This article is written by Pratyush Pandey, a student of NLU Delhi.
Finances are the prime requirement of any business. Equity firms, financial institutions and venture capitals are few of the sources for raising finances. These sources require the company to handover some control of the company to the users, which hinders the freedom of the company. Companies prefer to raise the capital from the general public. Since the fixed deposits in a company give better returns than those in a bank, it is a win-win situation for both.
Company deposits are governed by Chapter V of Companies Act 2013 (Acceptance of Deposits by Companies) read with Companies (Acceptance of Deposits) Rules 2014 (hereinafter referred to as Rules). These rules supersede the Companies (Acceptance of Deposits) Rules 1975.
The provisions relating to company deposits shall not apply on banking companies, non-banking financial companies, housing companies or any other company specified by the Central Government.
In this article, we shall briefly discuss the changes in key provisions dealing with company deposits from the old to the new Act. Companies Act 2013 deals with the subject in more detail with special emphasis on investor protection.
DEPOSITS
Money received by a company either through a deposit or loan or any other form is termed as a deposit. Certain exceptions to the definition were provided in the Companies (Acceptance of Deposits) Rules 1975. Companies (Acceptance of Deposits) Rules 2014 have added a few more exceptions, few of which are discussed below.
(i) The amount received after a subscription offer for securities is made shall not be considered as deposit if the securities are allotted within 60 days of its receipt or the money is refunded within 15 days after completion of 60 days.
The investors used to face a hard time getting the securities they had invested in. The accountability of the company has increased since the investors now have statutory protection.
(ii) The amount raised by issuing bonds or debentures (whose amount shall not exceed the market value of assets) must be secured by a first charge or a charge ranking pari passu with the first charge on any assets (excluding intangible assets) or bonds or debentures which must be compulsorily convertible into shares of the company within five years for getting exemption under the definition of deposits.
This further restricts a company from getting away with subsequent charges. It recognizes debentures convertible shares of the company thereby, making investment more secure.
(iii) The amount received by a company in the course of, or for its business purposes as an advance for the supply of goods or provision of services must be appropriated within 365 days failing which it becomes refundable. On the expiry of 15 days from the date the amount becomes refundable, it shall be deemed as a deposit.
The accountability of the company is further increased for amount it borrows in the name of business purposes. However, there is ambiguity in this rule as to what shall be considered as ‘appropriation’ of the amount received.
As to the deposits accepted prior to Companies Act 2013, the company shall submit to the Registrar of Companies the details of the deposits and the interest due which the company is supposed to repay within a year from commencement of Act (1st April, 2014) or a year from the time the payments are due, whichever is earlier.
If it is proved that the intention behind accepting the deposits was to defraud the depositors, every officer of the company who was responsible for the acceptance of such deposit shall 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.
COMPANY OBLIGATIONS
Companies Act 2013 requires a public company to have a net worth of not less than INR 1 billion or a turnover of not less than INR 5 billion for accepting public deposits as against Companies Act 1956 which required a net worth of only INR 10 million. The public company is also required to obtain prior consent in the form of a special resolution for accepting deposits which must be submitted to the Registrar of Companies.
This is a blow to the small and medium enterprises who will not be able to take public deposits due to the high financial requirements which need to be met.
The Companies Act 2013 and the Companies (Acceptance of Deposits) Rules 2014 attempt to make investment by the general public more safe and secure. The various provisions which obligate a company ensure the money invested by the public is not lost as it can be converted into shares. The idea is to create a more investor friendly atmosphere in the corporate world and to reduce cases of fraud played on the investors by companies.
