Recent Amendments in Deposit Rules

Ministry of Corporate Affairs came with amendment to the Companies (Acceptance of Deposits) Rules, 2014, last month. These rules has been published in official gazette on 29^th June 2016 and came into force on that date. In this post, we will discuss these amendments.

Definition of deposits

Clause (c) of sub-rule (1) of Rule 2 defines deposits with a negative list of item excluded from the scope of deposits. We have discussed original provision earlier here.

There is no new change in sub-clause (i) – (viii), (x), and (xiii). New sub-clauses (ix a), (xv), (xvi), (xvii), and (xiii) inserted. All other sub-clauses are amended by these amendment rules.

Bond or Debenture for ten years

Presently, bond or debentures secured by first charge or bond or debentures compulsorily convertible to shares within five years are excluded from the definition of debentures. Therefore a compulsorily convertible debenture after that period seems to be included in the definition of deposits. After this amendment, this period shall be ten years.

This sub-clause (ix) after this amendment read as under –

“any amount raised by issue of bonds or debentures are secured by the first charge or a charge ranking pari  passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within five ten years…”

Listed Debentures

With the introduction of new sub – clause (ix a), unsecured but listed debentures are also excluded from the definition of deposits. This new sub – clause read as under –

“any amount raised by the issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India.”

Amount received and held in trust

This is a correction of a drafting error. After correction sub – clause (xi) read as under –

“any non – interest bearing amount received or and held in trust”

Now an amount should be received in trust and shall also be held in the trust to qualify for an exemption. An amount received in trust but not held in trust shall not qualify for the exemption.

Amount received in the course of business

Presently there are four items listed in sub – clause (xii) where the amount received in the course of business will be exempted from deposits.

Additional items after this amendment rules are –

“(e) as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;

(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;

(g) as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications; ”.

Now, following amounts are exempted from deposits if received in the course of business –

• Certain advance received for goods or services;
• Advance under agreement for immovable property;
• Secured deposit;
• Advances for long term projects;
• Advances for warranty or maintenance contract;
• Advance received as allowed by any sectoral regulator; or
• Advance received for subscription towards publication.

Nidhi deposits

Sub-clause (xiv) an amount accepted by Nidhi company in accordance with the rules made under Section 406 of the Act.

Now with amendment to the explanation of this sub-clause, all amounts received by a Nidhi company shall be considered as deposits unless specifically excluded under this clause.

Chit fund subscription

Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982 (40 of 1982) will be exempted from deposit under newly inserted sub-clause (xv).

Amount in Collective Investment Scheme

Any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India will be exempted from deposit under newly inserted sub-clause (xvi).

Amount invested in convertible note issued by a start – up

An amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person will be exempted from deposit under newly inserted clause (xvii).

Conditions are –

• Startup company;
• Amount of Rs 25,000 or more;
• Received by way of convertible note
• Amount received in a single tranche; and
• Conversion or repayment should be within five years from receipt.

Explanation.- For the purposes of this sub-clause,-

1. “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 180(E) dated 17th February 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry;
2. “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.

Amount received for Alternate Investment funds, domestic Venture Capital Fund, Mutual Fund

“Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds registered with the Securities and Exchange Board of India in accordance with regulations made by it will be exempted from sub – clause (xviii)”.

Increased capacity to accept deposits from members

With these amendments, a public company may accepts deposit up to 35% of the aggregate of paid – up share capital, free reserve and securities premium account. In case of private limited company, such limit shall be up to 100%. With amendment and insertion of a proviso, sub rule (3) of Rule 3 read as under –

“No company referred to in subsection (2) of section 73 shall accept or renew any deposit from its members, if the amount of such deposits together with other deposits outstanding as on date of acceptance or renewal of such deposits exceed twenty-five thirty-five per cent of the aggregate of the paid-up share capital, free reserve and securities premium account of the company.

“Provided that a private company may accept from its members monies not exceeding one hundred per cent of aggregate of the paid up share capital, free reserves and securities premium account and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified.”

Credit rating requirement linked to Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998

Before the present amendment, there was a list of prescribed list of credit rating agencies. We have discussed original provision earlier here. Now, sub – rule (8) of rule 3 is substituted with a new rule –

“(a) 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 the Registrar of Companies along with the return of deposits in Form DPT-3.

(b) The credit rating referred to in clause (a) shall not be below the minimum investment grade rating or other specified credit ratings for fixed deposits, from any one of the approved credit rating agencies as specified for Non-Banking Financial Companies in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, issued by the Reserve Bank of India, as amended from time to time.”

Advertisement on the website also

Before the present amendment, an eligible company shall advertise circular in DPT – 1 in English and vernacular language newspaper. Now, such companies are required to advertise it on the website of the company, if any. Substituted sub – rule (2) of Rule 4 read as under –

“Every eligible company intending to invite deposits shall issue a circular in the form of an advertisement in form DPT-1 for the purpose in English language in an English newspaper having countrywide circulation and in vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated, and shall also place such circular on the website of the company, if any”

Deposit Insurance further deferred

Firstly, I am against such deferment of the requirement of deposit insurance. No insurance company in India is willing to offer a product of deposit insurance. This is evident that deposits are not up to the mark and beyond the risk-bearing capacity of the Indian insurance market. How much investment dangerous product should be permitted to offer to the general public.

After amendment proviso to sub-rule (1) of rule 5 read as under –

“Provided that the companies may accept deposits without deposit insurance contract till the 31st March 2017 or till the availability of a deposit insurance product, whichever is earlier.”

[UODATE: with effect from 15 August 2018, government deleted Rule 5, the greatest failure to protect investors.] 

Disclosures in the financial statement

This disclosure requirement is a self-explanatory and welcome step.

“(1) Every company, other than a private company, shall disclose in its financial statement, by way of notes, about the money received from the director.

(2) Every private company shall disclose in its financial statement, by way of notes, about the money received from the directors, or relatives of directors.”.

Government disclaimer

In the circular in form of the advertisement issued in the format given in Form DPT -1, there will be following disclaimer –

“6. DISCLAIMER.- It is to be distinctly understood that filing of circular or circular in the form of advertisement with the Registrar should not in any way be deemed or construed that the same has been cleared or approved by the Registrar or Central Government. The Registrar or Central Government does not take any responsibility either for the financial soundness of any deposit scheme for which the deposit is being accepted or invited or for the correctness of the statements made or opinions expressed in the circular or circular in the form of advertisement. The depositors should exercise due diligence before investing in the deposits schemes.”.

I will say, God save depositors and our government. Registrar and Ministry is not a mere acknowledgement counter and has a duty to protect thousands of small investors. Someday – Sometime, when such a default will happen and the matter will go to Supreme Court, Court will have the last laugh.