COMPANY DEPOSITS – REVIEW OF COMPANIES ACCEPTANCE OF DEPOSITS (AMENDMENT) RULES, 2016

[2016] 133 CLA (Mag.) 1
Surendra U Kanstiya^*

Rules on acceptance of deposits by the corporate sector have been amended on 29th June 2016. Whereas few relaxations have been introduced, certain obligations have also been imposed on the companies accepting the deposits. In this article, major changes introduced through the Companies (Acceptance of Deposits) Amendment Rules, 2016 have been analysed.

INTRODUCTION

Activities relating to acceptance of deposits by companies are regulated by Chapter V of the Companies Act, 2013 (the Act) and the Companies (Acceptance of Deposits) Rules, 2014 (‘the Rules’). Time and again these Rules have been amended by the Ministry of Corporate Affairs (‘MCA’). On 29th June 2016 the MCA has again issued a notification and the Companies (Acceptance of Deposits) (Amendment) Rules 2016 (‘the Amendment Rules’) have been notified.

EXEMPT DEPOSITS

According to rule 2(1)(c), the ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include certain receipts as listed under the rule. That rule gives 14 types of transactions which are specifically excluded from the ambit of ‘deposit’ and they are generally known as exempt transactions. The Amendment Rules have amended four such exempt transactions and added five new exempt transactions. As a result, with effect from 29th June 2016, nineteen types of transactions would be outside the purview of ‘deposit’ under the Act. The same is explained below :

AMENDMENT TO EXISTING EXEMPT TRANSACTIONS

Four exempt transactions already existing in the list of transactions that are not to be treated as deposit have been amended. The same are as follows:
- Compulsorily convertible instruments - Existing exemption available under rule 2(1)(c)(ix) was available to amount raised by issue of secured bonds or debentures which are compulsorily convertible into shares of the company within five years. Now the duration of five years has been extended to ten years.
- Amount in trust - Existing exemption available under rule 2(1)(c)(xi) available to any non-interest bearing amount received or held in trust is now restricted and would be available only to any non-interest bearing amount received and held in trust.
- Advances received - Existing exemption available under rule 2(1)(c)(xii) to the advance received in the course of business is extended to three more categories. The same are as follows :
  - As an advance towards consideration for future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less.
  - As an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government.
  - As an advance for subscription towards publication, whether in print or in electronic media to be adjusted against receipt of such publications.
  Of course, like other categories falling under rule 2(1)(c)(xii), these advances shall also be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.
- Nidhi companies - Explanation to the existing exemption available to nidhi companies under rule 2(1)(c)(xiv) has been stretched further. Now in certain situations, any additional contributions made by the company as part of the promise or offer, shall also be considered as deposits.

CREATION OF NEW EXEMPT TRANSACTIONS

Five more categories have been added to the list of transactions that are not to be treated as deposit. The same are as follows :
- Listed unsecured non-convertible debentures – Any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognized stock exchange as per applicable regulations made by Securities and Exchange Board of India [rule 2(1)(c)(ixa)].
- Chit subscriptions – Any amount received by way of subscription in respect of chit under Chit Fund Act, 1982 [rule 2(1)(c)(xv)].
- Collective investment schemes – Any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India [rule 2(1)(c)(xvi)]
- Start-up company – An amount of Rs.25 lakh or more received by a start-up company by way of a convertible note (convertible into equity shares or repayable within a period of not exceeding five years from the date of issue) in a single tranche from a person [rule 2(1)(c)(xvii)];
- SEBI registered funds – Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds registered with the Securities and Exchange Board of India in accordance with regulations made by it [rule 2(1)(c)(xviii)].

QUANTUM OF DEPOSITS

The threshold on amount of deposits that can be accepted or renewed by a company from its members has now been increased further. Now quantum of such deposits can go up to 35 per cent of the aggregate of the paid-up share capital, free reserves and securities premium account of the company. A proviso has also been added to rule 3(3) which permits a private company to accept from its members monies not exceeding 100 per cent of aggregate of the share capital, free reserves and securities premium account. Such private companies are mandated to file the details of moneys so accepted to the Registrar in such manner as may be specified. This exemption is in line with the privileges given to the private companies by the Ministry of Corporate Affairs vide notification dated 5th June 2015 [2015] 126 CLA (St.) 207.

CREDIT RATING LINKED TO NBFC DIRECTIONS

Rule 3(8) mandates every eligible company accepting public deposits to obtain, at least once in a year, credit rating for deposits accepted by it. It has now been provided that the credit rating in such case, shall not be below the minimum investment grade rating or other specified rating for fixed deposits, from any one of the approved credit rating agencies as specified for non-banking financial companies in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 1998, issued by the Reserve Bank of India, as amended from time-to-time.

PUBLICATION OF CIRCULAR

Every eligible company intending to invite deposits shall now be required to issue a circular in the form of an advertisement in English language in an English newspaper having countrywide circulation. Moreover the company shall also place such circular on the website of the company, if any.

DEPOSIT INSURANCE

A proviso has been added to rule 5(1) permitting the companies to accept the deposits without deposit insurance contract till the 31st March, 2017 or till the availability of a deposit insurance product, whichever is earlier.

DISCLOSURE IN FINANCIAL STATEMENT

A new rule 16A has been inserted requiring the deposit accepting companies to make following disclosure by way of notes in the financial statement :
- Every company, other than a private company, shall disclose about the money received from the director
- Every private company, shall disclose about the money received from the directors or relatives of directors

DISCLAIMER IN FORM DPT-1

A company allowed to accept deposits from its members is required to issue a circular in Form DPT-1. Every eligible company intending to invite deposits is required to publish a circular in the form of an advertisement in Form DPT-1. Form DPT-1 contains the details about the company and its financial position, details of outstanding deposits, particulars of deposit scheme, etc. Now Form DPT-1 shall also contain a disclaimer clause reading as under :
“It is to be distinctively understood that filing of the circular or circular in the Form of advertisement with Registrar should not in any way be deemed or construed that the same has been cleared or approved by the Registrar or the Central Government. The Registrar or the Central Government does not take any responsibility either for the financial soundness of any deposit scheme for which the deposit is being accepted or invited or for the correctness of the statements made or the opinions expressed in circular or circular in the Form of advertisement. The depositors should exercise due diligence before investing in deposit schemes.”

CONCLUSION

A significantly large number of companies have been enjoying the privilege available to them in the form of acceptance of deposits. Relaxation in the relevant norms would certainly benefit them. At the same time, large number of deposit holders are being taken for a ride every year and the only way to protect their interest is by disciplining the deposit taking activities of the companies. In a way, notification of the Amendment Rules is an attempt to attain both these objectives