Dear Professional colleagues,
Have a serious look into what is stated herein with your skillful application of mind. Section 2(31) of the Companies Act,2013, defines deposit and according to the definition all receipts of money by a company have been included in deposits except the ones which are not deposits as provided in rule 2(1)(c) of Companies(Acceptance of Deposits) Rules,2014(Deposit Rules). Section 73&76 provide the manner in which deposits have to be accepted. It is needless to state that compliance with section 73&76 is virtually beyond capacities of the large number of companies registered in India. Due to the definition of deposit and the provisions of section 73&76 there is wide spread confusions that that now all borrowings are prohibited for companies, particularly the small companies unless they are in accordance with section 73 &76 read with Deposit Rules. Before going into the analysis of the above provisions it is pertinent to mention here that borrowing is an inherent need and power of any business. Therefore it is an inherent need and power of companies which cannot be banned by any statute as it will work against the operation of the economic system in the country. A statute can only impose restriction cannot ban it. The company laws always recognized this inherent need and power of companies. EXAMPLES are section 292&293 of the Companies Act,1956 and section 179&180 of the Companies Act,2013 wherein this inherent need and power have been provided for companies. In the backdrop of above let us consider the following question:
Are all borrowing by companies except ones exempted under rule 2(1)(c) of the Deposit Rules are deposits which needs to be accepted only after complying with the provisions of section 73&76 of the Companies Act,2013 or in other words can not a company borrow money from say X & Y(who are neither directors nor shareholders) without complying with section 73&76?
Applicable provisions are:
1. Section 2(31) of the Companies Act,2013 which defines “deposit” as “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. Rule 2(1)(d) of the Companies (Acceptance of Deposits) Rules,2014 which defines “ depositor” which is as under:
“depositor” means,-
(i) any member of the company who has made a deposit with the company in accordance with the provisions of sub-section (2) of section 73 of the Act,or
(ii) any person who has made a deposit with a public company in accordance with section 76 of the Act;”
3. Section 73 of the companies Act,2013, the relevant portion of which is as under:
“(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:”
4. Section 76 of the Companies Act,2013 the relevant provision of which is as under:
“(1) Notwithstanding anything contained in 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 provided in sub-section(2)of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India,prescribe:”
[For sake of brevity entire provisions of section 73&76 are not given. The requirement of section 73&76 for acceptance of deposits are (a) issuance of circular to members or public as the case may be (b) credit rating to be obtained(c) filing of circular with Registrar(d)creation of deposit repayment Reserve account with 15% of the amount deposit maturing in a financial year(e) obtaining of deposit insurance(e) creation of security for the deposits received (f) creation of charge on the assets of the company for securing deposit and first and foremost(g) passing of special resolution]
Analysis of the above stated provisions:
(a) Section 73 does not require any analysis as it is purely procedural and self explanatory same is the case with section 76. Section 76 seems self contradictory as it starts with “Notwithstanding anything contained in section 73” but ends up with direction that sub-section 2 of section 73 needs to be complied with. Be that as it may, these two sections state that when a company wants to accept deposits they need to do certain things or in other words the deposit to be accepted must be in the manner and in accordance with these two sections of the Companies Act, 2013.
The definitions of “Deposit” in section 2(31) and definition of “depositor” in rule 2(1)(d) in the Deposit Rules need analysis. As to deposit its amply clear from the definition that all kinds of receipt of money by a accompany in whatsoever form are deposit except the ones which are excluded from the deposit in Deposit Rules. But the definition of “depositor” restricts the scope of the term “Deposit” as because as per the definition of depositor the depositor is one and only one who has given money to a company under and in accordance with the provisions of section 73&76 as the definition says “depositor” means,-
(i) any member of the company who has made a deposit with the company in accordance with the provisions of sub-section (2) of section 73 of the Act,or
(ii) any person who has made a deposit with a public company in accordance with section 76 of the Act;”
Thus a combined reading of the definition of Deposit and depositor it emerges that receipt of money by a company in the manner as provided in section 73&76 only can be deposit. In other words if X has lent money to a company which is not in accordance with the provision of section 73&76 the X cannot be termed as depositor and when X is not a depositor the company cannot be said to have received any deposit from X though the receipt be a borrowing. Hence all borrowing of money by the company is not deposit. A receipt of money to be termed as deposit must be in accordance with section 73&76 i.e the receipt is subject to conditions, restrictions procedures etc as provided in the above two sections.
Above analysis of the term deposit and depositor leads to the provisions of inherent power of borrowing by a company in the law which may or may not be deposit at the discretion of a company.
Applicable provisions are:
1. Provisions of section 179 relevant portion of which is as under:
“ (3) The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meeting of the Board, namely:-
(a) …………………..;
(b)…………………;
(c) …………………;
(d) to borrow monies;
………………………..
2. Provisions of section 180 relevant portion of which is as under:
“ (1) The Board of directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:-
(a)…………….
(b)……………;
(c) to borrow money, where money to be borrowed ………… will exceed aggregate of its paid-up share capital and free reserves..”
If section 179 and 180 are read it will be seen that there is no restriction as to whom the company shall borrow from. Only restriction is that if the borrowing exceeds paid-up capital and free reserves then Special Resolution is required. Section 179 and 180 which are independent of section 73&76 empower a company to borrow money from any one it chooses with only restriction that in case of borrowing exceeding paid-up capital and free reserves a special resolution be required. Thus any borrowing from any one under section 179&180 is freely allowed and that borrowing shall not be deposit.
It is also pertinent to mention here that the provisions of section 73&76 relating to acceptance of deposits are merely directory provisions not mandatory. Reason for saying so is that both these section do not provide for any consequences i.e. penalty etc for non-compliance of them. Golden rule of interpretation of statute is that if a provision of law does not provide for consequences then said provision is said to be merely directory irrespective of use of words “shall” or “may” in it.
Conclusion:- According to me as on today a company can borrow many from any one under section 179&180 and the money so borrowed is not deposit unless the company itself wants to make it deposit by following the procedure as provided in section 73&76.
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