Introduction
The term ‘deposit’ has been defined in the Companies
(Acceptance of Deposits) Rules, 2014 (Rules), which governs the
acceptance of deposits by companies, along with the relevant provisions of the
Companies Act, 2013. Deposits, under the Rules includes all deposits of money
with the company, including any amount borrowed by it. However, it specifically
excludes certain amounts received by a company, like those received from the
Government, another company, against any instruments regulated by the RBI, or
share subscription money. Loans from banks and the IFCI are also excluded.
Further, those amounts received in the course of the business of or as security
under a contract are also excluded.
The process of accepting deposits and their necessity are
explained in the following sections.
Process of Accepting Deposits
Eligibility Criteria
Section 76(1) of the Companies Act, 2013 (Act)
prescribes the eligibility criteria for a company to receive deposits from the
public. Under this section, a company must have a net worth of INR 100 Crores
or more, or turnover of at least INR 500 crores in order to accept deposits
from the public. Further, prior consent of the members has to be obtained by a
special resolution in a general meeting to do so, and such resolution must be
filed with the Registrar of companies prior to inviting any public deposits.
This can be done by an ordinary resolution for a banking company under section
180(1) of the Act.
Process of Accepting Deposits
The process of accepting deposits, under the Rules, by an
eligible company is as follows:
·
Firstly, as stated above, a resolution, whether
special or ordinary, as may be applicable, has to be passed in a general
meeting.
·
An eligible company must obtain a credit rating
from a recognised agency, such as CRISIL, which must include a rating on the
company’s net worth, liquidity, etc. This rating has to be informed to the
public at the time of inviting them for deposits, in order to assure the safety
of the deposits.
·
Under rule 4, a circular must be issued by a
company, to all its members, stating the financial standing of the company, the
details of outstanding deposits, credit rating, etc.
·
Under rule 5, the company must undertake to
provide deposit insurance. This must be done at least 30 days prior to the
issue of invitation. This insurance assures the repayment of deposits, along
with interest, in case the company defaults. The premium must be borne by the
company and cannot be recovered from the depositors.
·
Under rule 7, the company must execute a deposit
trust deed, as prescribed and appoint deposit trustees, who ensure that the
charge on the assets in case of secured deposits, the amount of deposit
insurance, etc. is sufficient and that the company does not provide any
information to the public that is inconsistent with the Act or Rules or the
deposit scheme. The trustees also carry out other functions for the security of
the depositors, such as calling meetings when requires, taking steps for
remedies in case of a breach of the terms of deposits, etc.
·
The company can then issue the invitation for
acceptance of deposits by post or speed post, or in an electronic mode or as an
advertisement, in accordance with the Rules. A deposit receipt must be issued
to the depositors, under rule 12, after the acceptance of deposits.
·
The company must maintain a ‘Deposit Repayment
Reserve Account’ in a scheduled bank, with a minimum of 15% of the amount
received as deposits scheduled to be matured in the current financial year.
This account is to be used solely for the purpose of repayment of deposits.
·
If a company accepts secured deposits, a charge
must be created and the assets of the company to the extent of the amount
received as public deposits and not less.
·
Under rule 14, the company must maintain a
register of deposits. Further, the company must file a return of the deposits
with the Registrar of Companies, in the prescribed manner.
Necessity of Public Deposits
Public deposits can prove to be a very attractive source of
finance for companies, especially those with a good standing, both financially
and otherwise, in the eyes of the public. This is because the process of taking
deposits from the public is much easier than raising debt through banks and
financial institutions, as the cost of raising debt from the public is lower
due to lower rates of interests and the process itself does not consume too
much time.
Public deposits also
provide a good option to small investors to invest in companies. Further, for
the company this also means that they can raise funds without affecting any
change in ownership, thereby also protecting the shareholders and their rights.
Lastly, public deposits can be used to create a good image of the company in
the eyes of the public, and even expand their customer-base, which can lead to
increased profitability.
Conclusion
While public deposits are a good source of finance for
companies, and consequently a good source of investment for small investors,
too much reliance should not be placed on this method of raising funds. From
the perspective of the company, it can be very hard to raise funds from the
public if the company is new or does not receive a good credit score.
From the point of
view of the public, there is always the factor of uncertainty as to the
performance of the company and the risk of default. Further, other options for
investment, like mutual funds are also easy, safe and cost effective which may
deter investors from depositing money with a company.
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