Deposits
By Asok Nadhani
9.3 Deposits
a. Any deposit of money with a company or any amount borrowed (including
unsecured debentures) by a company except the following items is termed as
deposits [Sec. 58(A)]:
Subscription or calls in
advance to shares/ Bonds/ Debentures, which are pending allotment
Loan from a banking
company
Unsecured loans from
promoters/any amount received from:
·
Sate/Central Government
or any other source where repayment is guaranteed by State/Central Government
·
Local authority/Foreign
Government/Foreign citizen
·
Loan from specified
Financial Institution
·
An employee of a company
as a security deposit.
Loans received from another company.
Any advance received from purchasing or selling agent or advance against
orders for supplies, if it is an advance in the ordinary of business.
Any amount received or kept in trust.
Loan from a director, member or relatives: Any amount received by a
private company from a person who, at the time of receipt of the amount, was a
director, relative of director or member. Such person shall furnish a
declaration in writing that the amount is not being given out of funds acquired
by him by borrowing from others.
Secured debentures: Debentures secured by mortgage of immovable property
if the amount of such debentures does not exceed the market value of such
immovable property.
Money brought in by promoters: Money brought in by promoters shall not be
taken as deposit in following cases:
·
The loans are given by
the promoters to the company pursuant to a condition of the financial
institution.
·
The loans are directly
given by the promoters/their relatives, and not by the friends and business
associates of promoters.
This exemption will be available till the loans of the financial
institutions are not repaid.
b.
Generally, public
deposits are unsecured (i.e., no charge is created when public deposits are
accepted).
9.3.1 Applicability of the provisions of the Act [S. 58A(7)]
The provisions of (S. 58A) shall be applicable to all other company
except –
Banking Company,
Companies
specified by Central Government (in consultation with the RBI).
9.3.2 Invitation and acceptance of Deposit
The company can
invite or allow any other person to invite on its behalf, any deposits only
when it:
i.
complies with the rules (laid down by the Central
Government in consultation with the RBI), relating to maximum limit, manner and
conditions regarding deposit. [S. 58A (1) & (2)]
ii.
issues an advertisement in the prescribed form or
manner stating about the financial position of the company
iii.
has made no default in repayment of earlier deposit
iv.
net owned fund is not less than 1 crore Rupees.
9.3.2.1 Advertisement
for inviting deposits
a.
Every company shall issue an advertisement approved
by the Board of directors before inviting any deposit in a vernacular and one
English newspaper. Such advertisements shall remain valid till earlier of the
following periods (S. 58A)
6 months from
the date of closure of financial year in which it is issued
date on which
the balance sheet of the company was laid in the company’s general meeting or,
(when the general meeting is not yet held, the latest date on which it is
proposed to be held.)
b.
Contents of the
advertisement: The advertisement shall contain –
Name and date of
incorporation of the company
Nature of
business carried on by the company
Brief
particulars regarding the management
Profits of the
company for 3 preceding financial years
Audited balance
sheets for two preceding years
The terms and
conditions of the acceptance and repayment of deposits
Date of approval
of the advertisement by the boards
c.
Declaration in
the advertisement: The advertisement shall contain the following
declaration –
the
advertisement is issued on the authority and in the name of the Board of
directors
the company has
compiled with the provision of these rules while formulating the advertisement
the deposits
accepted by the company are unsecured.
the deposits
shall rank pari passu with other
unsecured liabilities
the company is
not in default in repaying back any earlier deposits or its part thereof
including any of its interest.
The advertisement should be
filed with the registrar before its publication in the newspaper.
9.3.2.2 Statement
in lieu of advertisement
Where deposits
from public are not invited, a company can issue a statement in lieu of
advertisement. It shall contain similar information as in the advertisement and
shall be subject to the same terms, conditions and the provisions applicable to
the advertisement.
9.3.2.3 Application
form for accepting deposits
a.
Application regarding deposits shall be made in a
form supplied by the company. It shall contain the particulars specified in the
advertisement, including:
- Terms and
condition of acceptance of deposit
- A
declaration by the depositor that he is depositing the money at his own
will after reading and understanding the form and that the money is not
being deposited out of funds acquired by him by borrowing or accepting
deposits from any other person.
