This article is written by Karanpreet Singh, a law student at Guru Nanak Dev University, Amritsar. It discusses the concept of deposits and its various aspects under the spotlight of  Section 73 of the Companies Act, 2013.

Introduction 

For the smooth conduct of the business, a company requires capital. The most practised method of raising funds by the company is issuing shares and debentures. However, there is a third category of raising capital viz. ‘deposits’. A deposit is the amount lent to a company in the form of a short-term loan for backing any urgency in the company. The person who deposits the sum is known as the ‘depositor’. Lending the sum makes the depositor a creditor of the company. This article discusses the relevant rules, regulations, and provisions relating to deposits.

Furthermore, the invitation and acceptance of deposits are governed by Sections 73-76 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 made under Chapter V of the Act. It prohibits the acceptance of deposits other than those of members based on regular resolution or “eligible company” that must meet specific requirements outlined in the rules. Under the rules, eligible companies must have certain net assets and turnover. In contrast, public deposits significantly affect how companies process and accept deposits. This rule aims to strike a balance between:

• Promote company financing.
• To protect the interests of depositors against society.

Section 73 is the basis for scrutiny of how Indian companies raise their funds through public deposits while adhering to strict regulations. In order to ensure transparency and protect the rights of depositors, it defines specific conditions, eligible companies, exempted deposits, prohibition on acceptance, eligible depositors, punitive measures, and necessary compliance for receiving deposits from the public.

What is a deposit

According to Section 2(31) of the Companies Act 2013, “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. In other words, any receipt of money by the company from a depositor is called a deposit. The deposited amount held by the company is always recorded on the liabilities side of its balance sheet. Besides, deposits are one of the sources of capital financing. Unlike equity holders, depositors neither have any ownership claim nor any voting rights in the management of the company. However, deposits can be converted into shares according to the company’s policies.

A company’s reliance on public deposits as a source of short-term financing is essential. These public deposits provide a practical means of addressing urgent financial needs without turning to debentures and shares. Moreover, deposits enable companies to diversify their funding sources and lessen their reliance on funding from financial institutions. To maintain stakeholder confidence and reduce financial risks, companies must follow regulatory guidelines and ensure transparency and prudent management of public deposits.

Types of deposits

There are two types of deposits:

Secured deposit: A deposit that creates a charge over any tangible asset of the company is known as a ‘secured deposit’. In any contingency, the depositor can claim this charge over the allotted asset to recover his deposited amount. In case, the company is unable to repay the amount, the depositor can dispose off that asset against the recovery of his sum.

Unsecured deposit: As the name portrays, a deposit that does not create any charge over the company’s assets is called an ‘unsecured deposit’. The depositor is not provided with security over his deposited amount. A depositor usually hesitates to invest in unsecured deposits. However, companies usually allow high rates of interest on such deposits to lure the public.

List of exempted deposits

Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 sets out a list of transactions which may be termed an ‘exempted deposits’:

Amount received from government – Funds received from the central government or state government, as well as amounts received from sources backed by guarantees from these governments, or funds received from local authorities, or statutory bodies established under parliamentary, or state legislative cannot be called deposits.

Amount received from foreign parties under Foreign Exchange Management Act, 1999 (FEMA) – Funds received from foreign sources, including foreign governments, international banks, multilateral financial institutions, foreign corporations, foreign citizens, and entities residing outside India, are not classified as deposits under Company Law. These transactions are governed by the FEMA and its accompanying rules and regulations.

Amount received as loan or facility – Companies often secure financial assistance through loans or credit facilities. Funds obtained from banking companies, including subsidiaries of SBI, institutions notified by the Central Government under the Banking Regulation Act, 1949, corresponding new banks, or co-operative banks as defined by the Reserve Bank of India Act, 1934, do not fall under the deposit category.

Amount received as loan or financial assistance – Loans and financial assistance received from public financial institutions, regional financial institutions, insurance companies, or scheduled banks defined by the RBI Act 1934, are not considered deposits under Company Law.

Amount received against issue of commercial paper – Companies can raise funds by issuing commercial paper or similar instruments following RBI guidelines or notifications. These funds received in exchange for such instruments are not classified as deposits.

