In the 1980s and 1990s, accepting fixed deposits was a significant and popular source of
short-term funding for companies due to higher interest rates (e.g., 15% when banks paid
10-12%) and less procedural rigor compared to banks34. Brokers even offered upfront cash
incentives of 2-3.5% to attract depositors, making the effective cost of funds very high for
companies (20-22%)4. However, this period was marked by rampant defaults by several
companies, leading deposits to lose their charm4.
A landmark case, the Sharda Chit Fund scam, significantly influenced the stringent drafting
of the Companies Act 2013's deposit provisions4.... In this case, over INR 25,000 crores were
raised from small investors, primarily farmers and fishermen, with promises of up to 100%
interest through schemes disguised as chit funds, debentures, and redeemable preference
bonds7. This case, along with others, highlighted the need for stricter regulations to protect
investors' "hard money"9. The Companies Act 2013 aimed to prevent companies from easily
raising money, even for genuine businesses, by expanding the definition of deposit7.
Definition and Distinction of Deposits2...
Under the Companies Act 2013, the definition of "deposit" has been significantly expanded
beyond formally invited monies to include "all monies being mobilized by companies if not
specifically exempted under the deposit rules"210. This means any inflow of funds, unless
specifically excluded, could potentially qualify as a deposit510. The previous Companies Act
1956 definition included "deposit" and "loan" or "borrowed funds," while the 2013 Act
added "any other form" meaning any similar or colourable transaction10.
Key distinctions between a deposit and a loan:
•Deposit: It is generally a wider term that may include loans. The depositor is the prime
mover, seeking to invest money (e.g., for interest)11. The terms and conditions of
acceptance are primarily determined by the corporate or bank, not the depositor12.
•Loan: There is a basic need of the borrower to call for a loan. The terms and conditions are
stipulated by the loan provider (e.g., bank or financial institution)1112.
For financial reporting purposes, a company must disclose whether the amount received is a
deposit or a loan, and both parties to the contract must agree on its nature11.
Exempted Categories of Deposits12...
The rules specify certain categories of amounts that are excluded from the definition of
deposits, provided they meet specific conditions1012:
•Amounts from Government: Any amount received from the Central or State Government,
local authority, or statutory authority, or for which the government guarantees
repayment12.
•Foreign Parties: Amounts received from foreign parties under FEMA (Foreign Exchange
Management Act)1220.
•Banks & Financial Institutions: Any loan or facility from banking companies, State Bank of
India, its subsidiaries, corporate banks, or insurance companies12.
•Commercial Paper/RBI Instruments: Amounts received against the issue of commercial
paper or other instruments issued by the Reserve Bank of India1213.
•Other Companies: Any amount received from any other 'company' (as defined by
Companies Act 2013/1956) is an exempted deposit, irrespective of the nature of
receipt13.... This is a crucial exemption16.
•Subscription of Securities:
◦Share application money pending allotment or advance towards allotment of shares:
Must be allotted within 60 days of receipt. If not, it must be refunded within 15 days of the
60-day period. Failure to refund by the 75th day means it is treated as a deposit from day
one, not just from the 75th day13.... ESOP scheme amounts are treated similarly13. Refunds
must be in cash, no adjustments13.
•Directors/Relatives of Directors:
◦Director: Can provide loans without a specific limit, provided they declare that the funds
are from their own sources and not borrowed funds1421. This must also be reported in the
board's report14.
◦Relative of Director: Can provide loans only to private companies, subject to the same
declaration14.
◦If a director is also a member and provides funds under a scheme inviting deposits from
members, the funds will be subject to member limits, unless the director is giving it in their
capacity as a director without an overarching scheme2125.
•Bonds and Debentures: Must be secured by a first charge or pari passu charge, or
compulsorily convertible to shares within 10 years, and their value should not exceed the
market value of assets (valued by a registered valuer)14. Unsecured and unlisted debentures
are generally not exempted, unless received from another company1423.
•Employee Security Deposits: Amounts received from employees as security deposits for
performance of a contract, stipulated in an employment agreement15.
•Interest-Free Amounts in Trust: Any interest-free amount received by a company to be
held in trust15.
•Advances for Goods/Services/Property: Advances for supply of goods or provision of
services must be appropriated within 365 days15.... Advances for immovable property or
capital goods are also exempted1524. If not appropriated, these amounts become deposits
from day one1620. Companies often make 11-month contracts to ensure advances are paid
back within the period to avoid this issue17.
•Other Advances: Advances for warranty/maintenance under contract, amounts allowed by
a sectoral regulator, or advances for publication subscriptions18.
•Promoter Contribution: Unsecured loans brought in by promoters as stipulated by
banks/institutions as part of funding arrangements18.
