LOANS AND DEPOSITS APPLICABLE PROVISIONS OF COMPANIES ACT, 2013

1. LOANS AND DEPOSITS APPLICABLE PROVISIONS OF COMPANIES ACT, 2013 By CA. Prakash Wohra

2. DEFINITIONS

3. RELATED PARTY: • RELATED PARTY: (Sect. 2 (76) “related party”, with reference to a company, means— (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private company in which a director or manager is a member or director; (v) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent. of its paid- up share capital; (vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any company which is— (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix) such other person as may be prescribed;

4. RELATIVES: (Section 2 (77) ‘‘relative’’, with reference to any person, means any one who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such the following manner, namely:- (1) Father: Provided that the term “Father” includes step-father. (2) Mother: Provided that the term “Mother” includes the step- mother. (3) Son: Provided that the term “Son” includes the step-son. (4) Son’s wife. (5) Daughter. (6) Daughter’s husband. (7) Brother: Provided that the term “Brother” includes the step- brother; (8) Sister: Provided that the term “Sister” includes the step- sister.

5. RELATIVES: (Old Section 6) Meaning of “relative” A person shall be deemed to be a relative of another if, and only if,- (a) they are members of a Hindu undivided family; or (b) they are husband and wife; or (c) the one is related to the other in the manner indicated in Schedule IA as under: • (List of Relative) • 1. Father • 2. Mother (including step-mother) • 3. Son (including step-son) • 4. Son’s wife • 5. Daughter (including step-daughter) • 6. Father’s father • 7. Father’s mother • 8. Mother’s mother • 9. Mother’s father • 10. Son’s son • 11. Son’s son’s wife • 12. Son’s daughter • 13. Son’s daughter’s husband • 14. Daughter’s husband • 15. Daughter’s son • 16. Daughter’s son’s wife • 17. Daughter’s daughter • 18. Daughter’s daughter’s husband • 19. Brother (including step-brother) • 20. Brother’s wife • 21. Sister (including step sister) • 22. Sister’s husband From the above we find that the definitions of relative under new companies act, 2014 has been restricted to the persons in ascending and descending order with brother and sisters only. Whereas, in old provisions of Companies Act, 1956, it was more large and extensive

6. ACCEPTANCE OF DEPOSITS: (Section 73 ) • (1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided in Chapter V: • (2) A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, subject to the fulfillment of certain conditions, namely:— circulars, deposit not less than 15% in separate bank account , deposit insurance , certificate regarding not commitment of any default, providing security, if any. filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular; deposit repayment reserve account etc. • Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include any amount received– Cont……

7. From the Central /State Government or a State Legislature, local or any other statutory authority. ; • From foreign Governments, • From foreign or international banks, • From multilateral financial institutions or • From foreign Governments owned development financial institutions etc.; • From any banking company or • From institution notified by the Central Government, or • From a co-operative bank ; • From Public Financial Institutions; • From issue of commercial paper or • From any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India; • From any other company; (Inter Corporate Deposits) Cont…..

8. subscription to any securities, including share application money or advance towards allotment of securities pending allotment, provided the allotment is madewithin sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is refunded to the subscribers within fifteen days from the date of completion of sixty days. • From a director of the company • From the issue of bonds or debentures • From an employee of the company not exceeding annual salary. • From any non-interest bearing amount received or held in trust • in the course of, or for the purposes of, the business of the company • From the promoters by way of unsecured loan as per stipulation of lending financial institution or a bank. • by a Nidhi company in accordance with the rules made under section 406 of the Act.

9. Repayment of deposits etc. accepted before commencement of this Act. (Sec. 74) • (1) Where in respect of any deposit accepted by a company before the commencement of this Act, the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter, the company shall— • (a) file, within a period of three months from such commencement or from the date on which such payments, are due, with the Registrar a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayment.; and • (b) repay within one year from such commencement or from the date on which such payments are due, whichever is earlier. • (2) The Tribunal may on an application made by the company, after considering the financial condition of the company allow further time as considered reasonable to the company to repay the deposit. • 3) If a company fails to comply with the above it shall, in addition to the payment of deposit and the interest due, be punishable with fine of not less than one crore rupees but which may extend to ten crore rupees and every officer of the company who is in default shall be punishable with imprisonment upto seven years or with fine of not less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.

10. Filling of Documents, Forms with ROC. (Rules 16,19 and 20) • 16. Every company to which these rules apply, shall on or before the 30th day of June, of every year, file with the Registrar, a return in Form DPT-3 along with the fee as provided in Companies (Registration Offices and Fees) Rules, 2014 and furnish the information contained therein as on the 31st day of March of that year duly audited by the auditor of the company. • 19. Applicability of sections 73 and 74 to eligible companies.- It is hereby clarified that in case of a company which had accepted or invited public deposits under the relevant provisions of the Companies Act, 1956 and rules made under that Act (hereinafter known as “Earlier Deposits”) and has been repaying such deposits and interest thereon in accordance with such provisions, the provisions of clause (b) of sub-section (1) of section 74 of the Act shall be deemed to have been complied with if the company complies with requirements under the Act and these rules and continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposit in accordance with the terms and conditions and period of such Earlier Deposits and in compliance with the requirements under the Act and these rules; • 20. Statement regarding deposits existing as on the date of commencement of the Act shall be in Form DPT-4.

