"DEPOSITS" WITH AMENDMENTS AND NCLT TREATMENT THEREOF;

CS ANJALI GORSIA

ACCEPTANCE OF DEPOSITS BY COMPANIES:

SECTION 73 TO 76A OF THE COMPANIES ACT, 2013 AND COMPANIES (ACCEPTANCE OF DEPOSITS) RULES, 2014.

As the financial year started, and Annual General Meeting is round the corner of some or the other Company, I would like to highlight the topic “DEPOSITS”.I am writing this article in regards to clear the conceptuality chaos in the minds of people regarding the Deposits so accepted by the company under the provisions of Companies Act, 2013 and have tried best to my knowledge to simplify the same in terms of understanding so we can take advantage of same, establish themselves and figure out the compliances so applicable to related companies along with the amendments/ clarifications/exemptions so notified via notification so issued dated 13^th June 2017 by Ministry of Corporate Affairs. I Would Like To Divide My Article into Two Sections (1) After Commencement Of Act 2013 And (2) Before Commencement Of Act 2013.Only Sections Conceptuality Has Been Discussed In This Article.

In this article, the author begins with referring the sections of companies Act, 2013 in regards to Deposits.

The term “DEPOSITS¹”  is defined under the Companies Act, 2013 ("2013 Act") to include any receipt of money by way of deposit or loan or in any other form by a company.” but excludes:

1.       Amount received from Central Government or State Government or where the guarantee is provided by Central Government or State Government on any loan obtained by the Company.

2.       The amount received from Foreign Govt., Banks, FI, IFC, ADB, etc., subject to FEMA.

3.       Any amount received from Banking Company or from SBI or its subsidiaries.

4.       Any amount received as loan from Public Financial Institutions, Insurance Co, Banks etc.,

5.       Any amount raised through issue of Commercial Paper in consonance with RBI guidelines.

6.       Amount received by a company from any other company

7.       Amount received for subscription of securities, Share application money or calls in advance.

8.       Any amount received from the director (provided that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others).

9.       Any amount raised by the issue of secured bonds or debentures

10.   Any amount received from an employee of the company not exceeding his annual salary as a security under a contract of employment.

11.   Any non-interest bearing amount received or held in trust;

12.   Advance received for supply of goods

13.   Advance consideration for the transfer of property in an agreement.

14.   Security deposit for the performance of the contract.

15.   Loan brought in by promoters on stipulation laid by the lending Banks or FI

16.   Amount accepted by Nidhi Company.

Deposits can be accepted by the Companies under Section 73 to Section 76 of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014 as amended time to time

(1)                  AFTER COMMENCEMENT OF COMPANIES ACT 2013 i.e. on after 01-04-2014

ACCEPTANCE OF DEPOSITS

SECTION 73 SECTION 73 & 76 OTHER COMPANIES allowed by RBI Private Companies/ Public Companies having ü  Net Worth < 100 CR. ü  Turnover  < 500 CR Eligible Public Companies ü   Net Worth ≥ 100 CR. ü  Turnover ≥ 500 CR Banking Companies Non- Banking Companies Companies notified by CG CAN ACCEPT ONLY FROM MEMBERS CAN ACCEPT MEMBERS AS WELL AS PUBLIC CAN ACCEPT MEMBERS AS WELL AS PUBLIC Subject  to certain conditions under section 73 (2)(a) to(f) By passing special resolution Issuance of Circulars to Members. Filing of Circular with ROC Deposits repayment Reserve Account Deposits Insurance Certificate regards to Compliances falling at placeSecured or unsecured Deposit

