Definition of Deposits - exclusions

5.1 Rule 2 (1)(c)(xii)(a) of the Companies (Acceptance of Deposits) Rules, 2014 (Deposits Rules) excludes advance received for supply of goods or provision of services from the definition of ‘deposit’ if it is appropriated within 365 days from the date of its acceptance. The Committee noted that there are many businesses like heavy engineering and IT Services industries where customer advance beyond 365 days is prevalent. Large companies also give advances to SMEs for creation of infrastructure etc., and adjust these against subsequent supply or conversion of goods by SMEs. Similarly, in the case of seasonal or cyclical industries, advances are usually taken much before the actual delivery of the goods, in most cases exceeding 365 days. The Committee felts that there is a case for outstanding advances not be treated as deposits even after 365 days, if they are received in the ordinary course of business, as evidenced by a written contract and during normal business cycle subject to disclosure of details of such outstanding amounts in the financial statements. However, such relaxation should be made only after ensuring that all regulatory concerns have been addressed.

5.2 In terms of Rule 2(1)(c) (ix) of the Deposits Rules, any amount raised by issue of debentures compulsorily convertible into shares of the company within five years is excluded from the definition of “deposits”. The Committee recommended excluding debentures compulsorily convertible into shares of the company within ten years from definition of deposit under Rule 2 (1)(c)(ix).

5.3 Definition of the term ‘deposit’ exempts amounts received from various categories of institutions, banks and lenders, but amounts raised by the issuance of debentures/ bonds to SEBI registered entities such as Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds are not exempted. Further as these are institutional investors and well regulated, it may not be necessary to extend the extensive disclosure and compliance requirements intended to protect public debenture-holders/ bond-holders under the Deposits Rules to amounts raised from such entities. It was noted that the corresponding RBI guidelines for NBFCs expressly exclude such amounts from the definition of the term ‘public deposit’. The Committee recommended amendment of Rule 2(1)(c) of the Deposits Rules to exclude amounts directly received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds registered with SEBI, from the definition of deposits.

5.4 In terms of Rule 2(1)(c)(ix) of the Deposits Rules, only debentures secured by an exclusive first charge or charge ranking pari passu with the first charge on any of the specified assets excluding intangible assets are considered not to be deposits. It was suggested that, debentures secured by second and third charges, debentures with intangible assets as securities may also be exempted, and unsecured debentures may be excluded from definition of deposit. This would allow greater flexibility on issue of debentures. Security created over intangible assets is not a certain security and prone to high variability. Second and third charges are also not sufficient security for investors. The Committee, therefore, did not recommend including debentures secured by second and third charges, or consideration of security created against intangible assets for secured debentures but it recommended that the MCA may consider excluding unsecured debentures listed as per SEBI Regulations from the definition of deposits.

5.5 Convertible notes are promissory notes, which are not specifically recognized in the Companies Act, 2013 and are a mode of raising funds, especially for start-ups. It is felt that these may be considered as ‘deposits’ and resultantly, the compliance requirements for raising these would apply to ‘start-ups’ which would make it difficult to use these instruments to raise capital. The Committee, therefore, recommended that convertible notes, convertible into equity or repayable within 5 years from the date of issue, if issued to a person with a minimum investment size of Rupees Twenty Five lakh brought in a single tranche, should not be treated as deposits under the Companies Act, 2013. Further, safeguards to prevent misuse may be finalised in consultation with RBI.

Amount brought in by promoters

5.6 As per Rule 2(1)(c)(xiii) of the Deposits Rules, the amount brought in by promoters of a company pursuant to stipulation by a lending institution or a bank is excluded from the definition of deposit subject to certain conditions. It was suggested that unsecured loans brought by existing or new promoters coupled with repayment of some existing unsecured loans to fulfil the requirement of “quasi equity” stipulated by lending institution or bank may be treated as “exempt deposits”. The Committee felt that the present exemption is adequately worded and therefore recommended that no further exemption or change is required.

Issues relating to section 462 exemption vis-a-vis Deposits Rules

5.7 Private companies have been exempted from complying with the provisions of Section 73(2)(a) to (e), while accepting deposits from its members, provided that the deposit monies shall not exceed 100 percent of aggregate of paid up share capital and free reserves. It has been suggested that some of the Deposits Rules are not in harmony with such exemptions provided. The exemptions given under Section 462 of the Act would override the Deposit Rules. However, the Committee recommended that, with a view to provide clarity, the Deposit Rules may be amended to align with exemptions/modifications provided for private companies.

Advertisement/Circular in the form of advertisement

5.8 Rule 4(1) of the Deposits Rules requires every company intending to invite deposits from its members to issue a circular to all members, and in addition gives flexibility to publish the circular in a newspaper. It was suggested that it should not be mandatory to send individual circulars to members of the company under Rule 4(1) if an advertisement has been issued by a company for acceptance of deposits from public and also when the same is placed on the website of the company. The Committee agreed with the suggestion and recommended that the suggested option may be provided by amendment in the Rules.

Definition of deposit expanded to exempt bona fide business advances, institutional investments, listed debentures and convertible notes with safeguards. Proposed amendments narrow the definition of deposit by excluding bona fide business advances evidenced by contract (even if outstanding beyond the current 365 day limit) with disclosure; extending exclusion horizons for compulsorily convertible debentures and excluding amounts received directly from regulated institutional investors; permitting exclusion for listed unsecured debentures; exempting certain convertible notes issued to qualifying investors subject to safeguards; retaining existing promoter contribution exemptions; aligning Rules with private company statutory exemptions; and allowing advertisement/website in lieu of individual member circulars.