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COMPANIES BILL 2012 Vs COMPANIES ACT 1956
PROVISIONS RELATING TO ACCEPTANCE OF DEPOSITS BY COMPANIES-AN ANALYSIS
The Companies Bill 2012 has already received assent in Lok Sabha and is all set to become a new law pretty soon. In this article, a detailed analysis of the provisions relating to acceptance of deposits in the proposed new law vis-à-vis the existing law has been made. It is worthwhile to note the far reaching amendments in provisions relating to acceptance of deposits. To give the readers a comparative view, we shall also discuss in brief, the existing provisions relating to acceptance of deposits and registration of charges.
To begin with, let us first take a look at the new provisions relating to acceptance of deposits by companies. A bare perusal of the new provisions would reveal that the existing provisions contained in sections 58A to 58AAA have been completely overhauled. It is no exaggeration to say that that the existing provisions have received a facelift from the law makers of our country.
Scheme of the existing law and proposed new law:
Let us take a look at the scheme of the provisions relating to acceptance of deposits by companies under the old and new law. Under the existing law, the relevant provisions are contained in sections 58A, 58AA and 58AAA. Whereas the new law relating to acceptance of deposits by the companies is contained in Chapter V comprising of sections 73 to 76.
Section 73 of the proposed new law is somewhat analogous to section 58A under the existing law, though modified and condensed to a great extent. The provisions of section 58AA relating to acceptance of deposits from small shareholders and intimation of default in repayment of deposits thereof has been dropped under the new law. Similarly, section 58AAA making any offence connected with or arising out of acceptance u/s 58A or 58AA as cognizable has been done away with.
Under the proposed new law, there shall be some new provisions contained in sections 74, 75 and 76.
Existing provisions vis-à-vis new provisions:
After having seen a comparative overview of the provisions relating to acceptance of deposits by companies under the old and new law, let us now analyze and compare the provisions as they stand right now and how they will be under the new law once it comes into force.
Section 58A under the existing law was inserted into the Act by Companies (Amendment) Act, 1974 with a view to monitor the manner in which deposits are to be invited and accepted by companies. The section empowers the CG to make rules and prescribe limits subject to which deposits may be accepted by a company. The section does not make distinction between deposits from members and public. The acceptance of deposits at present depend upon twin conditions apart from compliance with rules made in this behalf, one is issuance of mandatory advertisement showing financial position of the company and no default in repayment of any deposit or interest payable thereon. Any deposit accepted in contravention of rules prescribed is liable to be repaid and in addition if there is any default in such repayment, a separate fine is also prescribed. Similarly any acceptance of deposit in contravention of rules prescribed is also liable to a fine. Apart from this, the section also empowers the Tribunal to issue directions for repayment in case of any default thereof either upon its own motion or on an application made by a depositor.
Provisions of section 58AA were inserted into the Act by Companies (Amendment) Act, 2000 mainly to protect the interests of the small depositors, i.e. holders of deposits not exceeding Rs. 20,000/- in a financial year. Section 58AAA makes any default in relation to sections 58A and 58AA as cognizable offence under the Code of Criminal Procedure, 1973.
Having discussed in brief the existing provisions relating to acceptance of deposits by companies, let us now take a comparative view of the provisions of section 58A and 73 proposed under the new law.
Section 73 which is somewhat analogous to section 58A, starts with a somewhat negative stipulation in as much as sub-section (1) reads as follows:
“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…” What it implies is that any invitation or acceptance of deposits from public is generally restricted and any deposits from public shall have to be accepted only in the manner prescribed under this chapter. However, only specified category of public companies based on such net worth or turnover as may be prescribed are allowed to accept deposits from public in accordance with section 76 which would be discussed in the later slides. Now besides the banking companies, NBFCs have been expressly excluded from the provisions relating to acceptance of deposits.
Another striking feature is that the existing section 58A mandates issuance of advertisement showing financial position of the company whereas under the new law, this requirement has been dispensed with and the same seems to have been replaced by issuance of circular to its members from whom deposits are to be accepted showing therein financial position of the company, total number of depositors and the amount due, credit rating obtained etc.
Under the existing provisions, no credit rating in respect of public deposits is required whereas under the new law, provisions of section 73 mandates obtaining credit rating and the same is required to be disclosed in the circular issued in this behalf to its members for inviting deposits.
