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Provisions relating to Acceptance of Fixed deposits

G S Rao , Last updated: 08 January 2014  

Introduction: Companies normally raise funds through issue of Equity/preference shares, debentures, commercial papers and inter corporate loans. Fixed deposits are also one of the instruments available to a company to raise funds to meet its short term or long term requirements. This article focuses on the changes brought in by the Companies Act,2013(referred as New Act or CA2013)

Why law with regard to fixed deposits is made stringent?

Some companies which require funds induce gullible investors offering a higher interest rate than the rate of interest offered by banks. Often fixed deposit holders end up fighting for unpaid interest or return of principal amount on maturity. Fixed deposits are basically seen as contract between the companies and deposit holders. As such the rights and obligations arise from the terms and conditions of offer inviting fixed deposits and acceptance by investors. As litigation in courts for rights will be an expensive affair to small investors, the legislation has provided some safeguards to protect investors’ interest. Banking and non banking financial companies are regulated RBI Act, 1937. Acceptance of Deposits is governed by the stringent provisions under the Companies Act and Rules framed under Section 58A of Companies Act,1956(referred as Old Act or CA1956) in consultation with   Reserve bank of India.

Scheme under Old Companies Act, 1956:

Section 58-A  and 58-B of CA1956 provide  that fixed deposits are  to be invited / accepted  in the manner and  within the limits fixed by  Rules  framed by the Central government in consultation with the RBI  and also as per the terms and conditions in the offer and acceptance. Section 58AA provides protection to small depositors who invest amounts up to Rs.20,000/-. Further section 58AAA has been introduced to make any default in acceptance or refund of fixed deposits as a cognizable offence. Besides this filing of audited return of fixed deposits, certain disclosures in the directors report about deposits which matured but remained unpaid and confirmation by auditors about compliance of Acceptance of Fixed deposits (Rules) were existing  as checks and balances.


Changes at a glance made by the Companies Act, 2013:

Under the CA 2013 or New Act deposits from members only can be accepted subject to approval from members and compliance of rules. Deposits from public can be raised only by such companies which have prescribed net worth or turnover to be notified by Rules. Deposits accepted before commencement of the new Act have to be refunded within a period of one year or on becoming due which ever is earlier. Let us now analyse the provisions in the relevant section and rules displayed by MCA on its web site.

Conditions to be fulfilled for acceptance of deposits from members:

Section 73 (1) prohibits acceptance or renewal of deposits from the public except in the manner provided in Chapter V. This prohibition however does not apply to a banking company and non banking financial companies which are coming under the purview of Reserve Bank of India Act,1934. Central government has power to exempt from the restrictions /prohibitions, any other class of companies after consulting RBI.

1. As per Section 73 (2)  a company has to do the following, if it wants to accept Fixed deposits from members:-

- To pass a special resolution of the members at the General meeting of the company.

- To comply with the Rules prescribed in consultation with RBI and terms and conditions mutually agreed by the company and deposit holders either for acceptance or for repayment.(Rules are displayed in web site of MCA for feed back and subject to change)

- To issue a circular to its members highlighting the financial position of the company, credit rating, no of depositors, outstanding amount towards depositors and such other particulars as may be prescribed. These details indicate the soundness of the company or a warning about risks involved.

-  To file a copy of the circular with the Roc along with statement of financial position 30 days before the issue of circular.

-  To open a Deposit Repayment Reserve account (DRR) with a scheduled bank for   such sum which shall not be less than 15% of the amount of deposits likely to mature during the financial year. This is some what similar to Rule 3A of old Companies (Acceptance of Deposits) Rules 1975 which mandates provision for maintenance of liquid assets.

- To provide deposit insurance in the manner provided in Rules.

Rule 13 of Companies (Acceptance of Deposits) Rules 2013(CAoDR, 2013) describes the manner in which insurance coverage is to be provided. As per this rule, insurance should cover the company’s liability on fixed deposits and interest thereon in case of default by the company. The rule further indicates that in case of deposits up to Rs.25,000/- coverage should be to full extent. However in case of deposits exceeding Rs.25,000/-  it limits coverage up to 25,000/-. Thus this is indicative of the amount of FDs fully insured. This is not in agreement with the explanation given in the rule. Still some more clarity is wanted on this score.

- To certify that the company has not defaulted in repayment of either deposits or interest on FDs

- To provide security for due repayment of deposits either by creation of charge on the assets partly or other wise. If such arrangement is not made it must state in the circular, or form or advertisement or in any document inviting deposits clearly that the deposits to be accepted are unsecured.

2.  Every deposit accepted by a company must be repaid with interest as per the terms and conditions mentioned in the initiation for acceptance of deposits.

3. In the event a company fails to repay the deposit or part thereon for interest accrued and due there on, depositor may apply to Tribunal for seeking a direction to the company for payment or damage resulting from such non payment.

4. Deposit repayment reserve account shall not be used by the company for any purpose other than for the purpose for which it is created. It is a new requirement and is welcome.