11. ACCEPTANCE OF DEPOSITS FROM PUBLIC BY CERTAIN COMPANIES: (Sec. 76) • (1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe: • Provided that such a company shall be required to obtain the rating (including its net worth, liquidity and ability to pay its deposits on due date) from a recognized credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits: • Provided further that every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

12. TERMS AND CONDITIONS OF ACCEPTANCE OF DEPOSITS BY COMPANIES- • On and from the commencement of these rules,— No company referred to in sub-section (2) of section 73 and no eligible company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than six months or more than thirty-six months from the date of acceptance or renewal of such deposit: Provided that a company may, for the purpose of meeting any of its short-term requirements of funds, accept or renew such deposits for repayment earlier than six months from the date of deposit or renewal, as the case may be, subject to the condition that- (a) such deposits shall not exceed ten per cent. of the aggregate of the paid up share capital and free reserves of the company, and (b) such deposits are repayable not earlier than three months from the deposits or renewal thereof.

13. For inviting deposits from its members or other public following requirements needs to be fulfilled: a. Advertisementsor circulars by registered post includingspeed post or by electronic mode in Form DPT-1- b. an advertisement in Form DPT-1 for the purpose in English language in an English newspaper and in vernacular language in one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated. c. Every company inviting deposits from the public shall upload a copy of the circular on its website, if any. d. enter into a contract for providing deposit insurance at least thirty days before the issue of circular or advertisement or at least thirty days before the date of renewal, as the case may be. e. Creation of security. f. Appointment of trustee for depositors. g. Meeting of depositors h. Maintenance of liquid assets and creation of deposit repayment reserve account.- i. Maintaining of registers of deposits. j. Return of deposits to be filed with the Registrar

14. PUNISHMENT FOR CONTRAVENTION- If any company referred to in sub-section (2) of section 73 or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first day during which the contravention continues.

15. DEPOSITS V/S. LOANS

16. From the above details following terms emerges which clears the above contention: • Public deposits for which certain terms and conditions are applicable. • Secured or unsecured loans from banks, financial institutions etc. • Loan against commercial paper or any other instruments. • Loan from another Company i.e. inter corporate deposits. • amount received towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment provided the allotment is madewithin sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is refunded to the subscribers within fifteen days from the date of completion of sixty days. • Amount received from a person who, at the time of the receipt of the amount, was a director of the company: • Amount received from an employee of the company not exceeding his annual salary. Cont…….

17. Amount received in the course of, or for the purposes of, the business of the companyprovided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance. • Advance received in connection with consideration for property under an agreement or arrangement; • Security deposit for the performance of the contract for supply of goods or provision of services; • Advance received under long term projects for supply of capital goods. • Amount brought in by the promoters of the company by way of unsecured loan in the stipulation of any lending financial institution or a bank. This exemption shall be available only till the loans of financial institution or bank are repaid and not thereafter; • Under the new act, even private company has to seek permission from members in generalmeeting before accepting such loans or deposits. No such approval was required under old Companies Act, 1956. • Earlier, the above provisions were mainly applicable to Public Limited Companies only. Now all these are made applicable to private companies also.

18. PROBLEMS WILL ARISE IN FOLLOWING CASES: • Where family has sufficient owned funds and do not require any financial assistance. • Where out of total family members including HUFs only two or three persons are directors. • Where old share application money kept for long duration or at least for more than 60 days. • Business advance for more than 365 days. Even genuine advance for goods having manufacturing cycle of more than 365 days. • Even financial assistance obtained but fully repaid shortly. • Advance security deposit of employee kept with the company but he or she leaves the company and such deposit is not yet refunded.

19. CASE STUDY

20. A family consist of 16 members i.e. 1. The family having net owned funds of Rs. 100.00 lacs starts business in pvt. Limited company. 2. All these members including HUFs are shareholders. 3. There are only two directors of the Company v.i.z. Father and elder son A. 4. Directors have net owned funds of Rs. 25.00 lacs only. 5. Under the current scenario, they need Rs. 75.00 lacs to run the business which their family members, who happens to be shareholders also, can made available to them. 6. Unfortunately they can not do so, because they are not directors of the company. 7. Even directors also can not borrow such money from them in their individual capacity for further bringing the same in to the company. Because there is restriction of borrowed funds also. Thus the Company is forced to take financial assistance from bank despite having own money in their pocket. This is against the law of f natural justice but for whom?

21. LOANS TO DIRECTORS/ SHAREHOLDERS AND THEIR RELATIVES (Section 185-Effective from12th September, 2013 )

22. RESTRICTIONS: • No company shall directly or indirectly advance any loan, including any loan represented by book debt, to any of its director or to any other person in whom the director is interested. • The expressions “to any of its director or to any other person in whom the director is interested” is also defined as under: (a) Any director od a lending company or of a company which is its holding company; or any partner or relative of any such director; (b) Any firm in which any such director or relative is a partner; (c) Any private Company of which any such director is a director or member; (It means inter corporate deposits within group as well.) (d) Any body corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director or by two or more such directors, together or (e) Any body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the board or any director or directors of the lending company. (f) This covers guarantees also. It means not only loans but corporate guarantees are also covered.

23. PENALTIES AND PROSECUTION: (a) Minimum fine of Rs. 5.00 lacs (Maximum up to Rs. 25.00 lacs) to the Company. (b) Minimum fine of Rs. 5.00 lacs (Maximum up to Rs. 25.00 lacs) or imprisonment up to 6 months or both to all such directors. • CAUTION: (a) It is to be noted that existing loans on the date of applicability of new provisions shall not be covered but any addition or renewal will be covered. (b) Similarly any outstanding corporate guarantee will also not be covered. However any fresh guarantee or renewal of such old guarantee will be subject to new provisions and are prohibited.

24. Thanks………..