CONTRAVENTION OF PROVISIONS OF COMPANIES ACT, 2013 CONCERNING ACCEPTING DEPOSITS BY COMPANIES

What are Deposits?

Simply put, deposits are advances and loans accepted by the business from members of the public subject to the aforementioned terms and conditions put forward by the Companies Act,2013 (‘the Act’). Section 73-76 of the Act read along with the Companies (Acceptance of Deposits) Rules 2014 relating to the subject of deposits[1]. Before the Act, it was governed by section 58-A of the Companies Act,1956.

Deposits do not include the following:

Amounts, loans, or advances –

  • Received from the Central or State Government.[2]
  • Received from foreign banks, foreign governments, financial institutions around the world and subject to Foreign Exchange Management Act, 1999.[3]
  • Received from other companies.[4]
  • Received from directors of a private corporation who have not received such an amount as a loan or deposit.[5]
  • Received against the subscription of shares provided that such shares are allotted within sixty (60) days.[6]
  • Received in exchange for the issuance of commercial money or other similar instruments approved by the apex bank of India i.e., The Reserve Bank of India (‘RBI’).[7]
  • Received in response to the issue of bonds or debentures.[8]
  • Received from banks or the State Bank of India and its subsidiaries.[9]
  • Received being non-interest bearing in nature.[10]
  • Such other amounts received are specified under section 2(1) (C) of the Act.[11]

Who can accept Deposits? (Section 73)

Companies have to fulfil certain conditions for it to be competent enough to accept deposits.  During the general meeting, a special resolution about accepting deposits must be enacted, and the resolution must be filed with the registrar of companies (‘ROC’). [12] Issue circular via. registered post or electronically to members inviting them. Such circular will include the company’s financial situation, credit rating, the total number of depositors, the amount received, and amount due to prior creditors, and such other particulars. A Circular approved by the general meeting shall be filed with the ROC using form DPT-1 within thirty days of it being issued.[13] Charge on the company’s assets that are at least equal to the number of deposits received. Unsecured Deposit to be marked on all deposits about such deposits.[14] Certifying that the business has not defaulted on deposit payments, and a minimum of five years has passed in case of such default.[15] Twenty per cent of the deposit maturing every year is to be transferred to an account named “Deposit Reserve Repayment Account” in a scheduled bank before 30th April. A return of the deposit is to be filled every year by the company using form DPT-3.[16]

Limitations

The Public Company should have a minimum net worth of hundred crores and a turnover of not less than five hundred crores. Deposits over 35% of the total paid-up share capital, free reserves, and securities premium account are not permitted. Among those thirty-five per cent, only a maximum of ten per cent deposits is allowed by members and the other twenty-five from other sources. [17] No company accepts such a deposit that is payable or renewed before 6 months or after 36 months from the date of acceptance or renewal of such a deposit. [18]

Exceptions

Public Companies for short term purposes can accept such deposits payable in six months even though –

  • Such a deposit cannot be more than 10% of the total paid-up capital, free reserves, and securities premium account,
  • It is not payable before three months from the date of such deposit or renewal.[19]

Deposits over 100% of a private company’s total paid up share capital, free reserves, and securities premium account are permitted. The details of these deposits should be filed with ROC using form DPT-3.[20] Some Private Companies can exceed this hundred per cent limit if – a private company which is a start-up for ten years from the date of incorporation, such company not being a subsidiary or associate company, borrowing from a bank or financial institution is less than twice of its paid-up share capital/fifty crores (whichever is less) and has not defaulted in the re-payment of borrowing at the time of accepting deposits.[21] Banking companies, non-banking financial companies as defined by the RBI Act of 1934, and other companies notified by the Central Government in collaboration with the RBI are exempt from these restrictions.[22]

Section 74 – Repayment of deposits accepted before commencement of this Act[23]

The above applies to companies that took deposits before this Act went into effect. [24] Form MBP-4 is filed with the ROC within three months of the Act’s enactment or when the deposit is required in this case. [25] This form will specify -the deposits accepted by the company, the deposit amounts remaining unpaid including the interest, and the arrangements made for the payments. [26] The deposits are to be paid within three years of the commencement of the Act or at the time it becomes due, whichever is earlier. [27] The company may apply to the National Company Law Tribunal (‘Tribunal’) for an extension of time to make such payments. [28] The Tribunal before granting any extension will review – the company’s financial situation, the number of deposits to be repaid including the interest, and such other related matters. [29]

A punishment of not less than one crore rupees and up to ten crore rupees will be imposed on a corporation that fails to pay such deposit within the prescribed time or extended time, in addition to the amount of the deposit and the interest.[30] Each officer in default will be punishable with imprisonment up to seven years or with a fine not less than twenty-five lakhs and which may extend to two crore rupees or with both.[31]

Section 75: Damages for fraud[32]