Inter-corporate deposits – When one company receives funds from another company, it often falls under inter-corporate deposits. Such transactions are exempted from being categorised as deposits.

Advance securities application money – Companies often receive advance payments or application fees for securities like shares. These funds, which are held in anticipation of allocating the securities, are not categorised as deposits unless the company fails to allocate the securities within 60 days from receiving the application money and does not issue refunds within 15 days after that period.

Loans from directors & relatives of directors – Amounts received from a company’s director or a relative of a director are excluded from the deposit category. However, the director or relative must provide a written declaration confirming that the funds were not acquired through borrowing or accepting loans or deposits from others.

Acceptance of deposits from members (private companies) – Private companies are subject to specific rules governing deposits. These rules do not apply to private companies that meet certain conditions, such as restricting the acceptance of monies from members to specific limits based on share capital, reserves, and premium accounts.

Secured debentures or compulsorily convertible bonds – Companies may issue bonds or debentures secured by assets or bonds that are compulsorily convertible into shares within a specified period (not exceeding 10 years). These transactions do not qualify as deposits.

Unsecured non-convertible debentures listed on stock exchanges – Issuance of non-convertible debentures that do not constitute a charge on the company’s assets and are listed on recognized stock exchanges as per SEBI regulations are exempted from being classified as deposits.

Amount received from employees and non-interest bearing amounts – Funds received from employees as non-interest-bearing security deposits and non-interest-bearing amounts held in trust are not considered deposits.

Receipt of advance for supply of goods or services – Advances received for the supply of goods or provision of services, provided that these advances are accounted for and appropriated against the supply or provision within 365 days from acceptance, are not categorised as deposits. However, in cases involving legal proceedings, the 365-day limit may not apply.

Trade advances or business advances – Advances received in connection with immovable property, security deposits for contract performance, advances under long-term projects for capital goods, and advances for future services such as warranties or maintenance contracts (provided the service period doesn’t exceed common business practice or 5 years) are not considered deposits.

Promoter’s co-pay – Amounts brought in by promoters of a company as unsecured loans in compliance with financial institutions or bank stipulations are excluded from the deposit category. This exemption is available only until the loans from financial institutions or banks are repaid.

Amounts received by Nidhi companies, chit fund companies, CIS – Specific categories of companies, including Nidhi companies, those dealing with chit funds, and those involved in Collective Investment Schemes (CIS) under SEBI regulations, may receive amounts that are not considered deposits.

Amount received as convertible note – Start-up companies recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) can receive convertible notes, provided they meet certain conditions. These notes are not classified as deposits.

Amount received from AIF, DVCF, etc.– Companies may receive funds from Alternate Investment Funds (AIFs), Domestic Venture Capital Funds (DVCFs), Infrastructure Investment Trusts, Real Estate Investment Trusts, and Mutual Funds registered with SEBI under SEBI regulations. These transactions do not qualify as deposits. 

Who is a depositor 

According to Rule 2(1)(d) of the Companies (Acceptance of Deposits) Rules, 2014, a depositor is a person who has deposited a sum in the company. The depositor could be:

• An individual,
• a company,
• a trust/firm,
• any companies entity, or
• any member of a private or public company.

In other words, it includes any people or organisations that give money or any other kind of financial benefit to a company in exchange for interest, repayment, conversion into shares or debentures, etc., as long as the company seems viable. Besides, depositors are considered creditors of the company and are recorded on the liability side of its financial statements. According to the deposit agreement, depositors are entitled to repayment of the principal amount and the agreed-upon interest.

Who is an eligible company

There are two different kinds of companies, i.e.: public and private. However, only publicly traded companies have the right to request deposits. Private companies are not eligible for this provision. The Companies Act 2013, specifies some requirements for a public company to be eligible to raise deposits. In accordance with the limitations outlined in Section 180(1)(c) of the Companies Act  2013, an eligible company may request public deposits.

• It should be a public company.
• It should have at least Rs. 500 crore in revenue or a net worth of Rs. 100 crore.
• The company management must adopt a special resolution. The registrar must receive this resolution.

