Friday, July 4, 2014

Guest Post - Company Deposits: New Rules Change The Game

[The following post is contributed by Abhishek Bansal and Stuti Bansal, Corporate Professionals, Advisors & Advocates. The authors can be reached at abhishek@indiacp.com and stuti@indiacp.com respectively)

This post discusses the concept of deposits as provided under Chapter V of the Companies Act, 2013 (hereinafter the Act of 2013) and the Companies (Acceptance of Deposits) Rules, 2014 (“Deposits Rules”), and how these may have an impact on the companies post the enactment.

Chapter V of the Act of 2013 (sections 73 to 76), except for section 75 and provisions relating to, or involving the National Company Law Tribunal, have been notified and came into effect from 1 April 2014. The Deposits Rules have been legislated thereunder to provide for the details relating to the acceptance and treatments of deposits under the Act of 2013.

Acceptance of Deposits

Deposits as understood in general parlance, are the funds procured by any company in the form of a loan etc. for repayment with interest at a future date. The Act of 2013 defines these as amounts including any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories as may be prescribed in consultation with the Reserve Bank of India. The Act of 2013, and the Deposits Rules provide for specific conditions subject to which a company may accept deposits, a detailed definition of ‘deposits’, and for specific exclusions from the definition.

As per the provisions of the Act, deposits may be accepted by a company either from its members or persons other than its members i.e. the general public. However, a private company cannot accept deposits from the public, being one of the very conditions to its incorporation as a private company under the Act. Further, only those public companies may accept deposits from the public in which the net worth or turnover is equal to or more than the prescribed net worth or turnover.

In accordance with Section 73 of the Act, a company, whether public or private, may accept deposits from its members after passing of a resolution in general meeting of the company, subject to the fulfillment of the terms and conditions prescribed under the section and the Rules.

These provisions are however not applicable to:

(a)           banking companies;

(b)          non- banking financial companies as defined in the Reserve Bank of India Act, 1934 registered with the Reserve Bank of India;

(c)           housing finance companies registered with the National Housing Bank established under the national Housing Bank Act, 1987; and

(d)          companies specified by the Central Government in consultation with the Reserve Bank of India (“RBI”).

Further, in accordance with the provisions of Section 76 of the Act, only a public company having a minimum net worth of Rupees One Hundred Crore and/ or a minimum turnover of Rupees Five Hundred Crore shall be eligible to accept deposits from the public, subject to the prescribed conditions with to procedure, disclosure and compliance.

Deposits Defined

The Act of 2013, as well as the Deposits Rules provide a definition of the term ‘deposit’ as including any receipt of money by way of deposit or loan or in any other form, by a company, and provides exclusions of certain amounts from the ambit of ‘deposits’. Such amounts and exclusions are provided for in Rule 2(1)(c) of the Deposits Rules.

Here, it is important to note that while exclusions and exemptions were also provided under the Act of 1956, the Act of 2013 sees many departures from the erstwhile provisions of law relating to deposits, providing for more stringent regulations, conditionalities and penal provisions. For example, in the case of bonds and debentures, such instruments could not be considered as ‘deposits’ if such bonds or debentures were secured by the mortgage of any immoveable property of the company. However, under the Act of 2013, the bonds or debentures issued by the company should be secured by a first charge or a charge ranking pari passu with the first charge on the assets of the company (excluding the intangible assets) or such bonds or debentures should be compulsorily convertible into shares of the company within 5 (five) years, for the company to exempt the amounts accepted from the category of deposits. There is also a departure in the convertibility nature of the debentures, the amounts for which they shall be exempted from being deposits. In such a scenario questions that arise are whether unsecured bonds or debentures issued by a company shall be exempt from falling under the category of ‘deposits’ under the Act of 2013? Whether the issuance of optionally convertible debentures to a company will be treated as deposits?

Another example of change in the exemptions is seen where the Act of 1956 did not provide for a time period, whereas under the Act of 2013, an amount received as securities application money by the company shall not be treated as a deposit, only if the securities are allotted within 60 days of receipt of such amount or if the amount is refunded within the period of 15 days after the completion of these 60 days. Thus the companies are now mandatorily to make allotment of securities against the share application money received by them within a maximum period of 60 days. Another ambiguity in this respect remains about whether amounts received from foreign entities, against the allotment of securities, but pending allotment beyond 60 days of receipt, will be treated as deposits under the Act of 2013.

Immediate Impending Action on Companies

Many companies have already accepted deposits and for such companies, the Act of 2013 and the Deposits Rules cast duties with respect to the amount of deposit or part thereof or any interest due on the amounts that remain unpaid on the commencement of the provisions relating to deposits under the Act of 2013, or becomes due at any time thereafter. The Act provides that such companies will now have to file a statement with the Registrar of Companies, with respect to all deposits accepted by the company and sums remaining unpaid along with the interest payable thereon along with the arrangements made for such repayments. Additionally, it is also mandatory that such amounts shall be repaid by the company within one year from such commencement or from the date on which such payments are due whichever is earlier. However, one question that comes to the mind in such a scenario is whether the deposits accepted under the Act of 1956 shall also be treated as deposits under the Act of 2013?

Conclusion

The provisions relating to deposits as contained in the Act of 2013 incorporate many changes, also including new requirements such as that for the appointment of debenture trustees and the company being required to obtain deposit insurance. Making the activity of accepting deposits more safe and transparent for investors, the Act now alters the provisions relating to this method of capital raising, nonetheless leaving some ambiguities, and confusions due to issues of interpretation, such as whether amounts accepted before 1 April 2014, not qualifying as deposits under the Act of 1956, but so qualifying as deposits under the Act of 2013, will be treated as deposits under the new Act. However the requirements for increased disclosures, credit rating, security for the deposits accepted, obtaining deposit insurance, etc. thereby making the process of acceptance of deposits costlier, as well as increased thresholds for a public company to be eligible to accept deposits, may force companies to consider other alternatives such as taking loans from banks instead of accepting deposits. Apart from including more details in the circular, a company accepting deposits is now also required to obtain credit rating at regular intervals during the tenure of the deposit.

- Abhishek Bansal & Stuti Bansal

1 comment:

vswami said...

".....may force companies to consider other alternatives such as taking loans from banks instead of accepting deposits."

The new rules, as understood, has the one basic objective of safeguarding and protecting the interests of the investing public, mostly in the category suffering from ignorance or imbecility , having no capacity to know the nitty-gritty or not-so-obvious risk factors. Even if the "other alternatives" were to be resorted by the invested companies,that would have the same frightful consequences; the only difference being it is the banks and stakeholders to whom the same risk factors would be passed and be faced with.

As regards the mentiioned requirements of filing returns or documents with the ROCs, without the machinery of a sophisticated kind in place to constantly scrutinize and keep monitoring as a continuous exercise,it seems to be a mere empty formality, so called paper-tiger, with no real purpose to serve.

Similarly , the requirement
"to obtain credit rating at regular intervals during the tenure of the deposit", is at best, of nuisance value, again with no real purpose to be served.

These , noted to have been simply glossed over in the write-up, nonetheless , in one's perspective, do call for a rethinking and drastic modifications of the new rules, seemingly framed with no insightful examination of the intricate implications.