Acceptance of Deposits in Corporate Regulations

ACCEPTANCE OF DEPOSITS CA MADHUSUDHANAN CHAPTER V- ACCEPTANCE OF DEPOSITS

WHAT WILL BE COVERED Deposits Overview of regulation over the years Definition of Deposit Who can raise deposits Procedure to raise deposits Implication of contravention Annual filings DPT 3 CHAPTER V- ACCEPTANCE OF DEPOSITS

CONTEXT OF REGULATION OVERTIME Private Co s from member is also deposit Deposit trustee Deposit insurance DCM Case 1983 Shri Vivian Bose Commission on Inquiry report - 1962 host of changes in Co. Act Co s Act 1956 SC uphold the right to regulate No specific provision Sec 58A and rules Further amendment Companies Act, 2013 Governed by RBI 1974-75 1) Limits on how much deposits can be raised 2) Minimum liquid assets and repayment reserve 3) Certain Mandatory disclosures in advertisement 1) Restriction on interest rate 2) Penalties and Criminal liability for non-adherence 3) Empowering CLB and NCLT later to deal with these matters CHAPTER V- ACCEPTANCE OF DEPOSITS

DEFINITION OF DEPOSIT Money 01. Money raised Sec 2(31) deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such amount as may be prescribed in consultation with the Reserve Bank of India 02. Exempted deposit If excluded from the definition as per the transaction need not comply with the deposit provision of this chapter. categories of 01 rules those This is an inclusive definition. 02 03 03. Comply with rules Chapter V- Acceptance of Deposit (Doesn t apply to Banks, NBFC and Housing Finance Companies) CHAPTER V- ACCEPTANCE OF DEPOSITS

BALANCE SHEET SOURCE OF FUNDS Liabilities Loans from Banks/NBFC Secured Debenture Unsecured Debenture Optionally Convertible Debentures Compulsorily Convertible Debentures Advance from Customers for supply Security Deposit Convertible note Loan from Promoter s HUF Loan from LLP Loan from Director Loan from a Promoter company CHAPTER V- ACCEPTANCE OF DEPOSITS

Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include Any amount received from Govt., or any amount received from other source repayment is guaranteed by the Govt., Any amount received from foreign Govt., foreign/international banks, multilateral financial institutions, foreign govt., owned development financial institution, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of FEMA Any amount received as a loan or facility from any banking company or a co-operative bank Any amount received as a loan or financial assistance from Public Financial Institutions, regional financial institutions, Insurance Companies,Scheduled Banks Any amount received against issue of commercial paper or any other instrument issued in accordance with the guidelines or notification issued by the Reserve Bank of India; DEFINITION OF DEPOSIT CHAPTER V- ACCEPTANCE OF DEPOSITS

Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include; Any amount received by a company from any other company (like -ICD); Any amount received towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment (60 days to apply or return the money within 15 days from the end of such period). Any amount received from director of the company or a relative of the director of the Private company. (Declaration that loan given is not being given out of funds acquired by him borrowing) Any amount raised by the issue of bonds or debentures secured by a first charge or pari paasu charge with first charge on any assets referred in Balance sheet of Company (except intangible assets)/(Security FV > Debenture value) Debentures compulsorily convertible into shares of the company within 10 years Listed unsecured non-convertible debenture DEFINITION OF DEPOSIT CHAPTER V- ACCEPTANCE OF DEPOSITS

Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include; Any amount received from an employee not exceeding his annual salary Any non-interest bearing amount received or held in trust Any amount received in the course of or for the purposes of the business of the company; As an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of 365 days from acceptance of such advance. Appropriate : to keep an amount of money to use for a particular purpose M/S Banwari Lal Arora and Sons v. S.R. Foils & Hygiene Private Limited CP No.49/2021 NCLT Delhi -2023 As advance, in connection with consideration for immovable property under an agreement or arrangement DEFINITION OF DEPOSIT CHAPTER V- ACCEPTANCE OF DEPOSITS

Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include; Any amount received in the course of or for the purposes of the business of the company; As security deposit for supply of goods or provision of services As advance received under long term projects for supply of capital goods (except immovable property) As an advance towards for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement,5 years or as per business parlance 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 (print or digital) (Repay within 15 day if the contract is cancelled if the company is not able to perform) DEFINITION OF DEPOSIT CHAPTER V- ACCEPTANCE OF DEPOSITS

Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include; Any amount brought in by the promoters by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions,namely:- loan is brought as per stipulation imposed by the lending institutions; either by promoter or their relative or both the exemption shall be available only till the loans of financial institution or bank are repaid any amount accepted by a Nidhi company in accordance with the rules made under section 406 of theAct. any amount received by way of subscription in respect of a chit under the Chit FundAct,1982 (40 of 1982) any amount received by the company under any collective investment scheme in compliance with regulations framed by the SEBI DEFINITION OF DEPOSIT CHAPTER V- ACCEPTANCE OF DEPOSITS

Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include; 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 not > 10 years from the date of issue) in a single tranche,from a person. convertible note means an instrument evidencing receipt of money initially as a debt,which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument. any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts, Real Estate Investment Trust and Mutual Funds registered and regulated by SEBI DEFINITION OF DEPOSIT CHAPTER V- ACCEPTANCE OF DEPOSITS

DEPOSITS OR NOT?? Liabilities Deposits Loans from Banks/NBFC Secured Debenture Not a deposit Not a deposit, if secured against first charge and Security > Debenture Not a deposit if listed Deposit (can come out of deposit if received from eligible person) Not a deposit, if the tenor is less than 10 years Not a deposit If appropriated before 364 days Not a Deposit Not a Deposit if issued by Start-up Deposit Deposit Not a Deposit if given out of own funds Not a Deposit Unsecured Debenture Optionally Convertible Debentures Compulsorily Convertible Debentures Advance from Customers for supply Security Deposit Convertible note Loan from Promoter s HUF Loan from LLP Loan from Director Promoter company CHAPTER V- ACCEPTANCE OF DEPOSITS

DEPOSITS CAN BE RAISED FROM ? Deposits From members (both for public and private Co.)- Sec 73 From Public (only eligible Co.) Sec 76 eligiblecompany means a public company as referred to in sub-section (1) of section 76, having a net worth of not less than Rs. 100 Crores or a turnover of not less than Rs. 500 crore and which has obtained the prior consent of the company in general meeting (if borrowings exceeding the limit u/s. 180(1)(c) Special Resolution else an Ordinary resolution) CHAPTER V- ACCEPTANCE OF DEPOSITS

DEPOSITOR Depositor Any member of the company who has made deposit as per 73(2) Any person who has made a deposit with a public company as per 76 CHAPTER V- ACCEPTANCE OF DEPOSITS

LIMITS ON HOW MUCH DEPOSITS CAN BE RULE 3 Rs. In Crores Net- worth 100 100 100 100 100 Nature of Company Percentage of limit prescribed Eligible Public Company (From Members) Eligible Public Company (From Public) Ineligible Public Company (From Members) Govt. Company (From Public and Members) Private company 10% 25% 35% 35% 100% I. The above limits does not apply to a private limited company if a) It is a start-up, and ten years has not passed from the date of incorporation or b) A Private company which fulfils all the conditions 1) The company is not an associate or a subsidiary company of any other company 2) Borrowings from Banks or Financial Institutions or any body-corporate is less than twice of the paid-up of Capital or 50 Crores whichever is lesser 3) Not defaulted on deposits at time of accepting the deposits * Net-worth = Paid up Share Capital + Security Premium + Free Reserves CHAPTER V- ACCEPTANCE OF DEPOSITS

TERM OF THE DEPOSIT LIMITS ON HOW MUCH DEPOSITS CAN BE RULE 3 Rs. In Crores Maximum term 36 Months Minimum term 6 Months 3 Months (if below conditions are met) Such deposits shall not deposit exceed 10 % of Paid-up Capital +Free Reserves + Share Premium Premature Repayment of Deposits At the request of the depositor after 6 months Rate of interest shall be 1% less than the rate for the period run CHAPTER V- ACCEPTANCE OF DEPOSITS

PROCEDURE FOR ACCEPTING DEPOSIT Pass a resolution either SR or OR depending on limits u/s. 180 (1) (C) for eligible for public / for members Ordinary resolution Rs. In Crores Issue Circular DPT-1 Appointment of trustee before 7 days of issue in case of secured deposit Creation of Deposit repayment reserve atleast 20% of amount maturing in the following financial year Cannot come below 20% at any point in time Deposit in Joint Names and Nomination Deposit register - all entries to be made within 7 days and maintain for 8 years Issue deposit receipts within 21 days CHAPTER V- ACCEPTANCE OF DEPOSITS