Section 73: Prohibition on acceptance of deposits from the public 

Sections 73 to 76 of the Companies Act, 2013 mention the provisions related to the restrictions and prohibitions for the company while accepting deposits. However, according to Section 73(1) of the Companies Act, 2013, companies are generally not allowed to accept public deposits. This rule safeguards the interests of the public and prevents fraudulent proposals by companies that might dupe depositors. Any violation of these provisions required for accepting deposits might result in severe penalties. However, in Section 73, there are certain rules provided for deposits. Besides, only eligible companies can accept deposits and abide by these rules. However, Section 73(1) does not apply to:

• A banking company;
• A non-banking financial company (NBFC); or
• Any other company as RBI or Central Government specifies.

Furthermore, Section 73(2) of the Companies Act, 2013, deals with the prohibition of accepting deposits from the public. The deposits cannot be raised by overlooking the following conditions:

• There must be a submission of a detailed circular of the company within its members stating the financial statements, credit rating, number of depositors, and the amount due to previous depositors.
• A copy of the circular and such statement must be submitted to the registrar of companies within a thirty-day period.
• There must be a 20 percent submission of the deposited amount accrued in the upcoming financial year before April 30. However, these deposits must be held within a separate bank account.
• There must be an insurance policy linked with those deposits.
• The company has to make sure that there are no outstanding interests or repayments of deposits to the public. Besides, such a default can put a stay on the company for demanding deposits for the next five years.
• There must be a separate account of charge over the company’s assets (against deposits). Such deposits are known as ‘secured deposits’. This provision also acts as a security against the deposited amount.

Status of deposits accepted before the commencement of the Act

Se­ction 74(1) states that if a company had accepted any deposits, any outstanding interest payments, repayment of deposits in the future before the commencement of the act shall be deemed similar as if that were done after the act. All those transactions are meant to be paid in the future.

Section 74(1)(a) states that such a company has to submit a statement to the Registrar of Companies after the commencement of the act. The statement must include a detailed report of the company’s deposits including balance, accrued interests, and repayments.

Se­ction 74(2) mentioned that the Tribunal has the power to extend the three-month period for repayments after considering the financial conditions of the company. 

Se­ction 74(3) is a punitive provision that states that if the company fails to repay the deposited amounts or interests linked to it in the specified time by the Tribunal, it may amount to a fine of ten crore rupees and a 7-year sentence.

From whom can a company accept deposits

In addition to the members of the company, only ‘eligible companies’ can receive deposits from the public. Therefore, not all companies can demand deposits from the public, although they can receive deposits from their members. Section 76 of the Companies Act 2013, and the Companies (Acceptance of Deposits) Rules, 2014 are held together while dealing with the cases of acceptance of deposits. The list of those entities are:

Members/Shareholders: Companies can demand deposits from their current members or shareholders. In contrast, the amount cannot be more than 25% of the paid-up share capital and free reserves of the company.

Directors: Depositors can also be directors of that company. To qualify the director as a depositor, the deposited sum must not exceed the annual salary held for the following two years.

Relatives of directors: Deposits are also permitted by the companies and relatives of the directors. The deposited sum cannot be larger than the amount of the loan or guarantee obtained by the director from the company.

Employees: Employees can also make deposits to the company. Their deposited amount cannot be greater than their annual salary.

Exemptions: The Central Government or the Reserve Bank of India (RBI) may give exemptions to certain individuals or legal entities.

Punishment for Contravention

If any company referred to section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act – The Company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000/- and where the contravention is a continuing one, with a further fine which may extend to Rs. 500/- for every day after the first day during which the contravention continues.

In contrast, Section 73(3) of the Companies Act, 2013  provides that any deposit accepted by the company under Section 73(2) must be repaid with interest according to the provisions of Section 73(4) of the Companies Act, 2013. This provides that if the company does not repay the deposit or the interest, a complaint can be filed with the National Company Law Tribunal (NCLT) mentioned in Section 408 of the Companies Act, 2013.

