INTRODUCTION

Generally, companies raise finance by issuing shares and debentures in the market. Raising funds from the public directly is another source which companies use nowadays to meet their short-term and medium-term requirements. This is known as Public Deposits. This source of raising finance has gained popularity because a company offers interest at a rate higher than the banks.

Due to the following reasons, companies find public deposits as an attractive source:

• It involves less paper work and formalities and is a comparatively simpler method to raise funds than others.
• Borrowing funds from the public is relatively easier than borrowing from financial institutions.
• Cost of fund is cheaper in case of public deposits as banks charge higher rate of interest on loans.
• Dependency on banks and financial institutions gets reduced.
• The company can build a larger customer base and create contacts with the public and the investors at large thereby enhancing its reach to the public which can be exploited for cross-selling of its products.
• It provides flexibility to the financial structure of the company as the funds raised from public deposits generally remain for a longer period.
• Being small investors, the depositors do not possess any control or right over the company’s management and thus it protects the shareholder’s rights.

However there are limitations too in this kind of source of financing.

• There exists an element of uncertainty in case of either poor performance of the company or poor economic condition in the country when the public can withdraw their deposits without notice.
• As some other financial instruments like equity or Mutual funds can give better appreciation of the invested fund, the investors may be reluctant to invest in such deposits.
• In view of return on deposits largely dependent on long-term performance of the company, there remains a risk of loss of money of the depositors in the event of failure of the company.
• Deposits with the companies are largely unsecured.

HISTORY

During the first quarter of the 20th century, there were no banks and financial institutions to finance for meeting short and medium term requirements of the borrowers. For the first time during this period, tea gardens of Darjeeling & Assam and textile mills of Gujarat & Maharashtra started acknowledging public deposits. Now in recent times, this method of raising finance has gained popularity where the companies accept public deposits under non-banking companies (Acceptance of deposits) rules and under certain government regulations.

MODUS OPERANDI

Deposits are accepted by the companies for period range varying from 6 months to 3 years at higher interest rates compared to the rates offered by banks and financial institutions. Depending upon the period of deposit and credibility of the company, the rate of interest varies from 11% to 15%. Financial brokers and other intermediaries extend support to these companies in raising funds from the public.

CONDITIONS FOR INVITATION AND ACCEPTANCE OF DEPOSITS

The invitation and acceptance of deposits are regulated by Section 73 to 76 of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014 made under Chapter V of the Act.  The provisions of the Sections shall not apply to a banking Company and a non-banking financial Company registered with the Reserve Bank of India.

Under the Companies Act and the rules framed, the invitation and acceptance of deposits by companies are subjected to the following conditions:-

1. It prohibits the companies to raise unlimited amounts of finance through public deposits.
2. It also restricts the companies in the manner that the total of all outstanding deposits cannot be higher than the prescribed ceiling in terms of certain percentage of the paid up capital and free reserves of the company.
3. A company can invite deposits only by means of advertisement. The advertisement must disclose the management structure and financial position of the company.
4. A company is prohibited from inviting further deposits if it has failed to repay previous deposits or interest thereon.
5. Under the regulation, the company must maintain its books with all the relevant details of the deposits and file audited returns of the deposits with the Registrar at regular interval.
6. Goodwill and past performance of the company have the bearing on rate of interest decided by it on the deposits collected from the public. However, it is required to be done in accordance with the guidelines prescribed by the Government.

Besides, The Reserve Bank of India (RBI) has put their regulatory provisions in order to regulate Public Deposits. The directives issued by the RBI are aimed at safeguarding the public interest and to provide them with a sense of security in investing in the public deposits. These regulations are concerned with:

1. Duration of deposits
2. Ratio of deposits to the free reserves and paid-up-capital of the company
3. For the purpose of safeguarding the interest of the depositors, the company has to invest a certain portion of the deposits in a scheduled bank free from any liability or in approved securities to repay the deposits to its depositors.

4. The company has to furnish returns with RBI at regular interval with specific details on its financial health, financial activities and public deposits.

RENEWAL OF DEPOSITS

Under this process, the depositor has an option of renewal of its deposits on maturity for an additional time period. This process may be continued as long as the depositor does not decide to withdraw his deposit.

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REGULATIONS ON RENEWAL OF DEPOSITS

In case the rate of interest is revised upward and the depositor wants to take the benefit of higher rates by pre-maturing the existing deposit and renewal of the deposit at the higher rate of interest, a non-banking financial company will allow the existing depositor to avail the benefit of renewal of the deposit at higher rate of interest, provided that, the deposit is renewed for a period longer than the remaining period of the original deposit and in terms of the other provisions; and the interest on the expired period of the deposit is reduced by one percentage point from the rate which the company would have customarily paid, had the deposit been accepted for the period for which such deposit had run; any interest paid earlier in excess of such reduced rate will be adjusted with the maturity amount.

REPAYMENT OF PUBLIC DEPOSITS

After the end of a specified time period when the original amount that is invested is paid back to the investor, the process is called repayment of deposits.

Section 74 of the Companies Act 2013 stipulates that the deposits accepted by a company afore the commencement of the Act should be recompensed by a company within one year from the commencement of the Act or from the date on which payment of such deposit becomes due, whichever is earlier.[1]

According to the section 74

“(1) 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—

(a) 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, notwithstanding anything contained in any other law for the time being in force or under the terms and conditions subject to which the deposit was accepted or any scheme framed under any law; and

(b) repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.

(2) 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.

(3) 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 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.”[2]

Regulations relating to repayment of deposits (In NBFCs)

• Within a period of three months from the date of acceptance, no Non-banking Financial Company (NBFC) shall repay any public deposit.
• Where at the request of depositor a non-banking financial company repays public deposit after the period of 3 months from the date of acceptance but before its maturity, the company shall make the payment of interest in the following way:
• No interest to be paid up to three months
• Between three months and six months interest not exceeding 10 % per annum to be paid
• Between three months and twelve months:- 1 % point less than the rate which the company would have ordinarily paid, had the deposit been accepted for the period for which such deposit had run
• A non-banking financial company may grant a loan up to 75 % of the amount of public deposit, to a depositor after the expiry of three months from the date of deposit. The rate of interest on the loan will be levied at a rate of interest which is higher by 2% points than the interest rate payable on the deposit.
• In case of death of the depositor, maturity proceed of the deposits is paid to the survivor had it been a joint account with survivor clause, otherwise maturity amount is paid to the nominee or legal heir/s. In such case, applicable interest rate is reduced by 1% point from the rate which the company would have customarily paid, had the deposit been accepted for the period for which such deposit had run up to the date of repayment;

CONCLUSION

Public deposit is one of the multiple financial instruments for the public to invest their hard earned money. While there are regulations to regulate the functioning of these companies to collect public deposits and service them, security of the public deposits is of prime importance. The public should be educated on the rules and regulations applicable for the companies collecting public deposits. Government and regulators must activate all their machineries at their disposal for ensuring safety of the hard earned money of the depositors.

[1] The Companies Act, 2013, no. 18, Acts of Parliament, (India)

[2] The Companies Act, 2013, no. 18, Acts of Parliament, (India)