Every Company needs funds to run and expand its business operations. These funds either are owners’ capital or debt. This debt can further be debenture, loans, and deposits. In this write-up, we are going to discuss deposits and inter-corporate borrowings.

In this write-up, I will analyse provisions related to acceptance of Deposits by the Company, the power of the Company to grant the loan, and restrictions on the powers of the Board to raise loans beyond the threshold limit.  Sections 73 to 76A, 179 to 180, and 186 very well articulate all the provisions. The write-up is divided into two parts, where this part (1st write-up) discuss the only meaning of the Deposits.

Deposits - Bag with rupee symbol and protection shield

Section 73 to 76A discuss the deposits, 179 to 180 provides about the power and restriction regarding the power of the Board, and section 186 deals with the Company’s power to grant loans to others.

Section 73: Prohibition on Acceptance of Deposit from Public.

Before moving further with the section, let us first understand the heading of Section 73; “Prohibition on acceptance of deposit from public.”

Heading itself make it very clear that this section prohibit (not restrict) from accepting deposit from public.


Section 2 clause (31) defines “Deposit” in an inclusive manner.

2(31) “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;

Deposits include any receipt of money in any form received by the company, except those which are excluded. The definition is inclusive as well as negative in nature.  Further, Rule 2 of the Companies (Acceptance of Deposits) Rule 2014 defines Deposits and provides the list of transactions not considered deposits.

Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

(i)  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 any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature ;

(ii)  any  amount  received  from  foreign  Governments,  foreign  or  international  banks,  multilateral  financial institutions  (including,  but  not  limited  to,  International  Finance  Corporation,  Asian  Development  Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign  Governments  owned  development  financial  institutions,  foreign  export  credit  agencies,  foreign collaborators,  foreign  bodies  corporate  and  foreign  citizens,  foreign  authorities  or  persons  resident  outside India  subject  to  the  provisions  of  Foreign  Exchange  Management  Act,  1999  (42  of  1999)  and  rules  and regulations made thereunder;

(iii) 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  notified  by  the  Central  Government  under  section  51  of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section  (2)  of  the  Banking  Companies  (Acquisition  and  Transfer  of  Undertakings)  Act,  1980  (40  of  1980),  or from  a  co-operative  bank  as  defined  in  clause  (b-ii)  of  section  2  of  the  Reserve  Bank  of  India  Act,  1934  (2  of 1934) ;

(iv)  any  amount  received  as  a  loan  or  financial  assistance  from  Public  Financial  Institutions  notified  by  the Central  Government  in  this  behalf  in  consultation  with  the  Reserve  Bank  of  India  or  any  regional  financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934);

(v) 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;

(vi) any amount received by a company from any other company;

(vii)  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; Explanation.- For the purposes of this sub-clause, it is hereby clarified that –

(a)  Without  prejudice  to  any other  liability  or  action,  if  the  securities  for  which  application  money  or  advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money  or  advance  for  such  securities  and  such  application  money  or  advance  is  not  refunded  to  the subscribers  within  fifteen  days  from  the  date  of  completion  of  sixty  days,  such  amount  shall  be  treated  as  a deposit under these rules.

Provided  that  unless  otherwise  required  under  the  Companies  Act,  1956  (l  of  1956)  or  the  Securities  and Exchange  Board  of  India  Act,  1992  (15  of  1992)  or  rules  or  regulations  made  thereunder  to  allot  any  share, stock, bond, or debenture within a specified period, if a company receives any amount by way of subscriptions to any shares, stock, bonds or debentures before the lst  April,2014 and  disclosed in the balance sheet for the financial  year  ending  on  or  before  the  3lst  March,2014  against  which  the  allotment  is  pending  on  the  3lst March,2015,  the  company  shall,  by  the  lst  June  2015,  either  return  such  amounts  to  the  persons  from  whom these were received or allot shares, stock, bonds or debentures or comply with these rules]

(b) any adjustment of the amount for any other purpose shall not be treated as refund.

viii) any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:

Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing  to  the  effect  that  the  amount  is  not  being  given  out  of  funds  acquired  by  him  by borrowing  or accepting  loans  or  deposits  from  others  and  the  company  shall  disclose  the  details  of  money  so  accepted  in the Board’s

ix) 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 Ten years:

Provided that if such bonds or debentures are secured by the charge of any assets referred to in  Schedule III of the  Act,  excluding  intangible  assets,  the  amount  of  such  bonds  or  debentures  shall  not  exceed  the  market value of such assets as assessed by a registered valuer;

(ixa) any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company  and  listed  on  a  recognised  stock  exchange  as  per  applicable  regulations  made  by  Securities  and Exchange Board of India.”;+

(x) any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;

(xi) any non-interest bearing amount received and held in trust;

(xii) any amount received in the course of, or for the purposes of, the business of the company,-

(a)  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:

(b)  as  advance,  accounted  for  in  any  manner  whatsoever,  received  in  connection  with consideration  for  an immovable  property under  an  agreement  or  arrangement  ,  provided  that  such  advance  is  adjusted 3[against such property] in accordance with the terms of agreement or arrangement;

(c) as security deposit for the performance of the contract for supply of goods or provision of services;

(d) as advance received under long term projects for supply of capital goods except those covered under item (b) above:

(e)  as  an  advance  towards  consideration  for  providing  future  services  in  the  form  of  a  warranty  or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;

(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;

(g) as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications;

Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or  without interest)  due  to  the  reasons  that  the  company  accepting  the  money  does  not  have  necessary  permission  or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules:

Explanation.- For the purposes of this sub-clause the amount  shall be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.