Repayment of deposits

Section 74: Under this section, companies are required to submit a declaration of receipt of the deposits to the Registrar. This provision also acts as a safeguard against deposit repayments. The condition linked to these deposits is that deposits must be made within a period of three months. To return the deposited sum to the public, usually, the time period allotted is one year to three years. Besides, if the matter is raised before the Tribunal, it can further extend this duration depending upon the financial condition of the company. Even if the company fails to return the money within the specified time period, members of that company can be imprisoned for seven years or be liable for Rs. 1 crore fine.

Damages for fraud

Section 75: This is also a justice-seeking provision under the Companies Act, 2013, as it can make the company liable for any financial damage incurred to the depositors by any act or omission on the company’s end. Nevertheless, the company can only be made liable if the mens rea is proven, i.e., the intention of the company was to dupe the depositors. This provision also attracts vicarious liability, as the employees of the company who have taken part in such deceiving can be personally made liable for the same. In other words, they would be facing legal consequences in his/her personal capacities according to the degree of offence.

Furthermore, the section mentions that in such a case a victim could initiate legal action against the company and its employees or any other group or individuals can plead on behalf of the victim. This provision encourages class action (a collective lawsuit on behalf of numerous plaintiffs against a single defendant) as individuals or groups can act on behalf of other victims.

Other protective measures provided under Companies Act, 2013

Pursuant to Section 245(1)(g), if a depositor believes that the management or actions of an enterprise are causing harm to the company, its directors or the depositors, can submit an application before Tribunal. This provision also comprises class action lawsuits. Various measures may be requested with this submission and declaration of damages or request for appropriate measures against:

• The Company or its directors for any dishonest, illegal or wrongful conduct or any possible misconduct on their part.
• The Company’s auditors, which include the accounting firm, for providing inaccurate or misleading information in their audit report or for engaging in dishonest, illegal or illegal activities. 
• Any expert, consultant, adviser or individual who has provided false or misleading information to the Company or has engaged in any dishonest, unlawful or unlawful activity or has been implicated in any possible wrongdoing on its part.
• One may also seek any other remedy the court deems appropriate.

Section 245(2) states that if depositors seek compensation, damages, or any other appropriate action from an audit firm, both the firm and every partner who played a role in providing inaccurate or misleading information in the audit report or engaged in fraudulent, unlawful, or wrongful behaviour will be held vicariously liable.

Section 245(3)(ii) states that there must be either one hundred depositors or a percentage fixed under regulations, whichever of the two is lesser. Therefore, the company owes a percentage of total deposits as mentioned by the regulations to the depositors.

Other rules related to deposits mentioned under Companies (Acceptance of Deposits) Rules, 2014

In the Companies Act, 2013, Chapter V is dedicated to rules and regulations surrounding the acceptance of deposits by companies. 

Rule 3: Rule 3 is a pivotal part of this chapter, and lays out essential terms and conditions regarding deposit acceptance. In essence, Rule 3 and its associated provisions are designed to ensure transparency, security, and fairness in the process of accepting deposits by companies. These regulations aim to safeguard the interests of both the company and its depositors, promoting trust and accountability. The provisions of Rule 3 are:

• Deposit duration: Rule 3 strictly prohibits companies, both under sub-section (2) of section 73 and eligible companies, from accepting or renewing any deposit, secured or unsecured, with a repayment period less than six months or exceeding thirty-six months from the date of acceptance or renewal. There are conditions where companies can accept or renew deposits for repayment earlier than six months. The deposits must not exceed ten percent of the aggregate of the company’s paid-up share capital and free reserves. These deposits should not become due for repayment earlier than three months from the date of deposit or renewal.
• Joint names: Rule 3 allows deposits to be accepted in joint names, not exceeding three individuals, with various clauses such as “jointly,” “either or survivor,” “first named or survivor,” or “anyone or survivor” to accommodate the depositors’ preferences.
• Limit on deposits: Companies referred to in sub-section (2) of section 73 are subject to a limit on the acceptance of deposits. The total deposits, when combined with other outstanding deposits, cannot exceed 25 percent of the aggregate of the company’s paid-up share capital and free reserves.
• Deposit limits: Eligible companies must adhere to deposit limits. Deposits from members should not exceed ten percent of the aggregate of the paid-up share capital and free reserves. For other deposits, excluding those from members, the limit is twenty-five percent of the aggregate of the paid-up share capital and free reserves.
• Government companies: Government companies that are eligible to accept deposits under section 76, have their own ceiling. The total deposits, along with other outstanding deposits, should not exceed thirty-five percent of the aggregate of their paid-up share capital and free reserves.
• Rate of interest and brokerage: Rule 3 establishes restrictions on the rate of interest and brokerage. Companies cannot invite or accept deposits carrying an interest rate or pay brokerage exceeding the maximum rate set by the Reserve Bank of India for non-banking financial companies. Only individuals who have received written authorization from the company to solicit deposits on its behalf are entitled to receive brokerage. Any payment of brokerage to unauthorised individuals is strictly prohibited.
• Unalterable terms: To protect the interests of depositors, Rule 3 mandates that companies cannot reserve the right to alter any terms and conditions of the deposit, deposit trust deed, or deposit insurance contract in a way that prejudices or disadvantages the depositors after the issuance of circulars or advertisements.

