The major source of funds for a private limited company is usually loans from its directors and their relatives. This avenue of funding is popular due to the various merits attributable to it, like lesser risk of equity erosion, lesser burden of interest as compared to external sources, etc. The rules relating to these acceptance of Deposits by Private Companies under Companies Act, 2013 have become a very common tea time debate topic. In the previous Act, the private companies could freely accept these loans from the directors and their relatives. The New Act, on the contrary, has brought about certain changes and a hell lot of restrictions in this wake. In this article, we will summarize the provisions relating to the acceptances of deposits by private companies under companies Act, 2013 as read with the Companies (Acceptance of Deposit Rules), 2014. 

Focus Areas of the Rules:

• A private company and an un-eligible public company are prohibited to accept loans or deposits from any other than its directors. The company can accept loans from its directors provided such funds are not borrowed funds. Eligible company, in this regard, means a public company having a net worth of not less than one hundred Crore rupees or a turnover of not less than five hundred Crore rupees and which has obtained prior consent of the company in general meeting by means of special resolution and also filed such resolution with the Registrar of Companies before making any invitation to the public for acceptance of deposits.
• Any money received as advance in the ordinary course of business shall qualify as deposits if such goods or services are not provided within 365 days of such receipt.
• Share Application money not allotted shall qualify as deposits.
• If the private companies have any such deposits with them currently, then they will have to file a statement with the Registrar within 3 months from the commencement of the Act, i.e. latest by 30^th June, 2014 in Form DPT-4. Further, they have to repay such deposits within one year from such commencement or from the date on which such payments are due whichever is earlier.
• Private companies and un-eligible public companies will have to file a return of deposits on 30^th June if they have any deposit received from person other than directors.

What is Deposit?

The definition of deposit is an inclusive definition. It includes any receipt of money by way of deposit or loan or in any other form, by a Company.

Exemptions: The following items are not considered as Deposits:

• Any amount received from Central Government /State Government/ local authority/statutory authority constituted under an Act of Parliament or State legislature /any other source whose repayment is guaranteed by Central Government or State Government.
• Any amount received from Foreign or international banks / multilateral financial institutions/Foreign Government owned development financial institutions / foreign export credit agencies / foreign collaborators/ foreign body corporate /foreign citizens / foreign authorities / person resident outside India subject to the provisions of Foreign Exchange Management Act, 1999.
• Any amount received as a loan from a Banking Institution including co-operative banks notified under Banking Regulation Act.
• Any amount received as a loan from Public Financial Institution /Regional Financial Institutions / Insurance Companies / Scheduled Banks.
• Any amount received against commercial paper or any other instruments issued in accordance with the guidelines of Reserve Bank of India.
• Any amount received from any other Company.
• Any amount received against subscription to any securities including share application money provided the securities are allotted within 60 days from the date of receipt of the application money or advance.
• If the securities are not allotted within 60 days then the same should be refunded within 15 days else the same shall be treated as deposit after completion of 15 days.
• Any amount received from a person who at the time of receipt was a director provided the director furnishes a declaration that the amount given is not out of borrowed funds.
• Any amount raised by issue of bonds or debentures secured by first charge on any assets referred to in Schedule III of the Act excluding intangible assets.
• Any amount received from an employee of the company not exceeding his annual salary in the nature of non interest bearing security.
• Any amount received as a Non- interest bearing amount received or held in trust.
• Any amount received in the course of or the purpose of the business for the following :-

a. As advance for the supply of goods or provision of services provided such advance is appropriated against supply of goods or provision of service within 365 days from the receipt of such amount,

b. As advance received in connection with consideration for property under an agreement or arrangement,

c. As security deposit for the performance of the contract for supply of goods or provision of services.

d. As advance received under long term projects for supply of capital goods.

If any amount received under clause (a),(b) and (d) becomes refundable due to the reasons that the company accepting money does not have necessary permission or approval to deal with the goods or services then the amount received shall be deemed to be a deposit after the expiry of 15 days from the date they become due for refund.

• Any amount brought in by the promoters themselves or their relatives by way of unsecured loan in pursuance of a stipulation of any lending institution on the promoters. Such exemption shall be available only till the loans of the Financial Institutions are not repaid and not thereafter
• Any amount accepted by a Nidhi Company in accordance with rules made u/s 406 of the Act.

Terms and Conditions for Acceptance of Deposits:

• No company shall accept or renew deposit whether, secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit.

Provided that a company may, for the purpose of meeting any of its short-term requirements of funds, accept or renew such deposits for repayment earlier than six months from the date of deposit or renewal, as the case may be, subject to the condition that such deposits shall not exceed ten per cent. of the aggregate of the paid up share capital and free reserves of the company, and such deposits are repayable not earlier than three months from the date of such deposits or renewal thereof.

• Deposits may be accepted in Joint names not exceeding 3.
• A non Eligible company Shall accept deposit only to the extent of 25% of the aggregate of paid up share capital and free reserves.
• No eligible company shall accept or renew-

(a) any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds ten per cent. of the aggregate of the paid-up share capital and free reserves of the company;

(b) any other deposit, if the amount of such deposit together with the amount of such other deposits, other than the deposit referred to in clause (a), outstanding on the date of acceptance or renewal exceeds twenty-five per cent. of aggregate of the paid-up share capital and free reserves of the company.

• A  Government companies shall not accept deposit more than 35% of the aggregate of paid up share capital and free reserves.
• Interest or Brokerage paid should not exceed the maximum rate of interest or brokerages prescribed by the RBI for acceptance of deposits by Non Banking Finance Companies.
• The Company shall not reserve to itself whether directly or indirectly a right to alter, to the prejudice or disadvantage of the depositor, any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract.

 Non-Applicability of the Rules:

These rules are not applicable to the following entities:

• A Non Banking Finance Company registered with RBI
• A Housing Finance Company registered with National Housing Bank
• A Banking Company
• Any other Company which the Central Government may specify from time to time.

Taxmantra Trivia:  Hence, we find that the deposit rules will  have multi-faceted effect on the corporate borrowing mechanism. The restriction relating to non-acceptance of loans and deposits from relatives of Director’s or members is being considered as detrimental to the corporate health by many of the players. This is owing to the fact that due to these restrictions, the scope of obtaining the funds for a small start-up is bound to get restricted and thereby costlier. However, there are few relaxations as well, like the provision of receipt of any money from another company and the provisions relating to the short-term  deposits. The overall effect of the rules on the workings of the private companies and start-ups is something to watch-out for.Further, the roles and responsibilities  of professionals will increase manifold in advising the start-ups to implement and execute the same.

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