India: Deposits: Better But Bitter!

Last Updated: 27 October 2014
Article by PSA


The Companies Act, 2013 ("2013 Act") has replaced the erstwhile Companies Act, 1956 ("1956 Act"). Sections 73 to 76 under Chapter V of the 2013 Act, along with the Companies (Acceptance of Deposits) Rules, 2014 ("Deposit Rules") provide the statutory framework and have significantly raised the benchmark for companies that wish to invite or accept deposits from the public. Following its notification, certain issues relating to "deposits" have caused concern and seem to have become bone of contention for companies (both public1 and private). Companies have always been attracted towards financing through deposits and, at times, problems have arisen in the context of such deposits. In order to control the malpractices, the 2013 Act has introduced strict provisions under the deposit regime.

This newsletter describes selective changes introduced by the 2013 Act which companies will need to adhere to.

1. Acceptance of deposits

Per the 2013 Act and Deposit Rules, the eligibility criterion for a company to accept deposits is pegged at its minimum net worth or turnover. The definition of "deposit" under the new Act includes "any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India." 2A public company having a net worth of at least INR 1,000 million (about $16.2 million3) or turnover of at least INR 5,000 million (about $81.4 million) would be eligible to accept deposits from persons other than its members.4 Enhancement of investor protection measures under the new Act has led to certain additions5 in the framework for accepting deposits. Private companies can accept deposits only from its members, unlike the earlier law where they could do so from directors and their relatives also. Such restriction on acceptance of deposits do not apply to certain types of companies which include banking, non-banking financial companies and6 housing finance7 or a company specified by the Central Government, after consultation with the Reserve Bank of India.

2. Key amendments under the 2013 Act

2.1 Scope of "deposits"

The definition of "deposit" is different under the old and the new law. The 2013 Act has substantially modified it and has brought financing arrangements under the scope of deposits. Many items of loans and other receipts that were not deposits earlier are now treated as such. The following will be construed as deposits pursuant to the Deposit Rules:

  • Loan from members;
  • Loan from a director if he has not given loan out of his own funds;
  • Loan from relatives of directors;
  • Share application money pending allotment for more than 60 days;
  • Secured debentures and compulsorily convertible debentures convertible within five years from the date of issue.

Thus, this wide new definition has resulted in share application monies, certain types of debentures, security deposit, advance against goods/property, loans from shareholders being treated as deposit under various circumstances. Optionally convertible debentures will no longer be excluded. Further, the Deposit Rules provide that bonds or debentures must be secured by a first charge over the assets of the company in order to qualify for exclusion. Thus, companies will be unable to issue unsecured optionally convertible debentures as that would render them as deposits, if and when converted into equity. Any amount received in the course of, or for the purposes of, the business of the company is excluded from the definition of deposits. The new Act puts certain additional conditions8 on such amount for it to be excluded such as:

  • Amount received as an advance for supplying goods or provisions of services;
  • Amounts received as advance for property under an agreement or arrangement;
  • Amount received as security deposit for the performance of the contract for supply of goods or provisions of services;
  • Amounts received as advance under long term projects for supply of capital goods.

Under the old law, compliance requirements with the applicable rules were not stringent and, therefore, companies had a greater flexibility. But, the new law and the Deposit Rules impose greater obligations on qualifying companies who will accept deposits. It will also be necessary to assess whether payments will come within the ambit of the exclusions of the definition which will prevent them from accepting certain types of payments.

2.2 Public Deposits & Repayment

Rule 19 of Deposit Rules deals with the requirement with respect to repayment of deposits accepted or invited under the previous Act. These must be repaid in a year, i.e. till March 2015. Further, companies are required to file a statement of all unpaid deposits within three months from the commencement of the new Act or from the date on which such payments are due. If deposits are not repaid by that time then it has penal implications in the nature of fine and imprisonment.9 The new Act has sought to execute a break from the earlier regime, by requiring all deposits accepted before the commencement of the 2013 Act to be refunded within a specified time frame. However, the repayment provisions appear to be somewhat ambiguous. On one hand, section 74 provides a mandatory requirement that deposits accepted before April 1, 2014 and which remain unpaid must be repaid within a predetermined period, yet there is no clarity whether "deposits" refers to the definition under the earlier law or the new one. This creates a grey area and is open to interpretation until clarified by the concerned authorities.

2.3. Deposit Insurance

The new regime provides for safeguarding the interest of the depositors by virtue of deposit insurance. Under the new Act deposit insurance, creation of reserve account and credit ratings must be procured for deposit thereby increasing the compliance costs for companies. For deposits accepted under the previous Act, there will be an obligation on a company to file a statement with the Registrar of Companies with details about all the deposits and the interest due thereon.10 The deposit insurance contract should specifically provide that in case company defaults in repayment of principal amount and interest thereon, the depositor shall be entitled to the repayment of principal amount of deposits plus interest thereon by the insurer up to the aggregate monetary ceiling as per the contract. Thus, it makes raising finance through deposits costly.

It is also mandatory for companies to provide, inter alia, additional information to the members for acceptance of deposits. Such information would include particulars of the charge created or to be created for securing such deposits (if any). The 2013 Act, unlike the previous Act, requires that the summary of the financial position of the company for the last three years must be provided to members. Thus, the concept of deposit insurance has strengthened the mechanism of investor protection in the interest of the depositors and must be welcomed.


It is quite evident that the 2013 Act along with Deposit Rules has ushered in some significant changes with regard to securities application money, compulsory credit rating, optionally convertible debentures, creation of security and investor protection. The additional compliance requirements will make companies spend more and thus is less cost effective. Obligation to maintain deposit insurance is a positive move in the direction of investors' protection. Keeping in sync with the overall theme of enhanced corporate governance of India Inc, the deposit provisions have become stricter and their violation will attract serious penal consequences (including fine and/or imprisonment). Ambiguities with regard to repayment have caused anxiety in the investor market. Hopefully, clarification by circulars will put an end to them.


1 Section 2(71) of the 2013 Act defines "public company". It is one which has seven shareholders and a minimum paid-up capital of INR 500,000 (about $8,175) and is not necessarily listed

2 Section 2(31) of the 2013 Act

3 1$ = INR 61 approximately

4 Section 76 of the 2013 Act

5 The 2013 Act requires detailed reporting and description of financial position of the company. It also asks for extent of the deposit insurance and credit rating of the company

6 Section 45I of Reserve Bank of India Act, 1934 defines this as: (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme of arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify

7 A housing finance company must be registered with the National Housing Bank established under the National Housing Bank Act, 1987

8 Rule 2(1)(xii) of Deposit Rules

9 Section 74 of the 2013 Act specifies fine of atleast INR 10 million (about $164,000) to INR 100 million (about $1.63 million). In addition to the fine on the company, fine may also be imposed on officers in default who could be punished with imprisonment up to seven years or with fine of atleast INR 2.5 million (about $ 40,875) to INR 20 million (about $327,000), or with both

10 Section 74 of the 2013 Act

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Nishith Desai Associates
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Nishith Desai Associates
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions