Permissible Deposits – Private Companies

Permissible Deposits – Private Companies

Short Summary:

In this spark editorial, the author begins by referring the provisions of section 73 of Companies Act, 2013 relating to Acceptance of Deposit by Companies. Author shall Shed Some Light on sources of permissible deposits, limits of deposits, provisions of deposits, compliances for acceptance of such deposits etc. The main thrust of the article, however, is upon the “Private Companies” along with discussion of circulars, notifications, amendments made by MCA.

This editorial is updated version of editorial NO. 91 titled “Acceptance of Deposit by Private Limited Companies” written by Author dated: 11^th August, 2015. Since many amendments made by the MCA till 29^th Oct., 2017. This spark editorial incorporated all major amendments to Deposit Rules.

This editorial would assist in understanding the provisions, requirement of acceptance / renewing of deposit under CA, 2013.

This is article no. 282 of the series of editorials written by the author on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

To run any business one of the most important factor is Money “Paisa”. Source of funding for Companies are Share Capital, Loan, Borrowings etc. Loans are the major source of funding for most of the Companies apart from their Share Capital. Companies borrow from various sources like banks, financial institutions, Inter Corporate Borrowings, Stake Holders etc. while Public Limited Companies borrows from mass public by accepting public deposits. Private Companies are strictly prohibited from accepting any loan or deposits from the public.

At the time when Company Act, 2013 introduced sources to accept deposit by Private Companies was hardly any (like: Directors, Inter Corporate Deposits, Banks and Financial Institutions). On the other hand, Private Company by and large is family concerns only. There was need for amendment in the Law by grant relaxation to Private Companies to accept Loan from the other Stake Holders or Relatives as there are no public interest indulges in the Private Companies.

Many representations made to the Government/ MCA by the Stake holders (i.e. Corporates, Business houses etc.) and Government also feels that there is need to provide some relaxations to run the business as “Ease of Doing Business”. MCA come with many amendments in Rules through notifications and circulars time to time. i.e.

      1 Removal of Difficulty Order,

      10 Notifications and

      3 Circulars till 31.10.2017.

First Quest:

What shall be the treatment of the Deposit accept by the Private Companies before 01.04.2014 which was allowed in Act, 1956 but not allowed in Act, 2013.

MCA has issued a Circular No. 05/2015 dated: 30^th March, 2015 and clarified that “such amount shall not be treated as deposit subject to the condition that relevant such private company shall disclose about the same in Notes to its Financial Statement”.

Meaning of Deposit:

2(31) 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.

Private Limited Companies

 

 

A.     ACCEPTANCE OF DEPOSIT FROM DIRECTOR: As per Chapter V, Acceptance of Deposits of Companies Rules, 2014, point VIII of definition of Deposit.  Any amount receipt from a person, who at the time of acceptance was a Director of the Company, will not be considered as Deposit.

Note:

·         Position at the time of acceptance of Deposit will be considered.

·         Director will submit a declaration with the Company that amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.

·         Company can accept any amount of loan from the Director.

·         Company have to give details of the same in the Directors Report (Like: Amount Received during the year, amount at the beginning of the year and amount at the end of the year)

B.     ACCEPTANCE OF DEPOSIT FROM RELATIVES OF DIRECTORS:

Company can’t accept loan from relatives of the director as per Companies Act, 2013 at the initial stage of the Act. However, as per ‘The Companies (Acceptance of Deposit) second amendment Rules, 2015’ dated 15th September, 2015 G.S.R. 695(E) Private Limited Company can accept loan from the relative of the Director if relative furnish 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 loans or deposits from others.

Note:

·         Position at the time of acceptance of Deposit will be considered.

·         Company can accept any amount of loan from the Director.

·         Company have to give details of the same in the Directors Report (Like: Amount Received during the year, amount at the beginning of the year and amount at the end of the year)

C.      ACCEPTANCE OF DEPOSIT FROM MEMBERS:

A.      Procedures to be followed for taking Loan from Members (Company):

As per Chapter V, Rule 2(1) (c) (VI), any amount received by a Company from any other company is excluded from the definition of deposits. Therefore, loans taken by a Company from any other Company, even if such other Company is its member, will not be treated as deposits. Hence the provisions and procedures required to be followed for accepting deposits in Chapter V under the Companies Act, 2013 will not be applicable in such cases.

B.      Procedures to be followed for taking Loan from Members :

As per Chapter V, Rule 2(1) (c) ( VII ), any amount received by a Company from a person who, at the time of the receipt of the amount, was not a Director of the Company but was member of the Company will not be considered as deposit,  Because Private Companies are allowed to accept Deposits from the members upto 100% of Paid up Share Capital and Free Reserves.

C.      Procedures to be followed for taking Loan from Members (Other than Company & Directors):

Private Company can accept deposits from the Members. However, for this purpose Private Companies are divided into 3 (three) categories i.e. followings:

EXEMPTED DEPOSIT
	Source	Before 01.04.2014	After 01.04.2014 to 05.06.2015	After 01.04.2014 to 15.09.2015	After 05.06.2015 To 13.06.2017	After 13.06.2017 To 19.09.2017
1	Members	Any No. of amount before 01.04.2014	Cant receive in this period	-	upto 100% of paid up share capital and free reserve After 29.06.2016 Upto 100% of paid up share capital, free reserve and Security Premium Account.	*Company can accept any no. of amount if fulfill conditions given in above  the chart. A private company which is a start-up, for five years from the date of its incorporation any amount.
2	Directors	Allowed any amount	Allowed any amount Condition money must be belonging to director only. Not borrowed fund	Allowed any amount Condition money must be belonging to director only. Not borrowed fund	Allowed any amount Condition money must be belonging to director only. Not borrowed fund	Allowed any amount Condition money must be belonging to director only. Not borrowed fund
3	Relative of Directors	Allowed any amount	Not allowed	Allowed any amount Condition money must be belonging to relative only. not borrowed fund	Allowed any amount Condition money must be belonging to relative only. not borrowed fund	Same earlier
4	Other Company	Allowed any amount.	Allowed any amount. But check relation of section 185.	Same earlier	Same earlier	Same earlier

*Private Company can accept deposits from Members without complying with the Provision of Section 73(2) clause (a-e) following private Companies:

1)      Which accept from its members monies not exceeding 100% percent of aggregate of the paid up share capital, free reserves and Securities Premium account; OR

2)      Which is a start-up, for five years from the date of its incorporation; OR

3)     which fulfill all of the following conditions, namely:-

a.      Which is not an associate or a subsidiary of any other Company;

b.      If the borrowing of such a company from the banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

c.       Such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under the section.

Provided that all the Companies accepting deposits shall file the details of monies so accepted to the Registrar of Companies in Form DPT-3.

 

	Loans from	Conditions, if any:
1.)	Shareholder:	Member: Yes, can accept, but subject to the condition specified in deposit Rules.
2.)	Director/Relatives of Director	Yes, can accept, but the director/relative will give a Declaration in writing that money is not given out of borrowed funds and company will disclose it in the Board's report.
3.)	Employee	Yes, can accept up to the employee’s annual salary (there should be a contract of employment with the company) in the nature of non- interest bearing security deposit.
4.)	Any other Individual	Can’t accept because it is prohibited by the definition of Private Company.
5.)	Proprietorship Firm ;	Can’t accept because it can’t be director, Member or relative of Director.
6.)	HUF	Can’t accept because it can’t be director, Member or relative of Director.
7.)	Partnership Firm	Can’t accept because it can’t be director, Member or relative of Director.
8.)	Any Company	Yes, can accept, but also comply with Sec 179(3) wherein the conditions are specified for the lender
9.)	Banks	Yes, can accept
10.)	Trust	Yes, can accept, but loan received should be non- interest bearing.
11.)	Outside India	Yes, can accept, but subject to the provisions of the Foreign Exchange Management Act, 1999 and rules and regulations made there under.
12.)	Govt. organization ( eg. SIDBI)	Yes, can accept
13.)	Any other Financial Institution which are not incorporated as Banks (eg. Religare, Fullerton, Barclays, Bajaj Finance). Yes, can accept

I.	Borrowings which are excluded from the definition of Deposits?
	i.         Amount from government and guaranteed by government.       ii.         Amount received from foreign government or foreign Bank.     iii.          Loan from Banks and Financial Institutions.     iv.         Amount received against commercial paper.       v.         Inter corporate borrowing.     vi.         Subscription to securities and call in advance.   vii.         Amount from Directors. viii.         Secured Bonds/debentures.     ix.         Convertible bonds/debentures.       x.         Non-interest bearing security deposit from employee.     xi.         Amount in trust.   xii.         Advance and security deposit received by company. xiii.         Unsecured loans from promoters. xiv.         Amount accepted by Nidhi Company.
II.	If deposit in the joint name of director and other person then how it will be treated? -
	A deposit in joint names of director and another person, who may or may not be director, should be permissible, if name of director is first depositor, though there is no specific provision.
III.	If a person ceases or resign from the post of director after giving loan then such loan will be considered as deposits or not?
	Requirement of director will be check at the time of receipt of amount. Thus, later he may cease to be a director.
IV.	If a person is director and shareholder of the Company and giving loan to Company whether it will be considered as loan from Director or Member
	As per my understanding this should be treat as loan from the Director instead of the Shareholder of the Company.
V.	Question: Whether LLP can give Loan to Company under this exemption:
	Solution: NO, LLP can’t give loan to Private Limited Company under this Clause. Because this clause covers only Company not Body Corporate.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).  Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.