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

Read the shape of that definition, because it is the opposite of what students expect.

It is inclusive and it is wide. Any receipt of money by way of deposit or loan or in any other form is a deposit. The starting position is that money coming into a company from outside is a deposit.

The exceptions are in the rules, not the Act. The categories that are not deposits are prescribed in consultation with the Reserve Bank of India. That is where money received from a bank, from a director out of his own funds, as share application money, as a genuine advance for goods, and the other familiar exclusions live.

So the honest answer to MU's label "Definition of Deposits" has two halves: the wide inclusive words of section 2(31), and the statement that what is excluded is prescribed by rules made in consultation with the Reserve Bank, not listed in the Act.

The prohibition, and who is outside it: section 73(1)

On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter.

Three verbs: invite, accept, renew. A company cannot escape by saying it only renewed an old deposit.

The proviso takes three kinds of body out of the section entirely:

• a banking company;
• a non-banking financial company as defined in the Reserve Bank of India Act 1934; and
• such other company as the Central Government may, after consultation with the Reserve Bank of India, specify.

That is MU's label "Applicability". Banks and NBFCs take deposits as their business and are regulated for it by the Reserve Bank, so the Companies Act stands aside.

Deposits from members: section 73(2)

A company may, subject to the passing of a resolution in general meeting and subject to rules prescribed in consultation with the Reserve Bank of India, accept deposits from its members, on such terms and conditions, including the provision of security, if any, as may be agreed between the company and its members, subject to the following conditions.

(a) The circular

Issuing a circular to its members including a statement showing:

• the financial position of the company;
• the credit rating obtained;
• the total number of depositors; and
• the amount due towards deposits in respect of any previous deposits accepted by the company,

and such other particulars, in the prescribed form and manner.

This is pure disclosure, and the third and fourth items are the telling ones: a member is told how many people are already in front of him and how much the company already owes them.

(b) Filing the circular

Filing a copy of the circular along with the statement with the Registrar within thirty days before the date of issue of the circular.

Note the direction of the thirty days: the copy goes to the Registrar before the circular goes out, so there is an official copy of what the members were told.

(c) The deposit repayment reserve account

depositing, on or before the thirtieth day of April each year, such sum which shall not be less than twenty per cent of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account.

Four numbers in one clause: 30 April each year, not less than twenty per cent, of deposits maturing during the following financial year, in a separate account in a scheduled bank.

And section 73(5) ring-fences it: the deposit repayment reserve account shall not be used by the company for any purpose other than repayment of deposits.

(d) Omitted

Clause (d) was omitted with effect from 15 August 2018. It required the company to provide deposit insurance in the prescribed manner. The requirement had never worked in practice because insurers would not write the cover, and it was removed. A set of notes that lists deposit insurance as a condition is out of date.

(e) The clean record

Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act, or in payment of interest on such deposits, and, where a default had occurred, that the company made good the default and a period of five years has lapsed since the date of making good the default.

So a past defaulter is not barred forever, but it must have cured the default and then waited five years.

(f) Security, and the word that must be used if there is none

Providing security, if any, for the due repayment of the amount of the deposit or the interest, including the creation of a charge on the property or assets of the company.

The proviso is the honest labelling rule: where a company does not secure the deposits, or secures them only partially, the deposits shall be termed "unsecured deposits" and shall be so quoted in every circular, form, advertisement or any document relating to the invitation or acceptance of deposits.

A depositor cannot be left to work out for himself that he is unsecured. The word must appear on the paperwork.

Repayment and the depositor's remedy: section 73(3) and (4)

Section 73(3). Every deposit accepted under sub-section (2) shall be repaid with interest in accordance with the terms and conditions of the agreement.

Section 73(4). Where a company fails to repay the deposit or part of it or any interest, the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due, or for any loss or damage incurred by him as a result of the non-payment, and for such other orders as the Tribunal may deem fit.

Note that the depositor goes straight to the Tribunal, in his own name, for the money and for his consequential loss. He does not need the company's cooperation and he does not need other depositors.

Deposits from the public: section 76

Section 76(1). Notwithstanding section 73, a public company having such net worth or turnover as may be prescribed may accept deposits from persons other than its members, subject to compliance with the requirements of section 73(2) and to rules prescribed by the Central Government in consultation with the Reserve Bank of India.

So an eligible public company carries everything in section 73(2) and two more requirements:

The first proviso: an annual credit rating. Such a company shall obtain the rating, including its net worth, liquidity and ability to pay its deposits on the due date, from a recognised credit rating agency, for informing the public of the rating at the time of invitation of deposits, which ensures adequate safety, and the rating shall be obtained for every year during the tenure of the deposits.

Every year, not once. A rating taken at the start and never refreshed would tell a depositor nothing about the year he is actually in.

The second proviso: a charge within thirty days. Every company accepting secured deposits from the public shall, within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted, in favour of the deposit holders, in accordance with the prescribed rules.

Section 76(2). The provisions of this Chapter apply mutatis mutandis to the acceptance of deposits from the public under this section.

MU's label "Eligibility to accept Deposits", answered

Put the three tiers together, because that is the answer:

1. Banking companies and NBFCs, and companies the Central Government specifies after consulting the Reserve Bank: outside the Chapter altogether, proviso to section 73(1).
2. Any company: may take deposits from its members only, on a general meeting resolution and the section 73(2) conditions.
3. A public company with the prescribed net worth or turnover: may in addition take deposits from the public, under section 76, with an annual credit rating and, for secured deposits, a charge within thirty days.