Similarly, maintenance of deposit repayment reserve equal to 15% of the amount of deposits maturing during a financial year and financial year next following in a scheduled bank will now be mandatory which is a new feature. Under the new provisions, it is also been made mandatory to provide such deposit insurance in such manner as may be prescribed.
It is also worthwhile to note that the existing provisions recognized public deposits only as unsecured whereas under the new law, deposits may be secured or unsecured. In case they are unsecured, then the deposits are to be quoted as such in every circular, form or any other document relating to invitation or acceptance of deposits.
Another notable difference is that under the existing section 58A, there is a suo-moto power given to CLB/Tribunal to issue directions to the company to make repayment of any deposit or part thereof in case of any failure of the company to repay.
Now let us also take a look at the difference in penal provisions in the existing law and the new law. It is worthwhile to note that under the existing law, i.e. section 58A there is a separate penalty provided for any deposits accepted in contravention of the provisions of section 58A or rules made thereunder. Any deposits accepted in contravention of rules made thereunder are required to be repaid within 30 days from the acceptance thereof, not only that separate fine has also been provided. Whereas in the new law there is no such penal provisions contained in Chapter V as a whole, one shall have to refer to section 450 which relates to penalty or fine in case of contravention of any provision of the Act where no separate penalty or fine is prescribed. Therein the fine prescribed in maximum Rs. 10,000/- only. Similarly, in case of any default in repayment of deposit, in the existing law there is no separate fine or penalty except that the depositor may approach CLB/Tribunal and seek directions to the company for making repayment. Imprisonment and fine are both prescribed for any non compliance with the order of the Tribunal. In the new law as well, there is no separate penalty in this regard, however since sub section (3) of section 73 provides that any deposit accepted under this section shall be repaid as per the terms and conditions of such deposit, one shall have to refer to section 450 again where penalty provided for contravention of the Act is maximum Rs. 10,000/-. It is interesting to note that in the existing law there is no penalty for non repayment of any deposits accepted before insertion of section 58A, in fact the existing law does not even mandate the repayment of any such deposit. However, under the new law, section 74 mandates the repayment of any deposit accepted before the commencement of this Act within a period of one year from the commencement of this Act or date of maturity whichever is earlier and in case of any default in doing so the company shall be liable to pay hefty fine of Rs. One crore which may extend to 10 crore and imprisonment to officers in default which may extend to 7 years and with fine of Rs. 25 lakhs. These are rather bizarre provisions on the face of it in view of the fact that fine for any deposits accepted in contravention of main provisions of the new law is prescribed u/s 450 which is only maximum Rs. 10,000/-, a hefty fine running into crores of rupees are imposed for non repayment within specified period of any deposits accepted before commencement of the new law.
The new provisions:
Let us now discuss new provisions contained in sections 74, 75 and 76. Section 74 deals with repayment of unpaid deposits or part thereof or interest thereon in respect of any deposit accepted by a company before the commencement of this Act. The sub section 1(a) requires filing of a statement with the ROC within 3 months of commencement of this Act or due date of such payments disclosing all deposits unpaid along with interest thereon if any and the arrangements made for such repayment. It has also been mandated by virtue of sub clause (b) of sub section (1) repay within one year from such commencement or date of maturity whichever is earlier. This implies that any deposits earlier accepted by the company remaining unpaid on the commencement of this Act shall have to be repaid within one year from the commencement of this Act or date of maturity whichever is earlier. This would also mean that a deposit earlier accepted and remaining unpaid may have to be repaid even before their maturity if the prescribed period of one year from the commencement of this Act expires earlier than the date of maturity. In such a case the companies may have to take the unnecessary yet unavoidable trouble of making arrangements for repayment even before maturity. Not only that, even the depositors may have to incur loss on account of interest on such deposit in the event of their repayment earlier to maturity.