SECTION 73 (2)(a) to(f) SHALL  NO APPLY TO PRIVATE COMPANIES (Notification dated 13th June 2017; Exemption Available to Private Companies) In the principal notification, in relating thereto, the following serial SUBSTITUTED, namely: -the Table, for serial number 6 and the entries number and the entries relating thereto shall be: Chapter V, clauses (a) to (e) of subsection (2) of SECTION 73: shall not be applicable to following private companies. A)  Which accepts from its members' monies not exceeding one hundred per cent, of aggregate of the paid up share capital, free reserves and securities premium account; or (B) which is a start-up, for five years from the date of its incorporation; or (C) which fulfills all of the following conditions, namely:- (a) which is not an associate or a subsidiary company of any other company; (b) if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and (c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section: Provided that the company referred to in clauses (A), (B) or (C) shall file the details of monies accepted to the Registrar in such manner as may be specified.” What is that specified manner: Rule 16 of COMPANIES (ACCEPTANCE OF DEPOSITS), RULES 2014. Every company to which such rules apply, shall on or before the 30th   day of June of every year, with the registrar, a return in Form DPT-3, along with the fee and furnish the information contained therein as on the 31st day of March of that year duly audited by the auditor of the company. READ WITH COMPANIES (ACCEPTANCE OF DEPOSITS), RULES 2014. Rule 3 TERMS AND CONDITIONS: Deposit shall be accepted or renewed for a period Minimum 6 months Maximum 36 months  If the Company wants to extend the Maximum time limit for deposits, it needs to renew the existing deposits. A company may accept or renew deposits for less than 6 months for its short-term purposes if it satisfies the following conditions: Such deposits shall not exceed 10% of Paid up capital + free reserves of the Company. Such deposits shall be repaid only after minimum 3 months.      Deposit holders can be joint holders and can nominate any person on their death to be such holder. LIMIT OF ACCEPTANCE UNDER SEC 73 LIMIT OF ACCEPTANCE UNDER SEC 76 (Eligible Companies) LIMIT OF ACCEPTANCE BY GOVERNMENT COMPANIES It cannot accept or renew deposit when that proposed deposits including existing deposits are more than 35% paid up capital and free reserves. ·                     It proposes to raise deposits from members and that proposed deposits including existing deposits accepted from members are more than 10% of the paid-up capital and free reserves. ·                       ·                       ·                     It proposes to raise deposits from other persons (not being specific to members) and that proposed deposits including existing deposits (excluding deposits not accepted from members) are more than 25% paid up capital and free reserves. It cannot accept or renew deposit when that proposed deposits including existing deposits are more than 35% paid up capital and free reserves. Every eligible Company shall obtain, at least once, in a year, credit rating for deposits accepted by it and a copy of the rating shall be sent to ROC along with the return of Deposits in FORM DPT-3. There is confusion in the notification – since it exempts companies only from provisions of section 73(2), and not from the Companies (Acceptance of Deposits) Rules, 2014. The rules lay a condition that the amount of deposit accepted by companies cannot exceed 25% of net worth. Therefore, the notification laying a limit of 100% seems to be inconsistent.. Rule 4 FORMS AND CIRCULARS:  TO be issued to all members in FORM DPT-1 and a copy of the advertisement to be served to ROC not less than 30 days before the date of issue. RULE 5 DEPOSIT INSURANCE Providing insurance is mandatory for Company accepting deposits. Company shall enter into a contract with insurance agency before 30 days of issue of circular advertisement. In rule 5, in sub-rule (1), for the proviso, the following proviso shall be substituted, namely: — “Provided that the companies may accept deposits without deposit insurance contract till the 31st March 2018 or till the availability of deposit insurance product, whichever is earlier.” (notification dated: 11th may, 2017 http://www.mca.gov.in/Ministry/pdf/CompaniesAcceptanceofDeposits_12052017.pdf RULE 6 CREATION OF SECURITY The Company accepting secured deposits shall create a charge on assets. The amount so secured shall not be less than the amount of deposit and interest thereon, which is not been insured under the insurance cover. Security cannot be created on intangible assets. Create charge on assets and file Form CHG. 9 with ROC within such creation RULE 7 APPOINTMENT OF TRUSTEES 1.       Appoint one or more trustees 2.       Execute a deposit trust deed 3.       IN form DPT-2 at least 7 days before issuing circular. Trustee cannot be o    Director or KMP or Officer or Employee of the 1.         Company 2.         Holding Company 3.         Subsidiary Company 4.         Associate Company o    Indebted to the Company’s mentioned above o    any material pecuniary relationship with the company o    Is a related party. The trustee cannot be removed before his expiry of the term until and unless his approval is given by the consent of all the directors. Kindly refer rule RULE 13 DEPOSIT REPAYMENT RESERVE ACCOUNT Every year, on or before 30th April, Company shall create a Deposit repayment reserve with a Schedule Bank having fund equal to 15% of deposits to be mature in the financial year and next financial year. RULE 16 & 16A RETURN OF DEPOSIT Every Company shall file a return of Deposits in DPT-3 on or before 30th June till the company has deposited with ROC. Disclosure to be made in Financial Statements. ·         Every company, other than a private company, shall disclose in its financial statements, by way of amounts, about the money received from the director. ·         Every private company shall disclose in its financial statements, by way of notes, about the money so received from the directors or relative of directors. 