Invitation and accepting deposits from the public

Section 58A of the companies Act 1956, was introduced for the first time by the amendment act, 1974, by which the central government was given power to prescribe the limits. The conditions subject to which deposits may be accepted by a company from the public or from its members.

Applicability

These rules apply to inviting and accepting deposits by non-financial industrial companies.

Company with net owned fund less than Rs.1 Crore

By clause(e) added to rule 3(1) vide notification, it is stated that no company with net owned fund of less than Rs.1 crore can invite public deposits.

(1) investments of such company shares of all other non-banking financial companies

(i) subsidiaries of such company

In view of the amendment made to acceptance of deposits rules, 1975 before the board of directors of a company decides to invite deposits, it has to be checked whether the company has net-owned funds of not less than Rs.1 crore as per its latest audited balance sheet within the meaning of section 45.

In terms of section 372(11) of the act, namely :

(i) if two companies have the same Managing Director or manager.

(ii) if the majority of directors of one constitute within six months preceding a majority of the directors of the other.

(iii) if not less than one-third voting power in the two companies is held by the same individual or body corporate.

(iv) if the holding company of the one is under the same management as the other.

(v) if one or more directors together with their relatives hold a majority of the shares in two companies, the two companies will be deemed to come under the same group.

Meaning of deposit under companies deposit rules

A deposit means any deposit of money with a public limited company any money borrowed by a company.

The deposit shall not be repayable earlier than six months or more than 36 months from date of acceptance or renewal.

But as an exception to (3) above deposits can be accepted repayable earlier than six months but not earlier than three months for meeting short-term requirement of funds subject to specified condition.

Deposits by one company to another (not being private limited company) and deposits from other specified in rule 2(b) are not deposits under the rules.

A private limited company cannot accept deposits from the public other than deposits from a director or relative or director or member. The deposits from a director or his relative or member by a private limited company do not come under the rules.

The deposits under the rules will carry interest not exceeding the maximum rate prescribed by the RBI under the Non-Banking Financial Companies on their public deposits.

What are not deposits

Moneys borrowed by a company in the following circumstances will not come under the above rules.

(i) Borrowings from Government – rule 2(b)

Any amount borrowed from the central or state government or any amount guaranteed by a government or any amount received from a local authority.

(ii) From a foreign source- rule 2(b)

Any amount from a foreign government or a foreign citizen or authority or person.

(iii) Bank loans

Any loan received from a scheduled bank or from a cooperative bank.

(iv) Loan from financial institutions

(v) Inter-company-loans

Loans received from another company

(vi) Security deposit

Any amount received from an employee of the company as security deposit.

(vii) Advance from purchasing/selling agent or advance against orders for suppliers

Trust money

Any amount received in trust or in transit.

Amount received by a private limited company

Any amount received from a person who, at the time of receipt of the amount, was a director or relative of director or members of a private limited company.

It may be noted that where a director or member (both) in a private limited ceases to be as such during the duration of the deposit, it appears to be fair to presume that such deposits should continue to enjoy the exemption till maturity only and cannot renewed as exempted deposit.

Departments View

However, the department is reported to be of the view that if a shareholder depositor ceases to be a member, the deposit made by him cannot be treated as exempted deposit.

Limits Applicable to a government company

A government company can accept or renew deposits if the amount of such deposits does not exceed 35% of its paid-up capital and free reserves.The above limit also includes any short-term deposits accepted by a government company up to 10% of its paid-up capital and free reserves.

Invitation Deposits may be even for less than six months

For the purpose of meeting any short-term requirements for funds, a company is allowed to accept or renew deposits against unsecured debentures or from shareholders or against directors guarantee, which may be repayable after three months from the date of such deposits or renewal thereof.

Deposits in joint names

Deposits may be accepted in join names not more than three. It is advisable in such a case to ask the depositors to state whether the basis will be “Either or Survivor”, “Number one or Survivor” or ” Anyone or Survivor”.

Payments where deposits in joint names

To avoid confusion the company should state under “terms and conditions” that in the case of joint deposits, the company shall pay the interest and make repayment to the person named first in the application unless otherwise desired.

Rate of interest

In terms of rules, the rate of interest payable by a company on public deposits shall not exceed the maximum rate of interest prescribed by the RBI that the NBFC can pay on their deposits.

Brokerage

The brokerage that may be paid by a company to brokers for procuring deposits cannot exceed the following limits :

(a) 1% for deposits up to one year

(b) 1.5% for deposits for more than one year and up to two years.

(c) 2% of the deposits for a period exceeding two years.

Precondition for accepting deposits

Where a non-financial industrial public company proposes to invite and accept deposits from the public, it will first issue an advertisement in a leading newspaper and which the company registration office is located.