Before jumping into the main discussion, let us have a look into the important term as under:
Loans” is not defined anywhere in the Companies Act, 2013. However, in normal parlance, any transaction in which money is given with the intention to be returned either with or without interest is termed as loan.
Deposits include any receipt of money by way of deposit or loan or in any other form by a company but do not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
Eligible Company means a Public Company having either a Net worth of not less than Rs. 100 crores or a Turnover of not less than Rs. 500 crores and which has obtained the prior consent of the company in a general meeting through a special resolution and also filed the said resolution with the Registrar of Companies before making any invitation to the Public for acceptance of deposits
Section 179 of the Companies Act, 2103 provides to take prior consent of the Board to borrow money.
Section 180 of Companies Act, 2013 provides to take prior consent of the members of the company by way of a special resolution to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed an aggregate of its paid-up share capital, free reserves, and securities premium, apart from temporary loans obtained from the company's bankers in the ordinary course of business. Section 180 does not apply to Private Company and as such Private company can continue to borrow money by simply passing Board Resolution even if the borrowed amount exceeds the above-specified Limit.
For Example: If XYZ Private Limited and ABC Limited both are having:
Paid-up Share Capital = Rs. 100 Crores
Free Reserves = Rs. 50 Crores
Securities Premium = Rs. 20 crores
Current Borrowed amount = Rs. 5 Crores
The amount to be Borrowed by way of passing Board Resolution will be up to Rs. 175 crores for both Private as well as Public Company.
However, if ABC Limited Company wants to borrow above Rs. 175 crores, then it will have to pass Special Resolution in the General meeting of the company but XYZ Private Limited can borrow the same without passing Special resolution.
Loans and Deposits are not synonyms. Although in both one party lends money and the other party receives it but there is a small difference between the two:
- Firstly, the interest rate is low as compared to Loan
- Secondly, the deposit is payable on demand subject to certain conditions whereas Loans are paid as per the agreement between the two-party, however obligation to pay money arises as soon as the loan is received.
So, let us understand the situation as to when the receipt of money is considered as a loan and when as a deposit.
Chart: 1 Who is eligible to accept deposits and from whom?
Chart: 2 Directors can provide Loans to the company either out of the Director's own funds or out of borrowed funds. Let us depict the scenario in the chart below:
Directors can lend money to the company in two ways:
1. Directors out of Borrowed Funds: There are two situations:
- If Director is also a shareholder: In this case, the amount received from the directors will be treated as Deposits from members and will have to comply the provisions of Section 73 read with the Companies (Acceptance of Deposits) Rules 2014 and Section 180 of the Companies Act, 2013 captioned above.
- If Director is not a shareholder: In this case, the amount received from the directors will be treated as Deposits from Public and the provisions of Section 76 read with the Companies (Acceptance of Deposits) Rules 2014 and Section 180 of the Companies Act, 2013 will be applicable. In this case, the deposits can be accepted only by an Eligible Public Company (explained above) and will have to obtain credit rating every year. In case of a secured deposit, the company will have to create a charge on its assets in favor of the deposit holders for an amount not less than the amount of Deposit so accepted.
2. Directors lending out of their own Funds: If a Company receives the amount from the directors of the company or the relative of directors of the private company out of their own funds, it will be treated as Loans and do not attract the provision of Section 73 or Section 76 of the Companies Act, 2013. However, to avail such relief, the director or the relative of the director as the case may be, needs to furnish a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Director's or Board's Report. Section 180 will be applicable to the Public Company.
- Every Public Company and Private Company shall disclose in its financial statement, by way of notes, about the money received from the director or relative of directors (in case of a private company).
- Every company other than Government company shall file an onetime return of outstanding receipt of money or loan by a company but not considered as deposits as per Companies (Acceptance of Deposit) Rules, 2014 from the 01st April 2014 to 31st March 2019, as specified in Form DPT-3 within ninety days from 31st March 2019 along with applicable fees.
- Loans from Director may be secured as well as unsecured.
- Unsecured Loan from directors may have zero rate of interest.
- The position of director at the time of acceptance of deposit will be considered. For Example: If Mr. A became Director on 25 August 2019 and ABC Limited accepts the amount of Rs. 100 crores from Mr. A on 03 August 2019, it will be treated as Deposit and not Loan.
The elaboration of the above discussion can also be viewed in the link below:
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