- Any changes
made upto the date on which the application form is issued by the company.
b.
Nomination [Sec. 58(11)]: Every
depositor is entitled to make a nomination in accordance with the provisions of
Sec. 109 A and 109 B.
9.3.2.4
Acceptance of deposits
The acceptance
of deposits is subject to Companies (Acceptance of Deposits) Rules 1975,
a.
The company has a minimum net owned fund (an amount
reached after reduction of accumulated losses and miscellaneous expenditure
from the aggregate of paid up capital and free reserve) of Rs. 1 crore.
b.
Maturity period of deposits accepted shall be
minimum 6 months and maximum 3 years. However, deposits for less than 6 months
may be accepted if such deposits do not exceed 10% of the aggregate of paid-up
capital and free reserves.
c.
Rate of interest can be maximum of 12.5% per annum
d.
If a company accepts deposits in contravention of
the rules it shall repay within 30 days of acceptance or any extended time as
the Central Government may allow.
e.
Ceiling on deposits: the aggregate amount of
deposit shall not exceed –
i.
In case of Government company: 35% of its
paid up capital and free reserves, irrespective of the nature of deposits.
ii.
In case of other company:
§
From
Shareholders: 10% of aggregate of paid up capital and free reserves.
§
From Others: Upto 25% of
aggregate of paid-up share capital and free reserves.
f.
Ceiling on
brokerage
A
company may pay brokerage for procurement of deposits only to a broker, (whose
business is to solicit and obtain deposits for company). The maximum rate of
brokerage is 1% for deposit of upto 1 year, 1.5% for deposit of upto 2 years
and 2% for deposit of more than 2 years.
9.3.2.5 Maintenance
of liquid assets
i. The company must
maintain liquid assets for repayment of deposit, as per following rules:
−
At least 15% of the amount of deposits maturing
upto 31st march of the following year must be invested by the company in the
form of liquid assets.
–
The investment in liquid assets shall be made on or
before the 30th day of April of each year.
–
The liquid assets shall not, at anytime, fall below
10% of the deposits maturing till the 31st March of the following
year.
–
The amount invested in the liquid assets shall be
utilized only for the purpose of repayment of the deposits.
ii. Following are
the permitted investments for maintenance of liquid assets.
−
Deposits held with a scheduled bank, free from lien
or charge.
−
Unencumbered securities of Central or State
Government.
–
Unencumbered securities approved under Indian
Trusts Act, 1882.
–
Unencumbered bonds issued by Housing Development
Finance Corporation Ltd.
9.3.3
Receipt of deposits
On acceptance or
renewal of deposit, the company should furnish a receipt within 8 weeks from
the date of the amount received, to the depositor or his agent. It should be
signed by an officer authorised in this behalf stating the name and address of
the depositor, date of deposit, maturity amount, percentage of interest and
details of amount received.
9.3.3.1 Register
of deposit
Every company
should maintain a register of deposits containing the prescribed particulars at
its Registered Office and such register should be preserved for 8 years from
the end of the financial year in which the latest entry is made in the
register.
9.3.3.2 Return of Deposit
Every company which has accepted deposits shall file a Return of deposits
with the Registrar, containing the information as on 31st March of
the year, on or before 30th June of every year, certified by the
auditor of the company.
9.3.4 Repayment
of deposits
a.
Every company which accepts deposits is liable to
pay back the principal amount with interest to the depositor within the
stipulated time or the extended time (not exceeding 30 days) as the Central
Government may allow.
b.
If the company fails to repay the amount in its
extended time the company shall be liable to pay an interest @ 18% p.a. on the
overdue amount and may be subject to the penal provisions as per rules and Act.
c.
Premature repayment: Premature repayment of
deposits are allowed subject to the following conditions:
It can be made
only after expiry of 3 months from the date of deposit.
The rate of
interest on such premature deposit shall be reduced by 1% from the rate
applicable (no interest of withdrawn before 6 month of deposit).
9.3.4.1
Consequences for contravention
For any
contravention of any rule or provision of the Act relating to acceptance and
repayment of deposits, the company shall be subjected to the following penal
provisions:
a.
Penalty for
contravention with the provisions as to invitation and acceptance
For
contravention of invitation, a fine which shall not be less than the amount of
deposit accepted.