However, sub section (2) of section 74 provides that the Tribunal may on an application made by the company in this regard, after considering the financial condition of the company; allow such further time as may be considered reasonable. Nevertheless, this appears to be rather unnecessary hassle as the companies desirous of seeking extension of time for making repayments of deposits accepted before the commencement of this Act due to financial constraints would be put to unnecessary hassle of having to make application to the Tribunal in this behalf. In my view, instead of making it mandatory for repayment of deposit earlier accepted within one year from the commencement or date of maturity whichever is earlier, it would have been much better to provide that any deposits accepted before the commencement of this Act would be repaid on the date of maturity according to the terms of the deposits unless renewed, in which case the provisions of this Act would have to be complied with before such renewal. In case of any default in this regard, hefty fine which shall not be less than one crore rupees but which may extend to ten crore rupees has been prescribed. As if that was not enough, it has also been provided that every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine of minimum Rs. 25 lakh or both. Quite interestingly, no such stringent punishment is prescribed for any deposit accepted in contravention of section 73 or rules made thereunder.
Section 75 deals with personal liability of every officer of the company in the event of default in repayment of any deposit in respect of which it is proved that the deposits had been accepted with intent to defraud the depositors.
Section 76 provides for acceptance of deposits from public by public companies having such turnover or net worth as may be prescribed subject to compliance with provisions of section 73(2) which also apply in case of deposits from members and also subject to obtaining credit rating in respect of its networth, liquidity and ability to repay the deposits on due date and inform the same to the public at the time of invitation of deposits from the public. This is notwithstanding the provisions contained in section 73.
Summing up, it may be safely said that on and after commencement of the Companies Act, 2012 only banking companies, NBFCs and public companies having such networth or turnover as may be prescribed are eligible for accepting public deposits. Private companies and public companies not having prescribed net worth or turnover are only eligible for accepting deposits from their members. The provisions relating to acceptance of deposits have been thus made stricter ensuring more disclosures, transparency, requirement of credit rating, deposit insurance, deposit repayment reserve account maintenance etc. Also unlike in the past all public companies are no longer eligible to invite and accept deposits from the public rather only those public companies which cater to the net worth or turnover as may be prescribed shall be eligible for inviting and accepting public deposits.
At this stage, t is worthwhile to discuss a very interesting aspect relating to eligibility of private companies to invite and accept deposits from the public and the different treatment given to it under the old and the new law.
Going back to the Companies Act, 1956 clause (d) was inserted into section 3(1)(iii) by Companies amendment Act, 2000 which provided for prohibition for acceptance of deposits from public by private companies. Prior to the insertion of clause (d) into section 3(i)(iii), private companies were not prohibited from accepting deposits from public in the absence of restriction in the definition of private company itself. However, there was a section 43A(IC) which provided that any private company accepting deposits from the public shall be deemed to be a public company for the purposes of this Act. Thus, prior to Companies Amendment Act 2000, even without specific prohibition in this regard in section 3(1)(iii), private companies were indirectly discouraged from inviting and accepting deposits from public by virtue of section 43A(IC). Therefore, with the insertion of specific prohibition by clause (d) into section 3(1)(iii), section 43A(IC) was rendered inoperative by the Companies (Amendment) Act, 2000. It is also important to note that section 58A does not make any distinction between deposits accepted from the members and from the public. So it can be safely concluded that under the existing law, private companies cannot accept deposits from public as they have been specifically prohibited from accepting deposits from public under clause (d) of section 3(i)(iii).
Now coming to the Companies Act 2012, it is very interesting to note that from the definition of private company, there is no clause corresponding to clause (d) of existing section 3(i)(iii). So going by the definition given in Companies Act 2012, private companies are certainly not prohibited from accepting deposits from public. However, having said that, one will still have to look for an enabling provision under the Act which is absent in view of specific prohibition to accept deposits from public for all companies under section 73(1) except in the manner provided under this chapter. It is also worthwhile to note that even under section 76 only certain class of public companies is eligible to invite and accept deposits from public. Therefore, it is due to this reason it can be said that private companies are not eligible for accepting deposits from the public even in the absence of any specific prohibition in the definition of private company.
From the aforesaid discussions, it is evident that there is a great deal of difference between the existing provisions of the Companies Act, 1956 relating to acceptance of deposits by companies and the proposed Companies Act, 2012. While some of these changes aim at simplifying the provisions and weed out stale and redundant provisions, some of them specially related to mandatory provision for repayment of deposits accepted prior to commencement of the proposed Companies Act 2012 and the hefty fine imposed in the event of default raises a few eye brows. Barring these exceptions, it can be said that in the proposed new law, the law makers of this country have really given a facelift to the existing provisions on the subject.
CS Abhishek Goyal