrangements from the scope of “deposits”.  Thus, compliance with the deposit rules was
not particularly onerous. 
1.3       With effect from April 1, 2014, the provisions
of the new Companies Act, 2013 (“2013
Act”)
relating to deposits have come into force.  The new legal regime has brought about two
changes which require urgent attention by all companies:
First, the scope of “deposits” has been expanded. On the
one hand, some financing arrangements, which were excluded earlier, have been
brought under the scope of “deposits”. On the other hand, the exemption
accorded to other categories of transactions has been made subject to several
conditions.
Second, the 2013 Act mandates repayment of all deposits
received under the 1956 Act, and requires all future deposits to comply with
the new regime.
1.4       In light of the above, it is important to
understand the new legal regime, so that businesses can accordingly prepare themselves,
and ensure that their commercial and financing arrangements are in due
compliance with the revised framework.
2.1       Amounts
received from members and directors’ relatives by private companies
2.1.1    Earlier: The following amounts were
excluded from the definition of “deposits”, under the Companies (Acceptance of
Deposits) Rules, 1956 (“Old Rules”):
(a)        Amounts
received by any company from its directors;
(b)        Amounts
received by a private company from its members, and directors’ relatives. 
2.1.1    Change:  As per the New Rules, any amount received by a private company from its members (not being
companies), and relatives of its directors are covered under the definition of
deposits,
as they are not specified to be excluded from the definition of
“deposits”.
Deposits accepted by a company (whether public or
private) from its directors continue to be excluded from the scope of
“deposits” under the New Rules.
2.2       Amounts
received in ordinary course of business of the Company
2.2.1    Earlier:  Any advances received against orders for the
supply of goods or properties or for the rendering of any service were excluded
from the definition of the deposits. No time limits were prescribed by the Old
Rules.
2.2.2    Change:  The New Rules have narrowed the scope of
exclusions, and specified additional conditions for claiming the benefit of
exclusion from the definition of “deposits”. 
Accordingly, the New Rules exclude “any
amount received in the course of, or for the purposes of, the business of the
company”
from the definition of “deposits” if they fall under the following
heads:
(a)        Amounts
received as an advance for the supply of goods or provision of services,
provided:
– They are accounted for in any manner whatsoever;
and
– 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.
The above time limit does not apply to any advance which
is the subject matter of any legal proceedings before any court of law.
Notes:  The above
time limit also does not apply to amounts received as advance under long term
projects for supply of capital goods. [See (e) below] 
(b)       Amounts
received as advance in connection with consideration for property under an
agreement or arrangement, provided:
– They are accounted for in any manner whatsoever;
and
– Such advance is adjusted against the property in
accordance with the terms of agreement or arrangement.
Notes:  No upper
time limit has been specified within which advance received as consideration
for property should be adjusted.
(c)        Amounts
received as security deposit for the performance of the contract for supply of
goods or provision of services;
Ordinarily, an advance is paid by the purchaser
towards part payment of the consideration for the contract.  On the other hand, a security deposit is made
for guaranteeing due performance of the contract.     
(d)       Amounts
received as advance under long term projects for supply of capital goods except
those covered under item (b) above
The Law Lexicon defines capital goods as equipment
and machinery, which are used for the production of other goods or services.[1]
The condition that advances must be appropriated within three hundred and sixty
five days has not been made applicable to capital goods.   
2.3       Application
/ advance money against shares and other securities
2.3.1    Earlier:  The Old Rules excluded any amount received by
way of subscriptions to any shares, stock, bonds or debentures from the scope
of “deposits”.
2.3.2    Change
(a)          The
New Rules have expanded the scope of exclusion by specifying that any amounts
towards subscription to any securities (and not just shares, debentures etc) shall be excluded from the
scope of “deposits”. 
(b)          The
language under the New Rules indicates that only amounts received and held
pursuant to an offer made in accordance with the provisions of the Companies
Act, 2013 will be eligible for exclusion from the definition of deposits. 
(c)          Most
importantly, the New Rules specify that application / advance monies shall be
excluded from the scope of “deposits” subject to the following conditions:
– Such amount is appropriated only against the amount due on allotment of the securities applied
for;
AND
The securities have been allotted within 60 days
of receipt of the application / advance money;
– In case the securities have not been allotted
within aforesaid period, such application / advance money has been refunded
within 15 days of expiry of such 60 days. 
It is specifically provided that adjustment of the
amount for any other purpose shall not be treated as refund. 
2.4       Secured
bonds or debentures
2.4.1    Earlier:  The Old Rules excluded bonds or debentures secured
by mortgage on fixed assets of the company from the definition of “deposits”.
2.4.2    Change:  Under the New Rules, to be eligible for
exemption, the security on bonds or debentures must be provided by way of a first charge or a charge ranking pari passu
with the first charge on any of the assets specified in Schedule III

excluding intangible assets of the company. 
Like in the Old Rules, it is provided that the
amount of the bonds or debentures should not exceed the market value of the
assets.  It is further provided that such
market value should be assessed by a registered valuer.
Notes:  The
New Rules have expressly clarified that bonds or debentures must be secured by
a first charge over the assets of the company for being excluded from
the definition of deposits.
The
provisions relating to registered valuer have not come into force till
date.  Explanation II to Rule 6 provides
that pending notification of said provisions relating to registered valuer, the
valuation of stocks, shares, debentures, securities etc. shall be
conducted by an independent merchant banker who is registered with the
Securities and Exchange Board of India or an independent chartered accountant
in practice having a minimum experience of ten years.
2.5       Convertible
bonds or debentures
The New Rules provide that only such bonds or
debentures, which are compulsorily convertible into shares of the company
within a period of five years shall be excluded from the definition of
“deposits”.  
Notes: Optionally convertible debentures are no longer
excluded from the definition of deposits. Further, even in case of compulsorily
convertible debentures or bonds, the conversion must happen within a period of
five years for exclusion from scope of “deposits”.  
2.6       Amounts
in transit and amounts received in trust
2.6.1    Earlier:
The Old Rules excluded “any amount
received in trust or any amount in transit”
from the definition of
“deposits”.
2.6.2    Change:  “Amounts in transit” are no longer excluded
from the definition of “deposits” under the New Rules.
Further, amounts received in trust are excluded
only if they comprise of non-interest bearing amounts. 
(to be continued)
– Madhusudan Bose



[1]
The Law Lexicon, Seventh
Edition

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

3 comments

  • If one were to convert the OCDs into CCDs convertible within a period of 5 years, would the same be out of the Deposit Rules? Or even in such cases, repayment is mandatory?

  • If OCDs are converted into CCDs convertible within a period of 5 years, it should come out of the scope of Deposit Rules.

    I believe your reference is to OCDs taken under the 1956 Act. If you convert, such OCDs would not become due after commencement of the 2013 Act, therefore,it appears possible to argue that they are not repayable under Section 74.

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