For
contravention of acceptance, a fine which shall range between Rs.
50, 000 to 10 lakhs.
Every Officer of
the company in default shall be liable to an imprisonment upto 5 years and
fine.
b.
Penalty for
contravention with the provisions as to repayment
The company
shall be punishable with fine which shall not be less than twice the amount of
deposits remaining unpaid.
Every Officer of
the company in default shall be liable to an imprisonment upto 5 years and
fine.
9.3.4.2 Consequences on default on repayment of
deposits
When a company makes a default in repayment of deposit or interest
thereon:
a.
The company cannot
buy-back its own shares till the default in repayment of deposits or interest
payable continues. (Sec. 77B).
b.
The company cannot issue
shares with differential voting rights (Sec. 86).
c.
A director of a public
company shall be disqualified from being appointed as a director in any public
company, if the public company of which he is a director fails to repay the
deposits or interest thereon on the due date, and such default continues for
one year [Section 274(1)(g)].
d.
The company cannot make
any intercorporate loan, investment, guarantee or security, till the default in
repayment of deposits or interest payable thereon continues. (Section 372A).
e.
A public company cannot
pay minimum remuneration (i.e., as specified under Section II of Part II of
Schedule XIII) to its managing director, whole time director and manager, if it
has made a default in repayment of public deposits or interest payable thereon
for a continuous period of 30 days in the preceding financial year, before the
date of appointment of such management person.
9.4 Small
depositors
The following
rules apply to Depositors who has invested a sum not exceeding Rs. 20,000 in a
financial year (termed as small depositors) [S. 58AA]:
a.
Intimation to
the Tribunal
Every company, which
accepts deposits from small depositors, shall intimate within sixty days to the
Tribunal for any default made by it in repayment of any such deposits (or its
part) thereof or any interest thereupon. Such intimation shall contain
particulars regarding the names and addresses of each small depositor, the
principal sum of deposits due to them and interest accrued thereupon.
b.
Advertisement
and Application form
In addition to the other
content in the advertisement and
application form, the company should also state in its every future
advertisement and application form inviting deposits from the public about its
every past default in repayment of the deposits or interests thereon and waiver
of interest and reason therefore. [S. 58AA(5)]
c.
Restriction on
Acceptance
No further deposits can be
accepted by the company unless the matured amount is repaid along with its
interest to the depositors, except in following cases:
voluntary
renewal of deposits by the small depositors
ineffectiveness
of repayment due to death of a small depositors
a competent
court or authority has stayed its repayment
d.
Utilisation of
funds obtained by taking loan
Where
a company has accepted deposits from small depositors and subsequently it
obtains working capital loan from any bank, it shall first utilize the funds so
obtained for repayment of the small deposits and interest thereon before
applying such funds for any other purpose. [S. 58AA(7)]
e.
Penal rate of
interest
The Company shall be liable
to pay a penal rate of interest @ 20% p.a. compoundable on annual basis on any
matured small deposits claimed but not paid.
f.
Applicability of
rule of under section 58A
Provisions contained in
Section 58A, shall, as far as may be, apply to the deposits made by the small
depositors also. [S. 58AA(11)]
9.4.1 Penalty
for contravention
i. For any default
in complying with the provisions of 58AA, every director shall be deemed to be
guilty and shall be punished with an imprisonment upto 3 years with a fine
Rs.500 or more for every day during which such non-compliance continues. [S.
58AA(9)]
ii. Default in
acceptance or refund of deposits to a small depositor shall be a cognizable
offence under the court of criminal procedure (S. 58AAA).
Examples:
Floating Charge
Ex.9.1 On January 10, 1998 a company, in
consideration of a past debt of Rs.2 lakhs and a future advance of Rs.1 lakh,
issued debentures to a creditor accompanied by a floating charge over its
assets. On June 25, 1998
an order for the winding up of the company was passed.
Held, the charge
is void as to the past debt of Rs.2,00,000, and is valid as to the fresh
advance of Rs.1,00,000 (Sec.534). [Ref. 9.2.4.2]
For more details, refer to Business & Corporate Laws, by
Asok Nadhani, BPB Publications-ww.bpbonline.com, bpbpublications@gmail.com
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