Rule 4: Form and particulars of advertisements/circulars: In continuation of Chapter V’s regulations, Rule 4 focuses on how companies should communicate their intent to accept deposits to their members and the wider public. This rule aims to ensure that information about deposit schemes is effectively and transparently communicated to members and the public. The key elements of this rule are as follows:

• Circular to members: Companies intending to invite deposits from their members are required to issue a circular in Form DPT-1. This circular should be sent to all members using a registered post with acknowledgment, speed post, or electronic means.
• Newspaper advertisement: In addition to the circular, companies must publish their intent in English and a vernacular language newspaper, both with a wide readership in the state where the company’s registered office is located.
• Website upload: To ensure transparency, companies accepting deposits from the public must upload a copy of the circular on their website if they have one.
• Authority and registration: Circulars or advertisements must bear the authority of the company’s board of directors and must be registered with the Registrar at least thirty days before they are issued.
• Validity: Circulars or advertisements remain in effect until one of the following occurs: the expiration of six months from the close of the financial year, the date of the financial statement presentation at the annual general meeting, or the date on which the annual general meeting should have been held.

Rule 5: Deposit Insurance: Rule 5 underscores the significance of deposit insurance in safeguarding the interests of depositors. Provisions mentioned in Rule 5 are put in place to secure the interests of depositors and ensure that companies have adequate insurance to cover potential defaults, fostering depositor confidence. The key elements of this rule include:

• Contract for deposit insurance: Companies intending to accept deposits, whether under Section 73(2) or as eligible companies, must enter into a contract for providing deposit insurance at least thirty days before issuing a circular or advertisement.
• Coverage: The deposit insurance contract should explicitly outline that, in the event of a default in repayment, depositors are entitled to receive the principal amount of deposits and interest up to the limit specified in the contract.
• Premium payment: Importantly, the amount paid as insurance premium must be covered by the company itself and should not be deducted from the principal or interest payable to depositors.
• Default resolution: If a company defaults in complying with the terms and conditions of the deposit insurance contract, making the insurance cover ineffective, the company must rectify the default promptly or enter into a fresh contract within thirty days. Failure to do so may result in penalties, and the company will be treated as having defaulted.

Rule 6: Creation of security: Rule 6 specifically addresses the creation of security for deposits, particularly for secured deposits. This rule ensures that assets securing deposits are of sufficient value to cover potential repayments, further enhancing the security of depositors’ funds. The key points are as follows:

• Asset charge: Companies accepting secured deposits must provide security through a charge on their assets, excluding intangible assets. This charge is established to ensure the repayment of the deposit principal and interest. Importantly, the security amount must not be less than the amount not secured by deposit insurance.
• Valuation: The valuation of assets securing deposits is critical. It is mandated that the market value of these assets must not be less than the value of deposits accepted and the interest payable. This valuation should be conducted by a registered valuer.
• Valuation clarification: In cases where the qualifications and experience of valuers are pending finalisation, an independent merchant banker registered with SEBI or an independent chartered accountant with a minimum of ten years of experience can perform the valuation.