1)  BEFORE COMMENCEMENT OF COMPANIES ACT 2013 i.e prior to 01-04-2014. SECTION 74:  This new section provides that where the Company has accepted deposits before the commencement of this Act: 1.       The amount of such deposits or any interest thereon shall be repaid within 1 year from such commencement or 2.       From such payments are due, whichever is earlier. Extension of time for the repayment of deposits may be granted by the Tribunal on an application made by the company. READ WITH COMPANIES (ACCEPTANCE OF DEPOSITS), RULES 2014.   Procedure for Companies which already accepted deposits: File within a period of 3 months from the commencement of this Act Form DPT – 4 with ROC. Shall repay all the deposits within o   one year from the commencement of this Act i.e., by 31st March 2015 or o   On the date of which deposits are becoming due, whichever is earlier. Which mean all the deposits should be repaid by 31st March 2015 even if they are not maturing or else a penalty of Rs. 1 Crore. The solution for this is provided; the Company can approach Tribunal for extension of the repayment period. o   If the Company renew existing deposits it shall follow the provisions of the new act. PENALTY PROVISIONS: CONTRAVENTION UNDER FOLLOWING SECTIONS PENALTY SECTION 73 Failure to pay deposits under Sec 73- application to be made to TRIBUNAL BY DEPOSITORS. for Companies which are going to accept new Deposits or renew existing deposits: Maximum – Rs. 5000/- and In the case of Continuing default then a maximum fine of Rs. 500/- every day on Company and every officer SECTION 74 In case of Fraud UNDER SEC 447 1.         Imprisonment of minimum 6 months and maximum 10yrs. 2.         Penalty of minimizing the amount liable and maximum of 3 times the amount SECTION 76 Company Minimum – Rs. 1 Crore Maximum – Rs. 10 Crore Officers Imprisonment up to 7 years [or] Penalty of minimum Rs. 25 lakh and maximum Rs. 2 Crore [or]Both imprisonment and penalty PROCEDURE TO RAISE DEPOSITS: 1.       Conduct Board Meeting and Pass Board Resolution for consideration of same in General meeting. 2.      In a case of eligible Company General meeting shall be held for passing a.       Special resolution, if the proposed deposits to be accepted along with all the borrowings of the Company are more than paid up capital and free reserves. b.       In all the other cases Ordinary resolution would suffice. 3.       In case of Company not being eligible Company, it has to hold a General meeting and pass a special resolution, if the proposed deposits to be accepted along with all the borrowings of the Company are more than paid up capital and free reserves 4.       Obtain Credit Rating for the Company. 5.       Obtain insurance before 30 days of issuing circular or advertisement for acceptance or renewal. 6.       Approving the circular (format of Circular in Form DPT – 1) to be issued for accepting a deposit in a Board meeting and if necessary, call for General Meeting. 7.       After passing of a Special Resolution, the company shall file Form MGT 14 within 30 days of passing the resolution with RoC. 8.       File the Copy of Circular with RoC before 30 days of issue of Circular. 9.       Issue circular inviting deposits in the name of the Board of Directors 10.   Publish Advertisement and Eligible Company shall upload the Circular on the Website. 11.   Every year, on or before 30th April, Company shall create a Deposit repayment reserve with a Schedule Bank having fund equal to 15% of deposits to be mature in the financial year and next financial year. 12.   Every Company shall file a return of Deposits in DPT-3 on or before 30th June till the company has deposits with ROC. APPLICATION TO NCLT UNDER SECTION 73(2) AND UNDER SECTION 74 (2) RULE 73 OF NCLT RULES Application by deposition for repayment of deposit or interest Where a company fails to repay the deposits or any part thereof or any interest thereon, an application under  sub-section (4) of section 73 of the Act or section 45QA of the Reserve Bank of India Act, 1934 (2 of 1934), The application shall be filed with the Tribunal, in Form No. NCLT. 11 – by  all or any of the depositors concerned, or where the deposits are secured, by the deposit trustee along with following documents: 1. Copy of the deposit receipt 2. A copy of the correspondence exchanged with the company. 3. Bank draft evidencing payment of application fee. 4. Any other relevant document. Application to allow further time as considered reasonable to the company to repay deposits.  Under 74 (2) The application under sub-section (2) of section 74 and subsection (2) of section 76 read with section 74(2) shall be in Form NCLT-1 same shall be served to ROC before a date of hearing along with following documents. 1. Names and addresses of the officers of the company. 2. Full details of small depositors such as names, addresses, an amount of deposits, a rate of interest, dates of maturity and other terms and conditions of deposits. 3. Reasons for non-payment or late payment. 4. Annual Reports for the last three years. 5. Projection and cash flow statement for the next three financial years duly certified by Statutory Auditors of the company. 6. Any other relevant document The Registrar of Companies in consultation with Regional Director shall submit to the Tribunal, the report on the affairs of the company within thirty days from the date of the receipt of the application and Tribunal may consider any observation made by the Registrar of Companies before passing an order. DISCLAIMER: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all or any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document. READER SHOULD SEEK APPROPRIATE COUNSEL FOR THEIR OWN SITUATION. I SHALL NOT BE HELD LIABLE FOR ANY OF THE CONSEQUENCES DIRECTLY OR INDIRECTLY. Hope my article helps you all for conceptual and procedural clarity. Any other suggestions /opinions are welcomed. Free to contact me for specific formats.Open for discussion. 1. http://www.mca.gov.in/Ministry/pdf/NCARules_Chapter5.pdf https://www.mca.gov.in/Ministry/pdf/Rules_30062016.pdf CS ANJALI GORSIA  (MEM NO: A49601)      (Author-CS Anjali Gorsia, Company Secretary in Practice from Nagpur (Maharashtra) and can be contacted at csanjali.gorsia@gmail.com)