Tuesday, September 16, 2014

“Deposits” existing on 31st March 2014 - how to be treated under new Companies Act/Rules?

Since notification of the Companies Act, 2013 and Rules thereunder, certain transitional issues relating to “deposits” are causing concerns to numerous companies, big and small, listed and unlisted, public or private. They arise from the substantially modified definition of the term “deposits”. Many items of loans and other receipts that were not “deposits” earlier being now treated as deposits. Companies are thus not allowed or severely restricted from accepting such amounts. While there are enough issues in the new definition, certain transitional issues are creating more urgent problems. Differing views by professionals and others to resolve the ambiguities is creating its own further confusion.

The issue is – how are monies received by a company on or before 31st March 2014 and which under the new definition have become deposits to be treated? The wide new definition has resulted in common items like share application monies, certain types of debentures, security deposits, advance against goods/property, loans from shareholders, etc. to be deposits under certain circumstances. If such monies were accepted on or before 31st March 2014, and they remain outstanding on and after 1st April 2014, is there a violation involved? Is there a time period during which such “deposits” should be repaid?

Take an example of share application money. The revised definition says that shares should be allotted within 60 days of receipt of share application monies, failing which the amount should be repaid within 15 days thereafter. Say, a company received on 29th March 2014. The allotment of shares partly took place on 31st August 2014 and remaining will take place in June 2015. Is there any violation of law? More specifically should the company:-
(i)             have repaid the share application money on 31st March 2014?
(ii)           have allotted the shares by 28th May 2014, and failing which repaid them by 12th June 2014?
(iii)          have allotted the shares by 31st May 2014, and failing which repaid them by 15th June 2014?
(iv)         Have allotted the shares by 31st March 2015 or repaid the amount?
(v)           if the monies were received on 1st January 2014, will they have to be repaid on 31st March 2014?

Or can the Company continue to hold these amounts till the Company/the share applicants decide to either allot the shares or refund the money?

Similar concerns arise for numerous other common items that are now treated as deposits.

There are serious penal consequences if the provisions are violated including fine and/or imprisonment.

Section 74 provides that “deposits accepted” before 1st April 2014 and which “remain unpaid” shall be repaid within one year from that date or one year from date when they became due, whichever is earlier. It is not clear whether “deposits” refers to the definition under the earlier law or the new one. It is also not clear whether “unpaid” means due and unpaid or unpaid even if not due.

The issue is further complicated by the Rules. For example, it is provided that shares should be allotted against share application monies within 60 days of their receipt failing which the amounts should be repaid within 15 days after such 60 days. Advances against goods have to be adjusted by delivery of goods or repaid within one year. And so on. Will – and, if yes, how - will these provisions apply to such amounts existing on 31st March 2014? For example, in case of share application monies in the above example, will the allotment have to be carried out within 60 days? For advance received against goods on 1st January 2014, should the goods be delivered or amount repaid by 1st January 2015?

Professionals and even professional bodies are not much helpful in sense of having a consensus. On one extreme is a view that the new law does not at all apply to any amount received on or before 31st March 2014, which will continue to be governed by the old law. Another view is that Section 74 should be interpreted to mean that all such amounts on 31st March 2014 should be repaid within the time specified in that section. Yet another view is that the new law applies to such old amounts too and thus, for example, share application monies received on or before 31st March 2014 should have been repaid within 60 days of receipt. The FAQs of the Institute of Company Secretaries of India opines that share application monies existing on 31st March 2014 should be repaid by 31st May 2014 or else it will be treated as deposits. No detailed reasoning is given for this view.

I submit that amounts received on or before 31st March 2014 ought to be governed by old law. The new law ought to apply only to receipts on or after 1st April 2014.

However, there is ambiguity and resultant anxiety. It is reported that amendments relating to deposits are soon expected. I hope that either these amendments or amendment to the rules or clarification by circulars resolve these ambiguities.

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