Acceptance of Deposits: What a Deposit Is and Who May Take One

In one line

A company may not take money from the public as a deposit at all, and may take it from its own members only after telling them the truth about its finances, setting aside a fifth of next year's repayments, and having a clean record.

In exam wording: section 73(1) prohibits a company from inviting, accepting or renewing deposits from the public except as this Chapter provides; section 73(2) allows a company to accept deposits from its members on a resolution in general meeting and on five conditions; and section 76 allows a public company of prescribed net worth or turnover to accept deposits from persons other than its members, with a credit rating and a charge on its assets.

Why the law has this at all

A deposit is a loan from somebody who is not a bank and is not equipped to assess the borrower.

A bank lending to a company has a credit committee, security, covenants and the ability to call the loan. A retired schoolteacher who puts three lakh rupees into a company's fixed deposit scheme because the advertised rate was two points better than her bank has none of that. She cannot read the balance sheet, cannot take security, and will not know the company is failing until it stops paying.

India has had repeated waves of companies collecting public money on that basis and losing it. So the 2013 Act does something blunt: it closes the public deposit route to ordinary companies altogether, leaves it open only to members, who at least own the company and get its accounts, and opens it to the public only for large public companies that must buy a credit rating every year and secure the money with a charge.

Everything in section 73(2) is a disclosure or a cushion. Read each condition and ask which of the two it is.

Some words this chapter uses

A deposit is defined in section 2(31). A member is a person on the register of members; for a company, that is its shareholders. A circular here is the notice a company must send its members before taking their money. A credit rating is an independent assessment of the borrower's ability to repay. A scheduled bank is one in the Second Schedule to the Reserve Bank of India Act 1934. Net worth is defined in section 2(57). To secure a deposit is to give the depositor a claim over specific assets.

The definition: section 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 categories of amount as may be prescribed in consultation with the Reserve Bank of India.