The prohibition on public companies accepting deposits from the public is a cornerstone of the regulatory framework designed to protect investors and maintain financial stability. Under the Companies Act, 2013, this prohibition ensures that only companies meeting specific legal requirements can raise funds from the public, thereby reducing the risks to individual investors. In this article, we’ll explore the legal framework governing this prohibition, the types of deposits covered, exceptions to the rule, and the consequences of non-compliance.
Overview of the Companies Act, 2013 on Public Deposits
The Companies Act, 2013, under its Chapter V – “Acceptance of Deposits by Companies,” establishes comprehensive rules on how companies can raise funds. Sections such as Sections 73-76A specifically outline the conditions, restrictions, and obligations of companies in regard to deposit acceptance. Public companies, in particular, are subject to strict regulations to protect public funds.
Key Objectives of the Prohibition
- Investor Protection: The rules prevent companies from taking deposits in a way that could jeopardize public funds.
- Transparency: By restricting public companies’ ability to accept deposits freely, these regulations promote transparency in fundraising activities.
- Regulatory Compliance: Establishing a clear framework for accepting deposits ensures that companies operate within legally established norms.
Understanding “Deposit” under the Companies Act, 2013
Definition of Deposits
Under the Companies (Acceptance of Deposits) Rules, 2014, “deposit” is defined as any receipt of money by way of a loan or in any other form by a company. However, specific types of transactions are exempted from this definition, which we’ll discuss later.
Categories of Deposits
- Public Deposits: Deposits accepted from the public or entities other than shareholders, generally by non-banking financial institutions (NBFIs).
- Private Deposits: Deposits from shareholders or directors under certain conditions.
Exempted Transactions
Certain financial transactions are not classified as deposits under the Act. These include:
- Loans from Banks and Financial Institutions
- Inter-Corporate Loans and Advances
- Security Deposits from Employees
- Advances for Supply of Goods or Services
Prohibition on Public Deposit Acceptance by Certain Companies (Section 73)
Under Section 73 of the Companies Act, companies are explicitly restricted from accepting deposits from the public unless they meet specific eligibility criteria.
Eligibility Criteria
Only companies registered as Public Limited Companies can accept public deposits, and they must fulfill the following:
- Shareholder Approval: Obtain approval from shareholders through a general meeting resolution.
- Registrar of Companies (RoC) Compliance: Submit all forms and statements prescribed by the RoC.
- Deposit Insurance: Provide adequate insurance coverage for the deposits received, ensuring investor protection.
- Credit Rating: Obtain a minimum credit rating from an approved agency as a measure of financial stability.
Restrictions and Conditions
Public companies not meeting these criteria are entirely prohibited from accepting deposits. Even eligible companies must strictly adhere to the prescribed rules, failing which they can face serious penalties.
Section 76: Public Deposits by Eligible Companies
Section 76 of the Act specifically allows certain public companies to accept deposits from the public. To do so, companies must:
- Secure Compliance with Section 73: Meet all requirements listed under Section 73.
- Seek Additional Permissions: Secure approvals from the Securities and Exchange Board of India (SEBI) if the company is a listed entity.
Additionally, such companies are restricted by the limit they can accept, which is determined by their net worth and past compliance records.
Exceptions to Prohibition
Certain companies are granted exceptions to accept public deposits under specific conditions, such as:
- Non-Banking Financial Companies (NBFCs): Licensed NBFCs can accept public deposits but remain under strict Reserve Bank of India (RBI) regulations.
- Housing Finance Companies: These entities may accept deposits within prescribed limits and must follow specific guidelines issued by RBI and NHB (National Housing Bank).
Types of Companies Restricted from Accepting Public Deposits
- Private Limited Companies: Except in rare cases where they have a special exemption, private limited companies are prohibited from accepting public deposits.
- Unlisted Public Companies: These companies are also prohibited unless they meet the rigorous conditions outlined in the Act.
- Startups and New Companies: Companies with limited operational history and financial stability are generally restricted due to higher risks.
Deposit Compliance Requirements for Eligible Companies
For companies eligible to accept public deposits, the following requirements are mandatory:
1. Issue of Deposit Advertisement (Rule 4)
Eligible companies must issue an advertisement in a prominent national newspaper detailing the terms, interest rate, and other conditions of deposit acceptance. This step ensures transparency and informed consent from depositors.
2. Creation of Deposit Repayment Reserve Account (Section 73(2)(C))
Companies are required to allocate at least 20% of the amount of deposits maturing in the following financial year into a separate Deposit Repayment Reserve Account. This reserve ensures that companies have the liquidity to repay deposits as they come due.
3. Provision of Deposit Insurance
Deposit insurance is essential for protecting depositor interests. Companies must provide insurance on all deposits, which would cover the principal and interest in case of a default.
4. Submission of Annual Returns
Eligible companies must file annual returns with the Registrar of Companies (RoC) detailing the status of deposits, repayments, and compliance with the Act’s requirements. This return must also disclose any defaults in repayment, creating transparency and accountability.
Penalties for Non-Compliance
The Companies Act imposes stringent penalties on companies that violate the prohibition on accepting public deposits. Key penalties include:
Fines and Financial Penalties
- For the Company: Financial penalties ranging from INR 1 crore to INR 10 crore, depending on the severity of the offense.
- For Officers in Default: Individual officers responsible for the offense can face fines or imprisonment for up to 7 years.
Consequences for Fraudulent Acceptance of Deposits
If a company is found to have fraudulently obtained deposits, it faces heightened scrutiny and may be subject to additional penalties, including being barred from the securities market.
Repayment Obligations
Companies in violation are required to immediately repay all unlawfully accepted deposits with interest as determined by the court. Failure to do so can result in winding-up proceedings against the company.
Significance of Prohibition on Public Deposits
1. Protecting Investor Interests
The prohibition primarily exists to protect public investors, especially those who may lack the expertise to assess company risk. By restricting deposit acceptance, only financially sound and compliant companies can access public funds.
2. Reducing Systemic Risks
A broad prohibition on deposit acceptance by non-compliant companies helps reduce systemic risk in the financial system. Companies with insufficient financial stability are less likely to cause market disruptions if they cannot access public funds.
3. Enhancing Corporate Accountability
The prohibition mandates that companies engaging with public investors comply with strict regulations, making them accountable for their actions and ensuring transparency in their financial operations.
Comparison with International Norms
Countries like the United States and United Kingdom have similar regulations prohibiting public companies from freely accepting deposits unless they comply with financial and legal obligations. This aligns with international best practices aimed at investor protection and financial market stability.
The prohibition on public deposits under the Companies Act, 2013 serves as a critical safeguard for the interests of public investors, maintaining stability in the financial system. By outlining stringent criteria and penalties for non-compliance, this framework ensures that only financially stable and responsible companies can raise public funds.
For companies, compliance with these rules isn’t just a legal obligation; it is a commitment to transparency, accountability, and the safeguarding of investor trust. As corporate governance norms continue to evolve, adhering to deposit regulations remains essential for building and maintaining a reputable and resilient business.