Guest Post: Deposits – Issues Under the Companies Act, 2013 – Part 2

[The following post is contributed
by Madhusudan Bose, who is a lawyer
and company secretary by profession, at PRA Law Offices, New Delhi
This is the continuation of the previous
post
on the topic]

3.1       Like in the Old Rules, the New Rules continue
to exclude “any amount received by a company from any other company” from the
scope of deposits. 
3.2       There is an important point to be noted
here.  As discussed under Paragraph (2)
above, the exemption granted to some categories of transactions, from the scope
of “deposits” is subject to certain conditions. For instance, an advance for
supply of goods or provision of services is required to be appropriated within
365 days.   
On the other
hand, “any amount received by a company from any other company” has also been
excluded from the scope of deposits.
Reading the
above together, it can be argued that once an amount is shown to be received by
a company from another company, it is excluded from the definition of deposits,
and no further condition need be complied. 
For instance, it can be contended that if a company receives an advance
for supply of goods and services from another company, it need not appropriate
the advances received within 365 days.
 
3.3       The above analogy is being borrowed from an
accepted interpretation of the Old Rules under the 1956 Act.  For example, under the Old Rules, if an
amount is received towards subscription to unsecured
non-convertible debentures (otherwise included in the definition of deposits)
,
such amounts were still considered as excluded from the definition of
“deposits” so long as it could be ensured that the debentures were subscribed
to and held by companies only. [A
Ramaiya, Guide to the Companies Act, 17th Edition, 2010, Part I,
Page 874]
3.4       However, it would have been much better
if the Rules themselves had clarified the above position.  A converse interpretation may have important
implications on the manner in which companies structure their commercial
contracts for goods and services with partner companies.
4.         Repayment
Of Deposits Accepted Before Commencement Of The 2013 Act
4.1       There
is a slightly vexing issue under Section 74 of the 2013 Act.  Section 74 of the 2013 Act requires all “deposits” “accepted by a company before the commencement of the 2013 Act”
to be repaid within one year of the commencement of the 2013 Act. Further, such
companies are required to file a statement of all unpaid deposits within three
months from the commencement of the 2013 Act or from the date on which such
payments are due.
4.2       Whether definition of deposits to be
construed as per the 2013 Act or the 1956 Act
4.2.1    As
discussed above, there are significant differences between the definition of
“deposits” under the 2013 Act, and under the 1956 Act.  For example, any amount received by a private
company from its members (not being a company) is covered within the definition
of a deposit under the 2013 Act.
4.2.2    One
pertinent question, therefore is, for the purposes of compliance with Section
74 of the 2013 Act, whether a company should consider the definition of
“deposits” under the 2013 Act or the 1956 Act.
4.2.3    Section
2 of the 2013 Act defines the terms used in the 2013 Act. It is a standard rule
of interpretation that words used in a statute are to be assigned the same
meaning as given to them under that statute, unless the context otherwise
requires.  Accordingly, it appears that
for the purposes of Section 74, “deposits” should be considered as
they are defined under the 2013 Act, and not under the 1956 Act.
4.2.4    The
above viewpoint is also in harmony with the framework relating to deposits
under the 2013 Act. The 2013 Act has sought to execute a clean break from the
legal regime relating to deposits under the 1956 Act, by requiring all deposits
accepted before the commencement of the 2013 Act to be refunded within the
specified time frame. The object appears to be that all deposits held by a
company should henceforth be held in accordance with the 2013 Act.
If for the purposes of Section 74, “deposits”
are construed as defined under the 1956 Act, there will be some amounts – such
as deposits received by a private company from its members – which
theoretically, can be retained by such companies indefinitely.  This is because these amounts did not constitute
“deposits” under the 1956 Act, and therefore, it could be argued that
the provisions of Section 74 does not apply to such amounts.  This does not appear to be in line with the
scheme of Section 74 of the 2013 Act.
Notes: Effectively, it appears that all amounts which
have been received by a company before the commencement of the 2013 Act, and
which would constitute “deposits” if received under the 2013 Act,
would have to be repaid by March 31, 2015. 
However, please see the exception with respect to repayment of “public
deposits” below.
4.3       Repayment of “public deposits”
accepted under the 1956 Act
4.3.1    Section
76 regulates acceptance of deposits by a company from the public (i.e. from
persons who are not members of the company). Sub-section (2) of Section 76
provides that the provisions of the Chapter (which include Section 74) shall
also apply to acceptance of deposits from the public under Section 76.
4.3.2    Rule 19
of the New Rules has relaxed the requirement with respect to repayment of
deposits under Section 74, for “public deposits” accepted or invited
under the 1956 Act.
Explanation to Rule 19 provides that:
(a)     In case of a company which had excepted or invited
public deposits under the relevant provisions of the Companies Act, 1956 and
rules made under that Act (“Earlier Deposits”); and
(b)    Has been repaying such deposits and interest
thereon in accordance with such provisions;
the provisions of Section 74(1)(b) (which provides for
repayment of deposits under the 1956 Act), shall be deemed to have been
complied with if:
(i)      the company complies with the requirements under
the Companies Act, 2013 and the New Rules; and
(ii)    Continues to repay such deposits and interest due
thereon on due dates for the remaining period of such a deposit in accordance
with the terms and conditions and period of such Earlier Deposits and in
compliance with the requirements under the 2013 Act and the New Rules.
4.3.3    The 1956
Act and the Old Rules do not define “public deposits”. However, with
reference to Section 58A of the 1956 Act, the reference to “public
deposits” appears to be to those deposits which have been accepted or
invited from the public, after issue of advertisement, in accordance with the
Old Rules.
5.         Companies
Eligible To Raise Public Deposits
And Important New Safeguards For Depositors
5.1       The
2013 Act has significantly raised the benchmark limits for companies who desire
to invite or accept deposits from the public.
5.2       Section
76 read with the New Rules stipulate that only a public company having a net
worth of not less than 100 crore rupees or turnover of not less than 500 crore
rupees would be eligible to accept deposits from persons other than its members.
The above limits are not applicable in case of a company accepting deposits
from its members.
5.3       The New
Rules propose important new safeguards for depositors such as provision for
deposit insurance, creation of security (in case of secured deposits), compulsory
credit rating etc.  However, these would
require a separate discussion altogether.
All in all, the overall changes in the legal regime
are welcome and calculated to give better security to depositors, and prevent
exploitation of gullible investors through disguised public issues.  As happens with every regime change, the
revised law is accompanied with some ambiguities, which would need to be
clarified over a period of time.  
(concluded)

– Madhusudan Bose

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.

2 comments

  • Companies (Acceptance of Deposits) Rules, [Rule 2.(1)(c)(xii)a] provides that if a company has not appropriated the advance received from non body corporate within 365 days of receipt of such advance for supply of goods, such advance shall be treated as deemed deposit. If the company falls under the category where it cannot accept deposit from public. How does the company deal with this deadlock situation.

  • Hi … What about section75(2) ? When does that stem into operation ? Can 75(2) proceedings be commenced even before exhaustion of ,74(2) remedy by a company ,?

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