Analysis of exempted deposits under Companies Act, 2013

Introduction

A company might not be taking deposits according to the meaning of deposits in common parlance, however, the way deposits have been defined in the Companies Act, 2013 (“Act”), those transactions would possibly tantamount to deposits. Here arises a need of a thorough interpretation of whether a particular transaction is deposit or not. In this article, the author analyzes what is deposit and what is not a deposit (commonly known as exempted deposits).

What is a deposit

Section 2(31) of the Act read with Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014 (‘Rules’) defines ‘deposit’ to include:

• any receipt of money
• by way of deposit or loan or in any other form, by a company

It becomes clear from the term ‘money’ that receipt of goods or services by the company shall not be treated as deposits. Deposits only covers monetary transactions i.e., receipt and return of money only.

What is NOT a deposit

Rule 2(1)(c) of the Act specifically mentions that following transactions (generally referred to as ‘exempted deposits’) are not deposits:

1. Money received from Government or any other source whose repayment is guaranteed by the Government or money received from local or statutory authority.
2. Money received from foreign source, foreign Governments, banks, bodies corporate and foreign citizens.
3. Loan from banks or Public Financial Institutions or Insurance Companies.
4. Issue of commercial paper or any other instruments.
5. Amount received from any other company (Inter-corporate borrowings)

[Analysis:

• The term here used is “company”, therefore, money received from a Limited Liability Partnership or a partnership firm may fall under the ambit of the definition of deposits considering other factual circumstances.
• Inter-corporate borrowings are not governed by the provisions of deposits; however, Section 179 (Powers of Board) and Section 180 (Restrictions on Powers of Board) must be complied by the borrowing company while taking a loan]

6. Amount received and held towards subscription to any securities

• Including share application money or advance towards allotment of securities pending allotment
• Allotment to be done within 60 days from receipt of money or advance
• If allotment is not done and the amount is not refunded within 15 days from the completion of sixty days, such amount shall be treated as a deposit.

[Analysis:

• In case of issue of securities, Section 42 (Private Placement) and Section 62 (Further Issue of Share Capital) also need to be complied which provide their own timeline for allotment of securities.
• The money must be refunded in case of non-allotment and shall not be allowed to be adjusted against any other purpose. Example: A Company after accepting share application money of Rs. 1 Lac fails to allot the shares in 60 days to Mr. Investor. The Company provided its services equivalent to Rs. 1 Lac to Mr. Investor within 15 days instead of refunding the money. In this case, Rs. 1 Lac is still in the bank account of the Company and the services provided to Mr. Investor will not tantamount to refund. Thus, such money shall become deposit.]

7. Loan from director of the company or a relative of the director of the private company

• Declaration that money is not given out of borrowed funds shall be taken and details of money so accepted shall be disclosed in the Board’s report.

[Analysis: The person must be director of the company as on the date on which loan was granted. – Example: The director retired after granting loan to the company. Will the loan be treated as deposit for the remaining tenure? No, the loan will still be treated as exempted deposit because as on the date of loan the person was the director of the Company.

– Example: A director took a personal loan from the bank and couldn’t use it completely. The remaining amount of loan was given to the company. This amount shall be treated as deposit because the amount has been borrowed by the director.]

8. (i) Issue of secured debentures (first charge or charge ranking pari passu on tangible assets) or

(ii) debentures compulsorily convertible (CCD) into shares of the company within 10 years or

(iii) listed unsecured non-convertible debentures (NCD).

[Analysis: The exemption is not provided to optionally convertible debentures (OCD) unless they are 100% secured.

Examples:

1. Company issues unsecured Compulsorily Convertible Debentures (CCD) convertible within 10 years. – Exempted Deposits
2. Company issues unsecured Optionally Convertible Debentures (OCD) convertible within 10 years – Deposits
3. Company issues unsecured Optionally Convertible Debentures (OCD) to another company convertible within 10 years – Exempted Deposits because it will be regarded as Inter-corporate borrowings]

9. Non-interest-bearing security deposit received from an employee of the company not exceeding his annual salary under a contract of employment with the company

[Example: An employee enters into a bond equivalent to his 3 months’ salary with a company @ 1% interest – it will be treated as Deposit because it consists of interest]

10. Any non-interest-bearing amount received and held in trust

[Analysis: Amount which is being held in trust by a trustee (company) on behalf of other cannot be used by the Trustee. Hence when the trustee is not allowed to utilize that money there’s no question of calling it a deposit.

Example: A company receives money from its key employees for a trust created for the benefit of its employees. In this case employees are the beneficiaries. Such money will not be treated as Deposit]

11. Amount received in the course of the business of the company

• Advance for supply of goods or provision of services
  • Advance is appropriated against supply of goods or provision of services within 365 days from the date of acceptance of such advance
  • In case of any advance is subject matter of any legal proceedings, the said time limit of 365 days shall not apply.
  • If the amount becomes refundable, it shall be treated as deemed deposits on the expiry of fifteen days from the date they become due for refund.

[Analysis: Appropriation of money within 365 days is of essence because if the same is not appropriated against supply of goods or services it is merely amount kept for financing the ordinary activities of the company and thus become a deposit. However, there is a rider between actually ‘supplying’ and ‘utilizing’ within 365 days.

Example 1: If an advance is received against supply of a unique furniture which shall be delivered within 24 months, such advance must not be kept idle for general business activities but shall be utilized for making the said furniture. In this case even if the tenure of supply extends 365 days, it is still exempted deposit.

Example 2: The company took advance for goods and does not receives a necessary statutory approval for manufacturing the goods. In this case there’s no legal proceeding and the amount shall be treated as deposit in case it is not refunded within 15 days from the date it become due for refund]

• Advance received in connection with consideration for immovable property

[Analysis: There is no time of limit 365 days in this case. Example: A real estate company receives customer advance and fails to deliver the property. It shall refund the advance within 15 days from the date it became due for refund. Otherwise, it shall be treated as Deposit]

• Security deposit for the performance of the contract for supply of goods or provision of services;
• Advance received under long term projects for supply of capital goods except properties.
• Advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less.

[Example: The company takes advance and provides lifetime warranty for its product – It shall be treated as deposit]

• Advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government
• Advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications

12. Unsecured loan by the promoters subject to fulfillment of the following conditions, namely:-

• (a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
• (b) the loan is provided by the promoters themselves or by their relatives or by both; and
• (c) It shall not be treated as deposit only till the loans of financial institution or bank are repaid and not thereafter.

[Example: The Bank imposed a condition that it will grant loan to the company only if the promoter also grants 10% of the loan to the Company. Now the tenure of loan from bank has come to end. Will the loan from promoter be now treated as deposit?

Ans: Yes. The promoter granted the loan to the Company due the stipulation imposed by bank and since the tenure of loan from bank is over, the loan from promoter shall be treated as deposit.]

13. Amount accepted by a Nidhi company subject to certain conditions.
14. Amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982
15. Amount received under any collective investment scheme
16. Amount of 25 lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within 10 years from the date of issue in a single tranche, from a person.
17. Amount received from Alternate Investment Funds, Domestic Venture Capital Funds [Infrastructure Investment Trusts, Real Estate Investment Trusts and Mutual Funds registered with the Securities and Exchange Board of India.