•Nidhi and Chit Fund Companies: Amounts raised by Nidhi and Chit Fund companies are
exempted, but must still be reported1819.
•Collective Investment Schemes: Amounts received under SEBI-regulated Collective
Investment Schemes19.
•Startup Companies: Amounts over INR 25 lakhs received from a single person in a single
tranche via convertible notes (debt convertible into equity within 10 years)19. These are
promising ventures, but small investments are not exempted19.
•SEBI Intermediaries: Amounts received from Alternative Investment Funds, Venture Capital
Funds, Infrastructure Real Estate, and Mutual Funds19. These are exempted but must be
reported in Form DPT319.
Practical Considerations for Exemptions:
•The nature of the transaction and intention of the parties are crucial. For example,
membership fees for a club are generally not deposits if they are revenue, refundable
without interest, and the club doesn't solicit public applications8.
•Always adopt a conservative interpretation of deposit rules26.
•For construction businesses, mobilised advances extending over 5 years are generally not
treated as deposits if linked to a specific project and documented as such, falling under the
"provision of services part of the contract" exemption2324.
Conditions for Acceptance of Deposits24...
Companies accepting deposits must adhere to strict conditions:
1.General Meeting Approval: Obtain consent of the company in a general meeting by way of
an ordinary or special resolution24....
2.Circular/Advertisement: Issue a circular (Form DPT-1) to members detailing financial
position, credit rating, and previous deposit information2429. This circular must be filed with
the RoC (Registrar of Companies) along with an auditor's certificate24.
3.Deposit Repayment Reserve (DRR): Create a DRR account and deposit at least 20% of the
deposits maturing in the following financial year on or before 30th April each year5.... This
account must be opened with a scheduled bank and funds strictly used only for deposit
repayment31.
4.Security Creation: If accepting secured deposits, a charge must be created on company
assets (excluding intangible assets) under Schedule 3, with the value of assets not less than
the deposit amount plus interest, valued by a registered valuer2429. The security cannot be
in the form of a pledge30.
5.Deposit Trustee: Appoint a deposit trustee before issuing the circular and obtain their
consent430. A trust deed must be executed 7 days prior to the circular issue30. The trustee
must be independent (not related to the company, its directors, KMP, or employees) and
protect depositors' interests30.
6.Repayment & Interest: Ensure repayment along with agreed interest24. Premature
repayment (after 6 months) may allow a reduced interest rate (1% less)3132.
7.Tenure: Minimum 6 months, maximum 36 months. Deposits for less than 6 months
(minimum 3 months) must not exceed 10% of share capital, free reserves, and securities
premium2733.
8.Credit Rating: Eligible companies must mandatorily obtain a credit rating annually,
reflecting their liquidity and net worth429. The copy must be submitted to the RoC29.
9.Joint Ownership: Deposits can be held jointly by a maximum of 3 persons2734.
10.Register of Deposits: Maintain a register (under Rule 14) with details of depositors,
nominees, deposit amounts, duration, interest rates, and security particulars. Entries must
be made within 7 days of receipt issuance and preserved for at least 8 years31.
11.Advertisement: For eligible companies, advertisements must be made in English and
vernacular languages32.
12.No Alterations: Once a circular is issued, no alterations can be made to its terms29.
Limits on Deposit Acceptance27...
The maximum limits for deposit acceptance vary by company type:
•Any Company (General): Cannot accept more than 35% of its aggregate share capital, free
reserves, and securities premium account2728.
•Private Companies / IFSC Public Companies: Can accept deposits up to 100% of their share
capital, free reserves, and securities premium account2728.
◦Startup Company: No maximum limit for deposits invited from members for the first 10
years from incorporation2728.
◦Specific Private Companies: No maximum limit if they meet three conditions:
1.
Not an associate or subsidiary of any other company27.
2.Borrowings not exceeding twice its paid-up share capital or INR 50 crore, whichever is
less28.
3.No default in repayment of borrowings at the time of accepting deposits28.
•Eligible Public Companies: Defined as public companies with a net worth of over INR 100
crores or turnover of INR 500 crores, and having prior consent from a general meeting28.
◦From Members: Cannot exceed 10% of share capital, free reserves, and securities
premium28.
◦From Public (other than members): Cannot exceed 25% of share capital, free reserves, and
securities premium28.
•Eligible Government Company: Limit is up to 35%28.
Form DPT3 - The "MRI of a Corporate"5...
Form DPT3 is a crucial annual return that every company (excluding NBFCs and banking
companies) must file with the RoC, disclosing all outstanding amounts as of 31st March,
including both deposits and exempted deposits5.... It is considered like an "MRI of a
corporate" by Mr. Sarma, as it requires extensive information:
•Total number of deposit holders (beginning and end of financial year)35.
•Amount existing, accepted, repaid, and outstanding35.
•Details of secured/unsecured deposits35.
•Deposits matured but not claimed or claimed but not paid35.
•Particulars of liquid assets and charges created35.
•Rule-wise breakdown of all exempted deposit balances (opening, additions, repayments,
closing)35.
The data provided in DPT3 is expected to be linked with financial statements, enabling the
RoC to perform data mining and identify non-compliance, leading to penalties5. Company
Secretaries and secretarial auditors must meticulously review DPT3 before filing, as any
oversight can lead to significant liabilities3536.
Penal Provisions and Consequences of Default24...
Defaulting on deposit repayment can have severe repercussions for the company and its
officers:
•Director Disqualification (Section 164(2)): If a company fails to repay deposits, its directors
can be disqualified from re-appointment in that company and from appointment in any
other company for 5 years33. This applies if the default continues for one year or more37.
•Restrictions on Company Activities:
◦The company cannot make any investments, loans, or provide guarantees until the default
is rectified33.
◦The company cannot declare dividends so long as the failure to repay deposits
continues3337.
•Class Actions (Section 245): Depositors (100 in number or a prescribed value) can jointly
apply to the Tribunal (NCLT) for orders against damages or losses and suitable action against
the company, directors, auditors, or expert advisors33.
•Damages for Fraud (Section 75): If deposits are accepted with an intent to defraud (i.e., no
intention to repay), every officer involved is held personally liable without limitation and can
be prosecuted under Section 4473738. Section 447 is stringent, involving imprisonment
from 6 months to 10 years and a fine up to three times the amount of fraud37.
•General Penalties (Section 76A): For any non-compliance with Sections 73 and 76
regarding deposits, the company must refund the deposit plus interest (18% penal
interest)3237. Additionally, fines can range from INR 1 crore to twice the deposit amount
(whichever is lower) and extend up to INR 10 crore37. Officers in default face imprisonment
up to 7 years and a fine from INR 25 lakhs to INR 2 crore37.
•Rule 21 Penalties: For failure to comply with other provisions of the rules where no specific
penalty is prescribed, the company and officers in default face a fine up to INR 5,000, with a
continuing offense fine of INR 500 per day38.
Company Secretaries are particularly vulnerable to these penalties as "officers in default"
and must be extremely cautious, ensuring proper compliances and due diligence3839.
Accounting and Taxation Aspects4041
•Accounting: Indian companies generally follow either Indian GAAP (Generally Accepted
Accounting Principles) or Ind AS 109 (Indian Accounting Standards) for financial
instruments.
◦Ind AS: Deposits are accounted for through fair value measurement. Initial recognition is at
fair value plus transaction costs, and subsequent measurement is at amortized cost40.
Interest expense is calculated based on the effective interest rate method on the fair
value40.
◦Indian GAAP: Follows the historical cost method. Initial recognition is at the historical cost
(amount received plus transaction costs). Interest expense is recorded as per the contractual
rate41.
•Taxation: Interest paid on deposits is a deductible expense under Section 36(1)(iii) of the
Income Tax Act 196141. Conversely, interest income from deposits made by a company in
other entities is taxable under "income from other sources"41.
Key Takeaways and Practical Advice2...
•Deposits are a ticklish and dangerous topic due to their complexity and potential for
severe non-compliance23.
•Communication with Accounts and Finance Departments is vital: The secretarial
department must instruct them on what should not be done or ensure advance notification
of transactions3.
•Be extremely careful with "Exempted Deposits": Ensure that any advance received for
goods/services is genuinely appropriated within 365 days; mere book entries for refunding
and re-accepting advances are not permissible1617. The money must physically go out and
come back through the banking system if contracts are designed for 11-month cycles17.
•No "cooling period" between repayment and acceptance of advances. The appropriation
must happen within the stipulated time43.
•Purpose of funds is crucial: The person providing the money must specify its purpose; the
company cannot unilaterally determine it2244.
•Regulators are stringent: The RoC is actively penalizing companies, and penalties can be up
to three times the maximum39.
•Role of Company Secretaries: As the compliance officer, the company secretary is often
held responsible as an "officer in default." They must understand the gravity of their role
and ensure proper compliances, especially when working with companies that are
overleveraging or whose promoters' intentions are unclear3839.
•Continuous learning: Company Secretaries should regularly read statutory standards,
guidance notes, and legal commentaries39. Relying solely on tools like ChatGPT without
critical human intelligence is risky842.
•Seek NCLT/RoC for Grievances: Depositors facing non-repayment should approach the
NCLT or RoC for resolution.