(xiii)  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 fulfilment of the following conditions, namely:-

(a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;

(b) the loan is provided by the promoters themselves or by their relatives or by both; and

(c) the exemption under this sub-clause shall be available only till the loans of the financial institution or a bank are repaid and not thereafter;

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

(xv) any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982 (40 of 1982);

(xvi) any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India;

(xvii) an amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding ten years from the date of issue in a single tranche, from a person.

Explanation.- For the purposes of this sub-clause,-

“start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade.

II.”convertible note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

(xviii) any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts Real Estate Investment Trusts and Mutual Funds registered with the Securities and Exchange Board of India in accordance with regulations made by it.”

Explanation. – For the purposes of this clause, any amount.-

(a) received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in-kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or

(b)  any  additional  contributions,  over  and  above  the  amount  under  item  (a)  above,  made  by  the  company  as part of such promise or offer, shall be considered as deposits unless specifically excluded under this clause.

This definition of the Deposits under Section 2 clause c provides the negative list of the transaction.

There are nineteen transactions not considered as deposits, and all the other transactions will be deposits.

These fifteen transactions are;

1. Amount received from the government or its authorities and fund received from other sources but whose repayment is guaranteed by the government.

2. Fund received from any foreign government or international agencies such as Asian Development Bank.

3. Amount received from Banks

4. Notified Public and Regional financial institutions.

5. Amount received against the issuance of commercial paper.

6. Inter-corporate borrowings

7. Amount received for the subscription of securities (the definition of securities is under SCRA, 1956) share application money. Subject to the condition that amount will be used for allotting the securities applied.

The word is securities, so it will go beyond shares, debentures, etc. The allotment of Securities must be completed within 60 days. If securities are not allotted within 60 days, then the amount shall be returned within 15 days from the end of sixty days. Otherwise, the amount will be treated as a deposit.

8. Loan from the director of the company. Subject to the declaration that he has not extended such a loan by taking a loan.

9. Both Sub-clause IX and IXA contain the provisions related to Bonds and debentures. Only the following types of debentures will not be considered as deposits.

(a) Secured bond and debenture having the first charge on any assets

(b) Secured bond and debenture having pari passu charge with the first charge

However, these tangible assets should be the assets specified under Schedule III of the Companies Act, 2013.

Intangible assets cannot be used as security.  The value of such bonds and debentures shall not exceed the market values of such assets as valued by the registered valuer.

(c) The bonds or debentures compulsory convertible into shares (equity shares or preference) within Ten years.

(d) Listed bond and debentures, and listed bond and debenture don’t need to be compulsory convertible or secured.

So any type of bond or debentures, other than above mentioned will be considered as deposits. Some of the examples include;

> Unsecured non-convertible not listed debentures

> Secured non-convertible non listed debenture, however, having second or steep down charge on assets.

10. Amount received from the employee subject to a maximum amount not exceeding annual salary, and it should not charge any interest.

11. Any non-interest bearing amount held in trust.’

12. Clause spells the provision regarding the various business advance and security deposits received by the Company.

(a) Advance for the supply of goods or provisioning of services for 365 days from the date of advance. However, nothing of this shall apply to where such advance is for legal proceeding before a court of law. If company is unable to honour the transaction and return the amount then it will be treated as deposit.

(b) Advance for sale of immovable property. If company is unable to honour the transaction and return the amount then it will be treated as deposit.

(c) Security deposit for the performance of the contract. After the completion of performance amount to be returned within fifteen days otherwise it will be treated as deposit.

(d) Advance for the supply of capital goods except for immovable property. If company is unable to honour the transaction and return the amount then it will be treated as deposit.

(e) Advance for warranty and other for not more than 5 years.

(f) Advance received as per guidelines of the sectoral regulator or government. If the refund is to be made, it is to be made within 15 days.

(g) Advance for the publication in print or electronic media.

13. Amount bought by the promoters or their relatives due to pre-condition of the bank or financial institution for granting the loan to the company. However, such exemption is only till the repayment of such loan. It will be treated as a deposit if the amount continued to be with the company after the loan repayment.

14. Amount accepted by Nidhi company’s subject to certain provisions of the Companies Act, 2013.

15. Amount accepted under chit fund.

16. Amount received by the company under collective investment scheme.

17. The Start-up can issue convertible notes, and they can be converted into equity shares or repayable with a period of 10 years from the date of issue.

These convertible notes are debt. They become more interesting when we compare them to the debenture and loan of clause IX and IXA; these notes don’t need to be secured or listed if issued unsecured. Clause XVIII is self-explanatory and does not require too much pondering.

There is an explanation also attached with this clause, and it provides that any amount received by the company, whether in a lump sum or instalment and with the promise of return, shall be regarded as a deposit unless excluded.

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February 2024