Rule 7: Appointment of deposit trustees: Rule 7 introduces the necessity of deposit trustees for securing deposits. Rule 7 establishes a structured framework for the appointment and regulation of deposit trustees, further safeguarding depositors’ interests. Key provisions include:

• Consent requirement: A company must obtain written consent from deposit trustees before their appointment. This consent must be prominently mentioned in the circular or advertisement issued by the company.
• Trust deed execution: The company must execute a deposit trust deed at least seven days before issuing the circular or advertisement, outlining the terms and conditions of the trust.
• Ineligible appointments: Certain individuals or entities are ineligible for appointment as deposit trustees. This includes company officers, individuals indebted to the company, those with material pecuniary relationships with the company, and those who have entered into guarantee arrangements related to the deposits or interest.
• Removal procedures: Deposit trustees cannot be removed after the issuance of the circular or advertisement and before the expiry of their term unless all directors, including independent directors, consent to their removal.
• Duties of trustees: Deposit trustees have various responsibilities, including ensuring adequate security, compliance with deposit terms, and taking steps to protect depositors’ interests. They also play a role in calling meetings of depositors when necessary.

Rule 16: Return of Deposits to be filed with the Registrar

• Annual Return Submission: Companies falling under these rules must submit, before the 30th of June each year, an annual return using e-Form DPT-3 to the Registrar of Companies. They should also include the necessary fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. This return should contain information as of the 31st of March of that year, and it must be audited by the company’s auditor. The auditor must provide a declaration to confirm the accuracy of the information in Form DPT-3.
• Clarification: It’s important to note that Form DPT-3 is exclusively utilised for submitting returns related to deposits or details of transactions not categorised as deposits. This requirement applies to all companies except those owned by the government.

In addition, Rule 16A addresses the need for financial statement disclosures:

• For non-private companies: Publicly traded companies, excluding private ones, must include information in their financial statements, specifically in the form of notes, regarding funds received from directors.
• For private companies: Private companies are required to disclose, via notes in their financial statements, any funds they’ve received from directors or the relatives of directors.

Deposit v Loan

Deposits

• Acceptance of Deposits: Section 73 of the Companies Act, 2013, deals with the acceptance of deposits by companies. A deposit, in this context, refers to any amount of money received by a company from its members, including individuals and other companies, either as a loan or as an advance payment for goods or services to be provided in the future.
• Regulation: Accepting deposits from members is subject to strict regulatory requirements, including the need to comply with the Companies (Acceptance of Deposits) Rules, 2014. Companies must also submit periodic returns and disclosures about deposits accepted from members.
• Interest: Deposits may or may not carry interest, depending on the terms agreed upon between the company and the depositor. If interest is promised, it should be specified in the contract.
• Repayment: Companies must repay deposits to the depositors as per the terms of the deposit, which may include periodic repayments or repayment upon maturity.
• Use of Funds: Companies can use the funds raised through deposits for their operational or business purposes.

Loans

• Borrowing of Loans: The borrowing of loans is governed by Section 180 of the Companies Act, 2013. Companies can borrow money by taking loans from banks, financial institutions, or other lenders. These loans are typically in the form of debt instruments like term loans, debentures, or bonds.
• Regulation: While there are regulatory requirements for borrowing loans, they are generally less stringent compared to the rules governing the acceptance of deposits. Companies must follow their borrowing limits as specified in their Memorandum of Association and Articles of Association.
• Interest: Loans almost always carry interest, and the terms, including the interest rate and repayment schedule, are negotiated between the borrower (the company) and the lender.
• Repayment: Loans are typically repaid as per the agreed-upon terms, which may include regular instalments or a lump-sum repayment at maturity.
• Use of Funds: Companies borrow loans for various purposes, including capital investments, working capital, and other financial needs.

Challenge to the constitutionality of Section 73

In the case of M/s. Nidhi Land Infrastructure Developers Pvt. Ltd. v. Union of India (2017), the plaintiff, Nidhi Land Infrastructure Developers Pvt. Ltd., raised an objection regarding the constitutionality of Section 73 within the framework of the Companies Act of 2013. This section explicitly prohibits companies from accepting deposits from the general public unless they adhere to specific formalities. 