A worked example

Jalgaon Agro Foods Limited is an unlisted public company with a net worth below the prescribed threshold. It wants to raise four crore rupees.

From the public? No. It is not an eligible company under section 76, so section 73(1) prohibits it from inviting, accepting or renewing deposits from the public.

From its members? Yes, under section 73(2), if it can satisfy the conditions. It passes a resolution in general meeting.

The circular. It prepares a circular showing its financial position, the credit rating obtained, the total number of depositors and the amount due on previous deposits. It files a copy with the statement with the Registrar, and does so within thirty days before the circular goes out to members.

The reserve. Two crore rupees of the deposits will mature in the following financial year. On or before 30 April the company must deposit not less than twenty per cent of that, forty lakh rupees, in a separate account in a scheduled bank called the deposit repayment reserve account, and by section 73(5) that money may be used for nothing but repayment of deposits.

The record. It defaulted on deposit interest in 2020 and made the default good in 2021. Under condition (e) it must certify the default was made good and that five years have lapsed since. If the default was made good in March 2021, it may certify from March 2026 and not before.

Security. It gives no security. By the proviso to condition (f) the deposits must be termed "unsecured deposits" and quoted as such in every circular, form, advertisement and document relating to the invitation or acceptance.

A depositor is not paid. Mrs Deshmukh's deposit matures and is not repaid. Under section 73(4) she may apply to the Tribunal for an order directing payment of the sum due and for the loss or damage she has suffered from the non-payment.

Change one fact. Suppose the company's net worth were above the prescribed level. It could then use section 76 and take deposits from the public, but it would still have to satisfy all of section 73(2), would have to obtain a credit rating every year during the tenure of the deposits and disclose it at the time of invitation, and, if the deposits were secured, would have to create a charge on its assets of not less than the amount of the deposits within thirty days of acceptance.

Distinctions that carry marks

What this does NOT mean

It does not mean every receipt of money is a deposit. Section 2(31) is inclusive but the excluded categories are prescribed in consultation with the Reserve Bank.

It does not mean deposit insurance is required. Clause (d) of section 73(2) was omitted with effect from 15 August 2018.

It does not mean the twenty per cent covers all the deposits. It is twenty per cent of the deposits maturing during the following financial year, deposited by 30 April.

It does not mean a past defaulter is barred for good. Condition (e) lets it certify once the default is made good and five years have lapsed.

Quick revision

• 2(31): deposit includes any receipt of money by way of deposit or loan or in any other form; exclusions are prescribed in consultation with the RBI.
• 73(1): no company shall invite, accept or renew deposits from the public except as this Chapter provides. Proviso: banking companies, NBFCs, and companies the Central Government specifies after consulting the RBI are outside.
• 73(2), from members, on a general meeting resolution: (a) circular showing financial position, credit rating, number of depositors and amount due on previous deposits; (b) file it with the Registrar within thirty days before issue; (c) by 30 April, not less than twenty per cent of deposits maturing in the following financial year into a deposit repayment reserve account in a scheduled bank; (d) OMITTED w.e.f. 15-8-2018; (e) no default, or default made good and five years lapsed; (f) security if any, else the deposits must be termed "unsecured deposits" in every document.
• 73(3): repay with interest per the agreement. 73(4): depositor may apply to the Tribunal for the sum due and for loss or damage. 73(5): the reserve account is for repayment of deposits only.
• 76(1): an eligible public company may take deposits from the public, complying with section 73(2). Proviso 1: credit rating every year during the tenure, disclosed at invitation. Proviso 2: for secured deposits, a charge on assets of not less than the amount of deposits within thirty days. 76(2): the Chapter applies mutatis mutandis.

Test yourself

1. Define a deposit. Section 2(31): a 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.

2. Which bodies are outside section 73 altogether? A banking company; a non-banking financial company as defined in the Reserve Bank of India Act 1934; and such other company as the Central Government may specify after consultation with the Reserve Bank: proviso to section 73(1).

3. State the deposit repayment reserve requirement. On or before 30 April each year the company must deposit a sum not less than twenty per cent of the amount of its deposits maturing during the following financial year in a separate account in a scheduled bank called the deposit repayment reserve account: section 73(2)(c). By section 73(5) it may be used for no purpose other than repayment of deposits.

4. A company defaulted on deposit interest and made the default good two years ago. Can it accept deposits from its members? No. Condition (e) of section 73(2) requires it to certify that the default was made good and that a period of five years has lapsed since the date of making it good.

5. What must a company do if it does not secure its deposits? The deposits must be termed "unsecured deposits" and so quoted in every circular, form, advertisement or any document relating to the invitation or acceptance of deposits: proviso to section 73(2)(f).

6. What two extra requirements does section 76 impose on a company taking deposits from the public? It must obtain a credit rating, covering net worth, liquidity and ability to pay on the due date, from a recognised credit rating agency, disclosed at the time of invitation and obtained every year during the tenure of the deposits; and, where the deposits are secured, it must create a charge on its assets of not less than the amount of the deposits within thirty days of acceptance.