Acceptance of loan by public company

As per my understanding of reading Rule 2(b) (ix) of the Companies (Acceptance of Deposits) Rules 1975, deposits received from directors by public company or private company or deposits received from shareholders by a private company will be exempted from the purview of deposit. However such deposit has not made out of borrowed funds.

Private Company is prohibited to accept any invitation or acceptance of unsecured loans/deposits from the persons other than its members, directors or their relatives. Therefore a private company can accept deposits through private arrangement from its members, directors and their relatives.

Rule 2(b)(ix) exempt any unsecured loan money received from directors and shareholders from the definition of deposits. According to Rule 2(b)(ix), any amount received from members of a private company limited by guarantee are not exempt.

Other views are also solicited.

Loan from director of public Company is not exempted under Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Rules 1975. The exemption is available only for private limited company.

Dear Ajay ji

On the basis of your reply I can make out following replies according to you for public company-

  ACCEPTANCE FROM                        YES / NO 

- director                                             YES

-  relatives of director                             NO 

- shareholder / member                          NO 

- any member of general public               NO

Pls reconfirm my reply.

Yes, as per my understanding .

1.     Any borrowing that does not fall under Rule 2(b) of the Companies (Acceptance of deposits) Rules, 1975, will need to comply with Section 58A of Companies Act 1956.

The explanation to Section 58 A makes it very clear that the term 'deposit' includes any amount borrowed by a company in any form but shall not include such categories of amounts borrowed as may be prescribed by the RBI.

Further, as per Rule 2(c) of the Companies (Acceptance of deposits) Rules, 1975, "Depositor" includes any person who has given a loan to a company.

Thus, it needs to be noted that for the purposes of Section 58A of Companies Act 1956 and Companies (Acceptance of deposits) Rules, 1975, ‘deposit’ includes a loan.

2.     A loan given by :

(i)             a director or ;

(ii)            a relative of a director or ;

(iii)           a shareholder or ;

(iv)           any person among general public;

to a public company (whether listed or not), is not exempted under Rule 2(b) of the Companies (Acceptance of deposits) Rules, 1975.

3.     Hence, in this case, the company will obviously need to comply with Section 58A of Companies Act 1956.

4.     As per section 58A, a company shall not invite any deposit unless-

(i)           An advertisement has been issued in a prescribed manner ;

(ii)          The company is not in default in the repayment of any deposit and any interest thereon.

5.     This is the answer to your question Nehaji.

Regards,

Veeral Gandhi

Dear Ajayji,

Rule 2(b)(ix) of the Companies (Acceptance of deposits) Rules, 1975, exempts only Private companies from complying with the provisions of Section 58A of Companies Act 1956 not the Public Companies. Following is the excerpt of the Rule :

Rule 2(b)(ix)  : "any amount received by a private company from a person who, at the time of the receipt of the amount, was a  director, relative of director or member: 

Provided that the director or member, as the case may be, from whom money is received, furnishes to the  company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others;  

Explanation.- For the removal of doubts, it  is hereby declared that any deposit received or renewed by a company before the commencement of the Companies (Acceptance of Deposits) Amendment Rules, 1978, shall continue to be governed by the rules applicable at the time of such deposit or renewal as the case may be.”

Regards,

Veeral Gandhi

Dear Veeral

Rule 2(B) (ix) of the the Companies (Acceptance of Deposits) Rule, 1975  is defind as follow:

“Any amount received by a private company from a person who at the time of the receipt of the amount, was a director, relative of director or member.”

In exercise of the powers conferred by Section 58A read with sub-clauses (a) and (b) of Sub-section (1) of Section 642 of the Companies Act, 1956 (1 of 1956), the Central Government, in consultation with the Reserve Bank of India, hereby makes the following rules further to amend the Companies (Acceptance of Deposits) Rules, 1975, namely:-

1 . Companies (Acceptance of Deposits) Amendment Rules, 2004.- 

1.Short Title and Commencement - (1) These rules may be called the Companies (Acceptance of Deposits) Amendment Rules, 2004.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In rule 2 of the Companies (Acceptance of Deposits) Rules, 1975, in clause (b), for sub-clause (ix), the following sub-clause shall be substituted, namely:-

" (ix) any amount received from a person who, at the time of the receipt of the amount, was a director of the company or any amount received from a relative of a director or its member by a private company :

Provided that the director, relative of a director or member, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others".

After this amendments in this rule as on 12/03/2004 the  public company can take money from its director because the word private company has been replace in this sub clause by the word “ the Company”.

Regards

CS Ajay Mishra

Under Sections 58A read with Companies (Acceptance of Deposit), 1975 regulate the invitation and acceptance of deposits. A company may accept / renew deposits only after issuance of Advertisement (under rule 4) and Statement in lieu of advertisement (under rule 4A).

However, under rule 2(b) certain moneys are exempted deposits.

- director : Yes but it will be exempted deposit under rule 2(b)(ix)

- relatives of director  : Yes

- shareholder / member - Yes

-any member of general public:  In this case if the company has issued advertisement then the company can invite and accept deposit otherwise without invitation company may accept deposits by filing statement in lieu of advertisement. Yes

The above amounts will be classified as unsecured loans and except deposit from directors all will cover under deposits.

Explanation of sub rule 2(b)(ix) of Companies (Acceptance of Deposit) Rules, 1975

"any amount received from a person who at the time of the receipt of the amount, was a director of the COMPANY or any amount received from a relative of a director or its membr by a private company."

Company Includes private and public company.

Exemption:

Private company: Amount received from its directors, relative of directors or its members are exempted deposit.

Public Company: Amount received form its directos are exempted deposit.

Based on the representations made by the directors of public limited companies, the Department had laid down Companies (Acceptance of Deposits) Amendment Rules 2004. It was laid down to help closely held public companies to tide over temporary financial difficulties by raising resources from directors. I heartily thank Ajayji for highlighting this later development and I also thank Ankurji for giving the perfect answer for the query asked by Nehaji. 

Regards,

Veeral Gandhi

Thankyou Veeral ji...

In Annamalai v. Veerappa the Supreme Court observed that although, in a particular case, the term “loan” may include “deposits”, every loan is not a deposit. It indicated, in the course of drawing the distinction, that;

a. The person making the deposit has no right to call back the deposit;

b. The deposit does not become a debt until the period for which the money is deposited expires and

c.  As a consequence the creditor has no right to recover the money before the deposit period concludes.

The Supreme Court has repeatedly held that whether a transaction is a loan or a deposit will depend on the surrounding circumstances, the relationship and character of the transaction and the manner in which the parties treated the transaction.

However despite this three-point distinction it cannot be concluded that there exists no confusion since the two overlap considerably.

Dear Sir, Please clear my doubt...

a.Credit Rating by unlisted non banking non financial companies in the advertisement for public deposits as per section 58A not compulsory ?

b. the co. cannot pay interest more than 12.5% of their deposits and brokerage more than 1% ?

Thank you...