The plaintiff contended that this provision imposed disproportionate limitations on their capacity to conduct lawful businesses. This provision is encroaching upon their right to engage in legitimate commercial transactions. 

Nonetheless, the Supreme Court affirmed the legality of Section 73 through its verdict. The Supreme Court said that the provision had been formulated with the primary intent of safeguarding the rights and benefits of depositors. Therefore, it cannot be said that this provision violates the right of free conduct of business.

Role of judiciary

Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India (SEBI) 2012

In the case of Sahara India Real Estate Corporation, the Sahara Group’s unlisted companies raised funds through Optionally Fully Convertible Debentures (OFCDs) without complying with Section 73 of the Companies Act and other regulations. SEBI alleged that Sahara raised large deposits without complying with regulatory norms. Sahara contended that OFCD is a focused issue and does not fall under SEBI’s regulatory jurisdiction. The Supreme Court of India ruled in favour of SEBI, stating that OFCDs are true “securities” under the Securities and Exchange Board of India Act, 1992. Sahara was ordered by the Supreme Court of India to return the collected amount to investors along with interest to protect their interests. This case set a precedent for SEBI’s mandate to regulate financial instruments and ensure investor protection.

State of West Bengal v. Kesoram Industries Ltd. (2014)

In the case of Kesoram Industries Ltd., Kesoram Industries Ltd., issued debentures while also looking for public deposits. There arose a lawsuit against them after the company ran into financial problems and failed to repay the deposits and unpaid debts. Initially, the question of whether the State of West Bengal was legally permitted to file a lawsuit against the company to recover the unclaimed deposits. Secondly, it is the obligatory nature of the deposit repayment for companies. However, the Supreme Court ascertained that the State of West Bengal is vested with the legal standing to institute legal proceedings against Kesoram company. Furthermore, The company was held liable for its failure to adhere to the court’s orders. SC ordered them to repay the deposits and take care of any unpaid debts. The Supreme Court’s verdict further reaffirmed the importance of abiding by deposit-related regulations. It emphasised the obligation of companies to fulfil deposit repayment obligations within the stipulated time periods, thereby ensuring the protection of the interests of depositors. This judicial ruling put the significance of upholding deposit regulations in the limelight as it safeguards the depositors.

Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. Assistant Provident Fund Commissioner (2016)

In the case of Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd., there was an issue regarding the consideration of the outstanding legal liabilities of Gwalior Rayon Silk Co. as deposits. The central question was whether these unpaid liabilities, including contributions to provident funds and state employee insurance, should be classified as public deposits. In its decision, the Supreme Court ruled that the company’s outstanding statutory obligations should indeed be considered as “public deposits.” In fact, this judgement set a precedent by extending the legal requirements of public deposits to the unpaid legal obligations of the company in question.

Nitin Rekhan v. Union Of India (2022)

In the case of Nitin Rekhan, the petitioner had filed a writ petition before the Delhi High Court under Article 226 of the Indian Constitution, along with Section 482 of the Code of Criminal Procedure, 1973. The petitioner’s primary request was for the court to compel the Registrar of Companies to take legal action against respondents under Sections 73 and 76A of the Companies Act, 2013. The background of the case involved the petitioner paying Rs. 40,00,000 to the directors of the respondent company for share issuance, with this amount later being refunded. However, the petitioner alleged that the interest on this sum, as per the Companies (Acceptance of Deposits) Rules, 2014, was not repaid. The petitioner had filed a complaint with the Registrar of Companies, but no action was taken.

The petitioner argued that the inaction of the Registrar amounted to a violation of the Companies Act, 2013, and sought penalties against the respondent Company and its auditors, (which are also respondents in this case). However, the court ruled that the sum in question could not be classified as a “deposit” under the Companies Act, 2013, or the Companies (Acceptance of Deposits) Rules, 2014. The court based this decision on the fact that the money had been given for share allotment in 2010 and was returned in 2018, making the 2013 Act and Rules inapplicable. The court also referred to a circular that clarified this position. Furthermore, the court stated that the dispute stemmed from a private contract and was beyond the scope of its jurisdiction. The petitioner was advised to pursue alternative legal remedies for recovering interest or dues from the respondent company. Therefore, the writ petition was dismissed as the court found no valid grounds for its consideration. The court emphasised that the issue was contractual and not within the purview of writ jurisdiction. The court also clarified that its observations would not impact any future proceedings related to the case.