PROCEDURE FOR ACCEPTING DEPOSIT CONT., Terms and conditions of deposit cannot be changed, repayment should be as per term Rs. In Crores Charge creation if the deposit is secured/Secured only if 100% Cover/RV within 30 days Application Form for making Deposits Interest rate offered on the deposit should not exceed Rate set by RBI for NBFC Application to tribunal if the company fails repay the deposit or interest Disclosures in Financial Statements Loan from Director (even when it is exempted) Penal Rate of Interest on Overdue Deposits at 18% CHAPTER V- ACCEPTANCE OF DEPOSITS

PROCEDURE FOR ACCEPTING DEPOSIT Circular Rs. In Crores Filing of circular with registrar before 30 days from issue Circular (DPT-1) should contain Credit rating obtained (Eligible company only) Financial position of the company Secured or Unsecured deposit Details of security if secured Total number of depositors and amount due towards the deposit Auditor certificate of no default or 5 years has lapsed from the default & making good Director also has to assert the above in the circular Sent via Registered post or Speed post or Electronic mode (Members) Should be displayed in website (Only if raised from Public) Should be circulated in two newspapers English and Vernacular language of the office - (Mandatory for Public & May-Optional for Members) Circular is valid for 6 months from the closure of financial years in which it was issued or Date of AGM in which financials are adopted or Last date to conduct the AGM CHAPTER V- ACCEPTANCE OF DEPOSITS

DEPOSIT TRUSTEE AND HIS DUTIES One or more Trustee to be appointed and deposit trust deed executed 7 days prior to circular (DPT-2) Rs. In Crores Who cannot be a trustee? is a director, KMP or any other officer or an employee of the company is indebted to the company, has any material pecuniary relationship with the company; has entered into any guarantee arrangement in respect of principal debts secured by the deposits or interest thereon; is related to any person specified in clause (a) above What is the Duties of trustees? ensure that the assets of the company on which charge is created are sufficient to cover the repayment satisfy himself that the circular or advertisement inviting deposits does not contain information that is not the scheme or against the rules supervise the implementation of the conditions regarding creation of security for deposit ensure that the company does not commit any breach of covenants and provisions of the trust deed Take steps to ensure a remedy in case of breach take steps to call a meeting of the holders of depositors as and when such meeting is required to be held When can a depositor meeting be held? When depositors in 10% value request for a meeting or When there is default in repayment CHAPTER V- ACCEPTANCE OF DEPOSITS

FOLLOWING PROCEDURE NOT APPLICABLE TO CERTAIN PRIVATE COMPANIES Exemptions Rs. In Crores Issue and filing of circular with registrar Maintaining deposit reserve account Certifying that company has not defaulted on repayment of deposit I. The above limits does not apply to a private limited company if a) If money accepted doesn t exceed 100% of Paid up Share Capital + Free Reserves + SP or b) It is a start-up, and ten years has not passed from the date of incorporation or c) A Private company which fulfils all the conditions 1) The company is not an associate or a subsidiary company of any other company 2) Borrowings from Banks or Financial Institutions or any body-corporate is less than twice of the paid-up of Capital or 50 Crores whichever is lesser 3) Not defaulted on deposits at time of accepting the deposits CHAPTER V- ACCEPTANCE OF DEPOSITS

IMPLICATION OF CONTRAVENTION SEC 76A Rs. In Crores Contravention Inviting deposit or allowing another person to invite deposit not in compliance with Sec 73 or 76 If a company fails to repay the deposit or part thereof or any interest due thereon within the time specified Imprisonment upto 7 year and Officer Fine of Rs. 25 lakh max amounting Rs. 2 Crores Penalty Fine: Rs. 1Crore or twice the deposit amount whichever is less Max 10 Crores Company CHAPTER V- ACCEPTANCE OF DEPOSITS

DPT-3 Rs. In Crores To be filed by every company if they have deposit or exempted deposits at the end of the year To be filed before 30th of June every year Currently the form captures opening balance, deposits accepted, repaid and closing balance Ageing of balance is also required to be provided If the company has only exempted deposits the balances need not be audited balance CHAPTER V- ACCEPTANCE OF DEPOSITS

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