THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER V

Acceptance of Deposits

Sections 73–76A

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Chapter V — Acceptance of Deposits by Companies (Sections 73–76A)

Chapter V regulates the receipt of money by companies by way of deposits. It is a response to repeated public scandals — from the 1980s right up to the late 2010s — in which companies mobilised savings from unsuspecting depositors and vanished. The scheme of the Chapter is broadly to (i) prohibit all companies (other than banking and NBFCs) from accepting public deposits, (ii) permit acceptance of deposits from members subject to conditions, (iii) permit a narrow class of eligible companies to accept deposits from the public subject to stricter conditions, and (iv) enforce refund and penal consequences for violations.

Meaning of 'Deposit' [Section 2(31) and Rule 2(1)(c)]

'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 India.

Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 lists 18 exclusions — amounts received from Central or State Government, or foreign Government/bank; loans from banks or financial institutions; commercial paper; inter-corporate loans; subscription money towards securities pending allotment (for up to 60 days); directors' own money (accompanied by declaration that amount is not from borrowing); money brought in by promoters by way of unsecured loan in pursuance of stipulation of any lending financial institution or bank; advance received for supply of goods or services; and so on. These are amounts economically distinct from 'deposits' and are correctly excluded.

Section 73: Prohibition on Acceptance of Deposits from Public

On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter.

However, a company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members subject to fulfillment of the following conditions, namely —

Conditions for Acceptance of Deposits from Members [Section 73(2)]

1. 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 such form and in such manner as may be prescribed;
2. filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;
3. depositing, on or before the thirtieth day of April each year, such sum which shall not be less than twenty per cent (20%) of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account;
4. [omitted by the Companies (Amendment) Act, 2017 — erstwhile requirement of deposit insurance];
5. 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 if a default had occurred, the company made good the default and a period of five years has lapsed since the date of making good the default;
6. providing security, if any 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.

Classes of Companies Exempted from Section 73(2)(a) to (e)

Exempted from clauses (a) to (e) of Section 73(2) — i.e., relaxed conditions — are (by the Exemption Notification dated 5th June 2015, read with the Notifications dated 13th June 2017):

• A private company which accepts from its members monies not exceeding one hundred per cent of aggregate of the paid-up share capital, free reserves and securities premium account; or
• A private company which is a start-up, for five years from the date of its incorporation; or
• A private company which fulfils all of the following: (a) is not an associate or subsidiary company of any other company; (b) borrowings of such company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or 50 crore rupees, whichever is lower; and (c) such a company has not defaulted in repayment of such borrowings subsisting at the time of accepting deposits under this section.

Such private companies are still required to file details of monies so accepted with the Registrar in the prescribed form.

Repayment and Remedies [Section 73(3)–(4)]

Every deposit accepted by a company under sub-section (2) 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 for any loss or damage incurred by him as a consequence of such non-payment.

Section 74: Repayment of Deposits, etc., Accepted Before Commencement of this Act

Where in respect of any deposit accepted by a company before the commencement of this Act, the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter, the company shall —

• file, within a period of three months from such commencement or from the date on which such payments are due, with the Registrar a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayment; and
• repay within three years from such commencement or on or before expiry of the period for which the deposits were accepted, whichever is earlier.

The Tribunal may, on an application made by the company, after considering the financial condition of the company, the amount of deposit or part thereof and the interest payable thereon and such other matters, allow further time as considered reasonable to the company to repay the deposit.

If a company fails to repay the deposit or part thereof or any interest thereon within the time specified in sub-section (1) or such further time as may be allowed by the Tribunal under sub-section (2), the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees or twice the amount of deposit accepted by the company, whichever is lower, 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.

Section 75: Damages for Fraud

Where a company fails to repay the deposit or part thereof or any interest thereon referred to in Section 74 within the time specified therein or such further time as may be allowed by the Tribunal under that section, and 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, without prejudice to the provisions contained in sub-section (3) of that section and liability under Section 447, 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. Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.

This is, in effect, a statutory piercing of the corporate veil — officers become personally liable without limitation when deposits have been fraudulently raised.

Section 76: Acceptance of Deposits from Public by Certain Companies

Notwithstanding anything contained in Section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of Section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe.

'Eligible Company' [Rule 2(1)(e) of 2014 Rules]

A public company having —

• net worth of not less than one hundred crore rupees; or
• turnover of not less than five hundred crore rupees,

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 before making any invitation to the Public for acceptance of deposits. An ordinary resolution is sufficient for acceptance of deposits within the limit specified under Section 180(1)(c), i.e., aggregate of paid-up share capital and free reserves.

Additional Requirements for Eligible Companies

• Credit rating from a recognised credit rating agency — such rating to be obtained every year during the tenure of deposits; minimum investment-grade rating is mandatory.
• Creation of charge on company's tangible assets for an amount not less than the amount of deposits accepted — failing which, the deposit is deemed 'unsecured' and must be so disclosed.
• Appointment of deposit trustees, issuance of deposit trust deed, and maintenance of liquid assets in the form of deposit repayment reserve account.
• Issue of deposit circular or advertisement in the prescribed form after filing with the Registrar.

Limits on Deposits under Rules

Section 76A: Punishment for Contravention of Section 73 or Section 76

Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under Section 73 or Section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under Section 73 or Section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under Section 73 —

• the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees or twice the amount of deposit accepted by the company, whichever is lower, 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 and with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees.

The word 'and' in (ii) (substituted by the 2017 Amendment for the earlier 'or') means imprisonment and fine are now cumulative for officers. If it is proved that the officer of the company who is in default has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under Section 447 (fraud).

Landmark Cases on Deposits