The regulators have burnt their fingers in the past on the subject matter; the more talked-about examples being the Sahara group, the more recent Viswapriya (India) Limited case and other fly by night companies which used lacunae in the corporate ‘deposits’ to create innovative structures that eventually harmed hapless depositors.

The deposit norms under the Companies Act, 2013 (2013 Act) attempts to plug loopholes and restore depositors’ faith in the corporate systems. It works this formula by first, capturing more monetary receipts under the scope of ‘deposits’, second, mandating timely repayment of deposits taken under the Companies Act, 1956 (1956 Act) and third, requiring deposit-taking corporates to conform to rigorous compliance measures.

This article explores the changes that have significant implications.

‘Deposits’ Get a Wider Connotation

Companies cannot now take subscription advance or application money against shares (Subscription Amounts) with zero accountability to subscribers year on year; these Subscription Amounts need to either be appropriated towards allotment of shares within 60 days or refunded within 15 days from such 60 days, to escape the ‘deposits’ net. Amounts received by private companies from relatives of a director or its member will no longer fall outside the definition of ‘deposits’. There is now no blanket exemption for security deposits received from employees, the 2013 Act clarifies that this exemption is possible only if the deposit amount does not exceed the annual salary of the employee and is non-interest bearing. Additional conditions now also need to be satisfied by companies taking advances in course of or for business purposes. To elaborate, some of these conditions are: (i) appropriation of advance received against supply of goods or provision of services, within 365 days of receipt of advance; (ii) ensuring adjustment of advance received in consideration of property, against such property. Further, advances that become refundable because the company did not have the necessary approvals / permission to fulfil its obligations, will also be construed as ‘deposits’. Companies may be slightly more wary in viewing secured optionally convertible bonds / debentures and compulsorily convertible bonds / debentures (‘not’ convertible within 5 years) as preferred investment instruments given their now qualifying as ‘deposits’. These instruments along with bonds also need to be secured not by a mere mortgagee on immovable property as provided under the 1956 Act but by a first charge or a charge ranking pari passu with the first charge over assets specified in the 2013 Act. Importantly, optionally convertible debentures (irrespective of whether secured or not) unlike under the 1956 Act, will now be construed as ‘deposits’; this has visibly disturbed deposit-taking companies. As regards amounts received in trust by a company, now, only ‘non-interest bearing amounts’ are excluded from ‘deposits’.

Earlier Outstanding Deposits Have it Tough

Now, deposits outstanding under the 1956 Act have to be repaid within 1 year from 1 April 2014 or from the date on which such payments are due, whichever is earlier (Repayment Requirement). However, companies that have accepted deposits from the public under the 1956 Act may be exempt from this Repayment Requirement if they comply with requirements under the 2013 Act and Rules – while this exemption appears to give some breathing room, the stringent norms (as elaborated below) under the new Act may make the exemption meaningless.

Stringent Compliance Norms for Fresh Deposits

Now, if public companies want to take deposits from the public, they need to have a net worth exceeding Rs 100 crore (significantly higher than the earlier Rs 1 crore threshold) and additionally a turnover exceeding Rs 500 crore (such companies being Eligible Companies). Such Eligible Companies also need to obtain a credit rating every year from a recognised credit rating agency and get their members’ approval by a special resolution.

Companies, whether proposing to take deposits from the public (i.e only Eligible Companies) or from members (any company including Eligible Companies) also have to conform to stringent new norms. For starters, the interest rate offered cannot be higher than the maximum rate of interest or brokerage prescribed by RBI for accepting deposits by NBFCs. Further, (i) companies taking deposits from members and (ii) Eligible Companies taking deposits from the public which fall within the limits prescribed under the 2013 Act, have to get their members’ approval by an ordinary resolution. While companies always needed to issue an advertisement with deposit details, now the requirement is a circular to the depositors that also needs to be uploaded on its website with significantly more details than required under the 1956 Act (e.g, reasons or objects for raising deposits, details of the credit rating, the extent of deposit insurance obtained by the company and particulars of the charge created). Under the 1956 Act, companies had the flexibility to invest deposits received in certain specified account / securities – these included investment in an account with a scheduled bank or unencumbered securities of the central or state government; however, now, the only option available is investment in a ‘deposit repayment reserve account’ with a scheduled bank and such investment cannot fall below 15% (under the 1956 Act, this was 10%).

One other rigid requirement is that the deposit-taking companies concerned must enter into a deposit insurance contract with the depositor. Such a deposit insurance contract should provide: (i) for principal and interest on deposit not exceeding Rs 20,000, the entire amount should be repaid under such contract; and (ii) for sums exceeding the same, a minimum amount of Rs 20,000 should be paid to the depositor. The company should bear the insurance premium and not pass it on to the depositor. In addition to a deposit insurance, companies taking secured deposits should also create a charge over its assets (the assets are as prescribed under Schedule III of the 2013 Act and exclude intangible assets) (Charged Assets). In a nutshell, for secured deposits, the depositor should be protected completely by ensuring that the total value of the deposit insurance and Charged Assets (taking their market value into consideration) is always either equal to or greater than the deposit and interest. Further, companies need to appoint trustees for their secured depositors.


The new provision in the 2013 Act may help depositors regain confidence in the ‘deposits’ system after the unhappy experience of the past. We will, however, have to only wait and watch whether these safeguards deter corporates in taking the deposit route for mobilisation of funds.