Deposits accepted under Old Act or prior to CA2013:

Any deposits accepted by companies under the Old act, which have become due for payment or likely to fall due after the commencement of New Act, the following steps are to be taken (obviously from the date of coming into force of Section 73, 74)

a) To file a statement with ROC within 3 months from commencement of Act or from the date on which such payments are due, a statement clearly indicating the amounts of fixed deposits accepted and payable with interest and arrangement made for repayment.

b) The amount of fixed deposits accepted prior to new act has to be repaid within a period of one year or on maturity   which ever is earlier. This payment is to be made notwithstanding the terms and conditions accepted by the parties (Author’s comment: This section is not happily worded. Keeping in view the intended protection, above points are elaborated) [Section 74(1)]

It may cause hardship to some companies to repay the entire deposits accepted within one year as it will result in huge cash out flow. In case any company is not in a position to comply with this requirement, it may apply to the Tribunal for allowing it more time to repay deposits and interest. This one year period appears to be unreasonable especially when deposits are accepted for a term of 2 years or 3 years.

Conditions for acceptance of deposits from public (other than members)

1. A public limited company having such net worth  or turnover as may be prescribed by rules may accept deposits from persons other than its members by complying with the requirements Specified in Section 73(2) described above and subject to rules prescribed by Central Govt in this regard.

2. Other compliances for acceptance of public deposits:

The following other requirements are also mandatory:-

- Rating must be obtained from a recognised credit rating agency as to net worth, liquidity and ability to pay its deposits on due date and such rating must be stated in the invitation to the public

- Credit rating must be obtained every year during the tenure of deposits.

- Charge has to be created on the assets of the company in case of acceptance of secured deposits as per rules that may be prescribed. As per Rule 14 of CAoDR2013, security should be provided by creation of charge on the assets of the company (excluding tangible assets) to ensure coverage of full liability on fixed deposits. This value of the assets in no case should be less than the uncovered portion under deposits insurance coverage. Thus this indicates insurance coverage can be calibrated with market value of assets on which charge is created.

- Section 76 (2) provides that the provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits from public under this section. In other words, compliance with rules, circular inviting fixed deposits, providing of deposit repayment reserve, deposits insurance, and penal provisions etc are equally applicable.

What the draft Rules say?

Recently displayed draft of “The Companies (Acceptance of Deposits) Rules, 2013 qualify an eligible company as a company which must have a net worth of not less than Rs.100 crore or a turnover of not less than Rs.500 crores and which has obtained a prior consent of the company in general meeting by a special resolution and filed with RoC and where applicable(in the case of NBFCs) with RBI. Besides this Rules have defined depositor with more clarity. New requirements such as creation of Deposit repayment reserve, manner of insurance coverage, appointment of trustees and creation of charge on assets of the company etc are dealt with by the Rules. Coverage of rules is given mainly to highlight new requirements in this article.

Safe guards provided by the new Act:

1. Penalty or violation {Section 74(3)}:

 If a company fails to repay the deposit or part thereof or any interest thereon within one year or maturity or such further time as may be allowed by the Tribunal, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than 1 crore rupees but which may extend to10 crores rupees and every officer of the company who is in default shall be punishable with imprisonment which may extend to 7 years or with fine which shall not be less than 25  lakh rupees but which may extend to 2 crore rupees, or with both.

2. Personal liability for fraud (Section 75)

If any default, in complying with repayment of FDs as per Section 74(1) or within further time allowed by Tribunal, is committed and it is proved that deposits are collected to defraud depositors or use money for any fraudulent purposes, every officer responsible for such act without prejudice to provisions of section 74(3), shall be liable for all losses or damages (without any limitation) incurred by depositors. This is a very stringent provision which is welcome as it deters unscrupulous persons from indulging in frauds.

3. Further remedies:

a) Section 75(2) authorizes any aggrieved depositor or group of persons or any association of persons may file a suit or initiate other proceedings for protecting their interest in case of default and loss incurred by them as a result of default.

4. Other Checks and balances for compliances:

- As per Section 63(2)of CA2013 issue of bonus shares will not be permitted, if a company has defaulted in payment interest or principal amount of fixed deposits

- Similarly reduction of share capital and buy back of shares is prohibited, if there are any outstanding fixed deposits or interest thereon to deposit holders.

Conclusion: Although in the old Act sufficient safeguards exist to protect the interests of fixed deposit holders, New Act further strengthened interests by bringing in new provisions such as  appointment of trustees, creation of Deposit Repayment Reserve, deposit insurance, introducing personal liability with out any limitation etc., are praise worthy. Let us hope that the India Inc.will implement it in letter and spirit.


Tags: The Companies Act, 2013, Acceptance of fixed deposits, Companies (Acceptance of deposits) Rules 1975


This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.

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Published by

G S Rao
(Deputy General Manager)
Category Corporate Law   Report

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