If a corporation fails to repay the deposit, or a portion of it, or the interest on a specified date or an extended date as allowed by the Tribunal, and it is proven that the deposit was accepted to defraud the depositors or for other fraudulent purposes, the deposit will be forfeited.[33] Under section 447 of the Act, every executive of the corporation responsible for accepting such deposits is personally accountable for all losses/damages sustained by the depositors, without limitation. Section 447 stipulates that, without prejudice to any other liability under the Act or other provisions of law, any person who commits fraud shall be punished by imprisonment for a period of not less than six months but not more than ten years, as well as a fine at least equal to the amount involved in the fraud but not more than three times that amount. [34]

The sentence of imprisonment shall not be less than three years if the sum involved in the fraud is at least ten lakhs or one per cent of the turnover, whichever is less, and the crime concerns a subject of public interest.[35] While the sentence of imprisonment shall not be less than three years if the sum involved in the fraud is at least ten lakhs or 1% of the turnover, whichever is less, and the fraud concerns a matter of public concern.[36] An individual, a group of people, or an association that has suffered a loss as a result of such non-payment may also bring a lawsuit or initiate a case against such accountable officers. [37]

Section 76: Acceptance of Deposits from THE Public by Certain Companies [38]

Public deposits may be accepted only by a certain class of companies. It has to fulfil certain criteria i.e., the company has-

  • a net value of rupees one hundred crores;
  • a turnover rupees five hundred crores;
  • at a general meeting passed a special resolution and filed it with the ROC.[39]

The other requirements include obtaining a rating from the credit rating agency i.e., Initially at the time of inviting deposits, so that the public is informed and every year during the term of the deposits. [40] On the deposits being received a charge is to be created on the company’s assets within thirty days.[41]

Section 76A: Penalties for violation of section 73 or76[42]

The Company (Amendment) Act of 2015 added this provision. Any company that invites deposits in violation of section 73 or 76 of the Act or its rules, or fails to repay the deposit or any part thereof or the interest due within the stipulated time or such further time as the tribunal allows, shall pay a fine of not less than two crore rupees or twice the amount of deposit accepted by the company, whichever is lower, and may extend to ten crore rupees in addition to repayment of the deposit or interest[43].Any such officer who violates the law is subject to imprisonment for up to seven years and a fine of not less than twenty-five lakh rupees but not more than two crore rupees.[44] Although if the officer in default has acted fraudulently/knowingly he will be held accountable under section 447.[45]

Conclusion

Deposits are advances and loans made by members and the public. The provisions are related to deposits and are covered under sections 75-76 of the Act. These provisions provide for criteria that must be met by public companies for them to accept deposits. These provisions safeguard the depositors i.e., members and the public by providing for fines and penalties in case these provisions are contravened by the company or its officers.

Author(s) Name: Vedanta Pai (Pune University)

References:   

[1] Alok Patina, ‘Acceptance of Deposits by Private Companies under Companies Act, 2013’ (Taxmantra 5 October 2017) <https://taxmantra.com/acceptance-of-deposits-by-private-companies-under-companies-act-2013/> accessed on 23 November 2021

[2] Anupama Tripathi, ‘Implication exemption and penal Provisions’ (TaxGuru, 4 June 2021)

<https://taxguru.in/company-law/deposits-implication-exemption-penal-provision-companies-act-2013.html> accessed on 23 December 2021

[3] Ibid

[4] Ibid

[5] Ibid

[6] Ibid

[7] Ibid

[8] Ibid

[9] Ibid

[10] Ibid

[11] Ibid

[12] Ibid

[13] Ibid

[14] Ibid

[15] Ibid

[16] Ibid

[17] Ibid

[18] Ibid

[19] Ibid

[20] Ibid

[21] Ibid

[22] Ibid

[23] Companies Act, 2013

[24] Anupama Tripathi, ‘Implication exemption and penal Provisions’ (TaxGuru, 4 June 2021)

<https://taxguru.in/company-law/deposits-implication-exemption-penal-provision-companies-act-2013.html> Accessed on 23 December 2021

[25] Cleartax ‘Acceptance of Deposits’ (cleartax, 12 October 2021) <https://cleartax.in/s/acceptance-deposits> accessed on 20 November 2021

[26] Anupama Tripathi, ‘Implication exemption and penal Provisions’ (TaxGuru, 4 June 2021)

<https://taxguru.in/company-law/deposits-implication-exemption-penal-provision-companies-act-2013.html> accessed on 23 December 2021

[27] Ibid

[28] Anupama Tripathi, ‘Implication exemption and penal Provisions’ (TaxGuru, 4 June 2021)

<https://taxguru.in/company-law/deposits-implication-exemption-penal-provision-companies-act-2013.html> accessed on 23 December 2021

[29] Ibid

[30] Ibid

[31] Ibid

[32] Companies Act, 2013

[33] Cleartax, ‘Acceptance of Deposits’ (cleartax, 12 October2021) <https://cleartax.in/s/acceptance-deposits> accessed on 20 November 2021.

[34] Ibid

[35] Ibid

[36] Ibid

[37] Ibid

[38] Companies Act, 2013

[39] Cleartax, ‘Acceptance of Deposits’ (cleartax, 12 October2021) < https://cleartax.in/s/acceptance-deposits > accessed on 20 November 2021

[40] Companies Act, 2013

[41] Ibid

[42] Ibid

[43] Ibid

[44] Ibid

[45] Ibid

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