Conclusion 

Winding up, Section 73 of the Company’s Act 2013, and the Companies (Acceptance of Deposits) Rules, 2014 are vital in controlling how deposits are acknowledged by companies. As there is a hike of the corporate sector in the markets, special measures and provisions are made for depositors’ inclination. On the other hand, Section 73 of the Companies Act sets various standards regarding the acceptance of deposits and adherence to the rules by characterising the eligibility, accepted deposits, and permitted depositor entities.

To avoid legal repercussions and safeguard the funds of the depositors, compliance with the law is of significant importance. To acquire the trust and validity of their partners, companies should be mindful and use a reasonable level of raising funds while accepting deposits, keeping precise records, and guaranteeing convenient reimbursement. The legitimate arrangements of the Companies Act, 2013, cultivate an environment of monetary increment by finding some kind of harmony between security provisions and the company help section. This increases financial backer trust in the corporate area and advances a feasible and responsible company scene in India.

Frequently Asked Questions (FAQs) 

Which companies can accept deposits under Section 73?

Certain classifications of businesses like non-banking financial companies (NBFCs), lodging money companies, and infrastructure debt fund NBFCs, alongside explicitly absolved elements, are qualified to get deposits under Section 73. In any case, most companies are not approved to gather deposits from the overall population.

What are the eligibility criteria for accepting deposits?

To be qualified for accepting deposits, companies should stick to laid-out measures, such as the creditworthiness of the company, dispensing a hold for deposit repayments, getting investors’ status, and sticking to straightforward exposure standards.

Is there any limit on the number of deposits a company can accept?

The acknowledgment of deposit is limited by a ceiling – covered at 25% of the company‘s share capital and free reserves. In specific cases, this limit can be raised for a qualified company, dependent upon the discretion of the directors.

What are exempted deposits under Section 73?

Section 73 includes specific transactions that cannot be called deposits, such as funds with governmental origins, any amount granted by foreign governments, and exclusions granted by the Central Government.

Can a company accept deposits from directors and their relatives?

Yes, companies can take deposits from their directors and their relatives if specific conditions are satisfied and requisite disclosures are made.

What are the consequences of not adhering to the regulations mentioned in Section 73?

Failing to comply with Section 73 can result in severe penalties, including substantial fines and the potential imprisonment of accountable employees.

Is it possible to demand deposits without observing the established conditions?

No, strict adherence to the specified terms and conditions stipulated in Section 73 is compulsory; disregarding these could lead to legal actions.

Can a private company demand deposits from the general public?

In most cases, private companies lack the authorization to demand deposits from the public. Yet, they might be eligible to obtain deposits from directors and members, subject to specific conditions discussed above.

What measures should a depositor adopt to ensure the safety of their deposits?

To safeguard deposited funds, individuals should affirm the company’s compliance with the requirements mentioned in Section 73 and validate its authorization status. Prudently assessing the company’s financial conditions and creditworthiness prior to depositing funds is recommended.

References

• https://taxguru.in/company-law/deposit-companies-act-2013.html
• https://www.icsi.edu/media/portals/0/ACCEPTANCE%20OF%20DEPOSITS.pdf
• https://cleartax.in/s/acceptance-deposits 
• https://thc.nic.in/Central%20Governmental%20Rules/Companies%20(Acceptance%20of%20Deposits)%20Rules,2014.pdf 
• https://taxguru.in/company-law/Section-180-companies-act-2013-analysis.html 
• https://www.wirc-icai.org/images/material/PDF-Deposit-YMD.pdf 
• https://drive.google.com/file/d/1Gb-40bzEK82IjKFFp8MDFiKREP-eXpLg/view 
• https://www.taxmann.com/post/blog/reporting-exempted-deposits-under-companies-act-deposit-rules/