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INSIGHT – ACCEPTANCE OF DEPOSITS BY COMPANIES

The ordinary sources of finance are equity and preference shares, debentures and other debt securities. But companies, as they expand their activities, need more and more funds and this has led them to borrow from banks and financial institutions. But it puts the company under management & control of those financial institutions. This has induced companies to call for deposits from the public. Such deposits are unsecured debts and neither management control nor the formalities of charge on assets are putting any hindrances for availing of such amount.

Governing Laws:

Sections 58A, 58AA, 58AAA and 58B read with the Companies (Acceptance of Deposits) Rules, 1975 regulate the invitation, acceptance and repayment of deposits by public limited companies.

Some important Definition:
  • Deposits Deposit means deposit of money with, and includes any amount borrowed by, a company, but does not include certain types of borrowings; viz., amount received:
    1. from any Government, Local Authority or any other foreign person, citizen or authority or any amount guaranteed by Government.

    2. from Banks.

    3. from various Government or semi-Government financial Companies or Corporation/insurance Companies or a public financial institution as may be notified by the Central Government.

    4. from any other company.

    5. by way of security deposit from an employee.

    6. by way of security or advance from any purchasing, selling or other agents in the course of business or any advance received against orders for supply of goods, properties or services.

    7. by way of subscription to any share, stock, bonds or debentures pending allotment. Any amount received by way of calls in advance so long as this is not repayable under the Articles.

    8. in trust or in transit.

    9. also refer to amendments in Section 3(1)(iii)(d) and Section 43A by the Companies Amendment (Act), 2000.

    10. by a company from a director, relative of a director or member out of his own funds (that is not borrowed or accepted from others). The director/relative of a director/shareholder concerned however has to furnish a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others. Also refer to amendments in section 3(1)(iii)(d) and section 43A by the Companies (Amendment) Act, 2000.

    11. by issue of bonds or debentures secured by the mortgage of any immovable property or with an option to convert them into shares. Provided the amount does not exceed the market value of property.

    12. from promoters by way of unsecured loans pursuant to agreement with financial institutions for loans so long as such loans are outstanding.

  • Free Reserves

    Free Reserves mean the balance in the share premium account, capital and debenture redemption reserves and any other reserves shown in the Balance-Sheet of the Company and created by appropriation out of the profits of the Company, but does not include the following:

    1. the balance in any reserve created for repayment of any future liability or for depreciation in assets or for bad debts; and

    2. by the revaluation of any assets of the Company.

  • Net Owned Fund (NOF) NOF shall have the same meaning as contained in RBI Act, 1934. Acceptance of Deposits:

    A Company may accept deposits either by issuing Statement of Advertisement or a Statement in lieu of Advertisement. The detailed procedure relating to either case are enumerated below:

    Statement of Advertisement

    Section 58A(2)(b) prescribes that a Company before accepting deposits shall issue an advertisement along with a statement showing the financial position of the Company. Such advertisement shall be given in a leading English newspaper and vernacular newspaper circulating in the State in which the registered office of the Company is situated.

    The advertisement which is to be issued, should be approved by the Board of Directors of the Company at the duly convened Board Meeting. The advertisement must also include a statement to the effect that the advertisement is issued on the authority and in the name of the Board of Directors of the Company and must indicate the date on which the Board of Directors has approved the text of the advertisement including the terms and conditions subject to which the deposits are accepted by the Company.

  • Advertisement details:
    1. Name of the company.

    2. Date of incorporation.

    3. Business of the company and of the subsidiaries, if any.

    4. Particulars about the management of the Company.

    5. Profits of the company before and after making provision for tax for last 3 financial years.

    6. Dividends declared for last 3 financial years.

    7. Financial position of the Company as reflected in the last two (2) Balance sheets before the date of the advertisement.

    8. Other details as mentioned in the rules.

  • Validity of the advertisement: The validity of the advertisement issued at any time is only upto earlier of the below-
    1. six months from the closure of the financial year of the company in which the advertisement was issued

    2. (or)
    3. until the date on which the balance sheet is laid before the Company in Annual General Meeting (AGM).

  • Compulsory Registration of copy of Advertisement:

    Before issuing the advertisement, it is mandatory for a Company to file a copy of the advertisement with the Registrar of Companies duly signed by a majority of Directors, approving the proposal.

Statement in lieu of Advertisement

A Company can also accept/renew deposits without publishing an advertisement. In such cases, the Board of Directors of the Company shall approve a statement in lieu of advertisement containing all the particulars which have to be given in the advertisement and file a copy of the same duly signed by majority of the Directors with the Registrar of Companies. After registration of statement in lieu of the advertisement by Registrar of Companies, the Company can accept deposits.

Other miscellaneous provisions Limits up to which deposits can be accepted:
S. No. Particulars % of aggregate of Paid-up share capital and free reserves
i. Short-term deposit for a period not less than three months. 10
ii. Deposit from shareholders in case of public Company or deposit guaranteed by Directors or deposits against unsecured debentures. 10
iii. Any other Deposit other than referred in clause (2) above. 25

A company with Net Owned Fund (NOF) of less than Rs. 1.00 Crore shall not invite public deposits.

Form of application for deposits

A Company cannot accept/renew deposits unless a declaration is made by the depositor that the amount is not being deposited out of the funds acquired by him by borrowing or accepting deposits from any other person.

Interest rate and Penal interest rate:

Interest can be paid at the maximum rate of interest prescribed by the RBI that the NBFCs can pay on their public deposits. Presently its 12.5 % p.a at rests. Penal rates of interest are also prescribed in the rules for overdue period in case public deposits matured and claimed but remaining unpaid.

Brokerage:

Any person authorised in writing to solicit deposits on behalf of the Company and through whom deposits are procured shall only be entitled for brokerage.

Period of Deposits Maximum rate that can be paid as brokerage ( % of deposits)
up to one year
1%
between one and two years
1.5%
beyond two years
2%
Repayment of Deposits: The company shall not accept any deposit which is repayable :
  • on demand

  • on notice

  • before 6 months or after 36 months from date of acceptance or renewal of deposits.

Maintenance of liquid assets:

Every Company has to deposit or invest at least 15 % of its deposits maturing during the Financial Year ending 31st March every year latest by 30th April in the beginning of the year in any of the specified assets taken at their market value and the said sum can be utilised only for repayment of deposits maturing during the year but at no time the amount shall fall below 10% of the amount maturing until 31st March of that year.

Return of deposits

Company is required to file a return with the Registrar of Companies on or before 30th June every year containing information as on 31st March of that year duly certified by the auditors of the Company in a prescribed form.

Repayment of deposits before maturity

A Company, in response to a request from the depositor may make repayment of a deposit after the expiry of six months from the date of receipt but before the expiry of the period for which the deposit was accepted. Under such circumstances, the Company shall pay rate of interest on the deposit at a rate lower than 1% from the rate applicable for the period for which the deposit was made. The other terms are as per the rules.

Register of deposits Every Company accepting deposits under the rules shall keep a register in respect of deposits invited/accepted by the Company, containing the following details:
  1. Name and address of the depositor;

  2. Date and amount of deposit;

  3. Duration of deposit and the date on which each deposit is repayable;

  4. Rate of interest;

  5. Date(s) on which interest will be due;

  6. Any other particulars relating to deposit

The above register must be kept at the Registered Office of the Company and should be preserved for a period of atleast eight calender years from the financial year in which the latest entry is made in the register.

Penalty

Penalty is provided in the Act and Rules for the Companies and every officer of the Company in default for the contravention.

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