Prohibition on Acceptance of Deposits by Companies

5.1 Companies accepting deposits from their members or the public, are required to comply with the requirements of Section 73(2)(c) and 73(5), that is, of keeping an amount not less than fifteen percent of the amount of its deposits maturing during a financial year and the next financial year, deposited and kept in a scheduled bank in a separate bank account to be called as the deposit repayment reserve account. This account is not to be used by the company for any purpose other than the repayment of deposits. Private companies accepting deposits from their members are already exempted from this requirement. The Committee felt that though the provision was a safeguard for depositors, it would increase the cost of borrowing for the company as well as lock-up a high percentage of the borrowed sums. Accordingly, the requirement for the amount to be deposited and kept in a scheduled bank in a financial year should be changed to not less than twenty percent of the amount of deposits maturing during that financial year, which would mitigate the difficulties of companies, while continuing with reasonable safeguards for the depositors who have to receive money on maturity of their deposits.

5.2 The Committee has also noted that Section 73(2)(d) mandates a company accepting deposits to provide for deposit insurance in the manner and extent as is prescribed in Part 5 of the Companies (Acceptance of Deposits) Rules,2014. However, as insurance companies are not offering any products for covering company deposit default risks, this requirement was relaxed till 31/03/2016. MCA had also taken up this issue with Department of Financial Services (DFS) which stated that though an insurance company is not prevented by IRDA from devising an insurance policy to cover default risks, it is difficult to assess the risk and its likely exposure to liability as companies are not as tightly regulated as banks with particular reference to their financial efficiency and delivery of commitments. It was also noted by the Committee that as on date none of the insurance companies is offering such insurance products. Considering the above situation, the Committee felt that the provisions of Section 73(2)(d) along with relevant Rules be omitted.

5.3 On a related note, Section 73(2)(e) requires a certification from the company that no default has been committed in the repayment of deposits, accepted either before or after the commencement of the Act, or the payment of interest on such deposits. It was stated that this requirement was harsh on companies which might have defaulted due to reasons beyond their control, such as industry conditions at some point of time in the past, but repaid such deposits with earnest efforts thereafter. The Committee noted that imposing a lifelong ban for a default anytime in the past would be harsh. Therefore, it was recommended that the prohibition on accepting further deposits should apply indefinitely only to a company that had not rectified/made good earlier defaults. However, in case a company had made good an earlier default in the repayment of deposits and the payment of interest due thereon, then it should be allowed to accept further deposits after a period of five years from the date it repaid the earlier defaulting amounts with full disclosures.

5.4 The suggestion to allow private companies engaged in the infrastructure sector to take deposits from their individual members without any upper limit was considered. In this regard, the Committee agreed to recommend for allowing exemptions to such private companies from the upper limit, as promoters or their relatives or ‘Qualified Institutional Buyers’ (QIB), who had invested in the risk capital would already be aware of the business prospects of the company.

5.5 At present, private companies are permitted to accept deposits from their members’ deposits which amount shall not exceed 100% of their paid up capital and free reserves with relaxed compliance requirements. With a view to ease raising of funds for start-ups without additional compliance costs, the Committee recommended that limits with regard to raising of deposits from members for ‘Start-ups’ which are private companies may be removed for the first five years from their incorporation by using section 462 of the Act.

Repayment of deposits accepted before commencement of this Act

5.6 The Committee also deliberated upon the suggestion to incorporate, in the Act itself, provisions of Rule 19 of the Companies (Acceptance of Deposit) Rules, 2014, which allowed for deposits accepted under the Companies Act, 1956 to be repaid as per the original terms and conditions. The Committee recommended that the provisions of Rule 19 be provided in the Act.

Punishment for Contravention of Section 73 or Section 76

5.7 The Committee also deliberated on the suggestion for revisiting the provisions of Section 76A which provided that the defaulting company should, in addition to the repayment of the amount of deposit and the interest due, be punishable with fine which should not be less than Rupees One Crore, but which could extend to Rupees Ten Crore. The Committee recommended that the minimum fine be modified to Rupees One Crore, or twice the deposit accepted, whichever is lower, and the maximum amount be as already prescribed.

Deposit Reserve Requirement revised to reduce borrowing burden while preserving depositor safeguards and easing compliance for private companies. Proposed amendments change the deposit repayment reserve requirement to not less than twenty percent of deposits maturing in a financial year, recommend omission of the mandatory deposit insurance obligation due to absence of insurable products, limit indefinite bans on accepting deposits to companies that have not remedied past defaults while permitting rehabilitated companies to raise deposits after five years with disclosures, allow private infrastructure companies and start ups time limited exemptions from member deposit limits, incorporate repayment-as-original-terms for pre Act deposits into the Act, and modify minimum fines for deposit default while keeping the existing maximum.