Wednesday, June 11, 2014

Guest Post: Deposits - Issues Under the Companies Act, 2013 – Part 1

[The following post is contributed by Madhusudan Bose, who is a lawyer and company secretary by profession, at PRA Law Offices, New Delhi]


1.         Introduction

1.1       The company law in India prescribes stringent conditions for acceptance of deposits by any company. In the interests of the ordinary depositor, “deposits” are expansively defined to include any “receipt of money by way of deposit or loan or in any other form by a company” UNLESS the category of amount received is expressly excluded from the scope of “deposits” under the Rules. 

1.2       The list of excluded categories was conveniently broad under the Companies Act, 1956, and kept out most ordinary business transactions and financing arrangements from the scope of “deposits”.  Thus, compliance with the deposit rules was not particularly onerous. 

1.3       With effect from April 1, 2014, the provisions of the new Companies Act, 2013 (“2013 Act”) relating to deposits have come into force.  The new legal regime has brought about two changes which require urgent attention by all companies:

First, the scope of “deposits” has been expanded. On the one hand, some financing arrangements, which were excluded earlier, have been brought under the scope of “deposits”. On the other hand, the exemption accorded to other categories of transactions has been made subject to several conditions.

Second, the 2013 Act mandates repayment of all deposits received under the 1956 Act, and requires all future deposits to comply with the new regime.

1.4       In light of the above, it is important to understand the new legal regime, so that businesses can accordingly prepare themselves, and ensure that their commercial and financing arrangements are in due compliance with the revised framework.


2.1       Amounts received from members and directors’ relatives by private companies

2.1.1    Earlier: The following amounts were excluded from the definition of “deposits”, under the Companies (Acceptance of Deposits) Rules, 1956 (“Old Rules”):

(a)        Amounts received by any company from its directors;

(b)        Amounts received by a private company from its members, and directors’ relatives. 

2.1.1    Change:  As per the New Rules, any amount received by a private company from its members (not being companies), and relatives of its directors are covered under the definition of deposits, as they are not specified to be excluded from the definition of “deposits”.

Deposits accepted by a company (whether public or private) from its directors continue to be excluded from the scope of “deposits” under the New Rules.

2.2       Amounts received in ordinary course of business of the Company

2.2.1    Earlier:  Any advances received against orders for the supply of goods or properties or for the rendering of any service were excluded from the definition of the deposits. No time limits were prescribed by the Old Rules.

2.2.2    Change:  The New Rules have narrowed the scope of exclusions, and specified additional conditions for claiming the benefit of exclusion from the definition of “deposits”.  Accordingly, the New Rules exclude “any amount received in the course of, or for the purposes of, the business of the company” from the definition of “deposits” if they fall under the following heads:

(a)        Amounts received as an advance for the supply of goods or provision of services, provided:

- They are accounted for in any manner whatsoever; and

- Such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance.

The above time limit does not apply to any advance which is the subject matter of any legal proceedings before any court of law.

Notes:  The above time limit also does not apply to amounts received as advance under long term projects for supply of capital goods. [See (e) below] 

(b)       Amounts received as advance in connection with consideration for property under an agreement or arrangement, provided:

- They are accounted for in any manner whatsoever; and

- Such advance is adjusted against the property in accordance with the terms of agreement or arrangement.

Notes:  No upper time limit has been specified within which advance received as consideration for property should be adjusted.

(c)        Amounts received as security deposit for the performance of the contract for supply of goods or provision of services;

Ordinarily, an advance is paid by the purchaser towards part payment of the consideration for the contract.  On the other hand, a security deposit is made for guaranteeing due performance of the contract.     

(d)       Amounts received as advance under long term projects for supply of capital goods except those covered under item (b) above

The Law Lexicon defines capital goods as equipment and machinery, which are used for the production of other goods or services.[1] The condition that advances must be appropriated within three hundred and sixty five days has not been made applicable to capital goods.   

2.3       Application / advance money against shares and other securities

2.3.1    Earlier:  The Old Rules excluded any amount received by way of subscriptions to any shares, stock, bonds or debentures from the scope of “deposits”.

2.3.2    Change

(a)          The New Rules have expanded the scope of exclusion by specifying that any amounts towards subscription to any securities (and not just shares, debentures etc) shall be excluded from the scope of “deposits”. 

(b)          The language under the New Rules indicates that only amounts received and held pursuant to an offer made in accordance with the provisions of the Companies Act, 2013 will be eligible for exclusion from the definition of deposits. 

(c)          Most importantly, the New Rules specify that application / advance monies shall be excluded from the scope of “deposits” subject to the following conditions:

- Such amount is appropriated only against the amount due on allotment of the securities applied for;
AND
The securities have been allotted within 60 days of receipt of the application / advance money;

- In case the securities have not been allotted within aforesaid period, such application / advance money has been refunded within 15 days of expiry of such 60 days. 

It is specifically provided that adjustment of the amount for any other purpose shall not be treated as refund. 

2.4       Secured bonds or debentures

2.4.1    Earlier:  The Old Rules excluded bonds or debentures secured by mortgage on fixed assets of the company from the definition of “deposits”.

2.4.2    Change:  Under the New Rules, to be eligible for exemption, the security on bonds or debentures must be provided by way of a first charge or a charge ranking pari passu with the first charge on any of the assets specified in Schedule III excluding intangible assets of the company. 

Like in the Old Rules, it is provided that the amount of the bonds or debentures should not exceed the market value of the assets.  It is further provided that such market value should be assessed by a registered valuer.

Notes:  The New Rules have expressly clarified that bonds or debentures must be secured by a first charge over the assets of the company for being excluded from the definition of deposits.

The provisions relating to registered valuer have not come into force till date.  Explanation II to Rule 6 provides that pending notification of said provisions relating to registered valuer, the valuation of stocks, shares, debentures, securities etc. shall be conducted by an independent merchant banker who is registered with the Securities and Exchange Board of India or an independent chartered accountant in practice having a minimum experience of ten years.

2.5       Convertible bonds or debentures

The New Rules provide that only such bonds or debentures, which are compulsorily convertible into shares of the company within a period of five years shall be excluded from the definition of “deposits”.  

Notes: Optionally convertible debentures are no longer excluded from the definition of deposits. Further, even in case of compulsorily convertible debentures or bonds, the conversion must happen within a period of five years for exclusion from scope of “deposits”.  

2.6       Amounts in transit and amounts received in trust

2.6.1    Earlier: The Old Rules excluded “any amount received in trust or any amount in transit” from the definition of “deposits”.

2.6.2    Change:  “Amounts in transit” are no longer excluded from the definition of “deposits” under the New Rules.

Further, amounts received in trust are excluded only if they comprise of non-interest bearing amounts. 

(to be continued)

- Madhusudan Bose



[1] The Law Lexicon, Seventh Edition

2 comments:

Anonymous said...

If one were to convert the OCDs into CCDs convertible within a period of 5 years, would the same be out of the Deposit Rules? Or even in such cases, repayment is mandatory?

Madhusudan Bose said...

If OCDs are converted into CCDs convertible within a period of 5 years, it should come out of the scope of Deposit Rules.

I believe your reference is to OCDs taken under the 1956 Act. If you convert, such OCDs would not become due after commencement of the 2013 Act, therefore,it appears possible to argue that they are not repayable under Section 74.