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.
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.
WHAT IS A DEPOSIT?
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.