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Corp Law Company Deposits
Corp Law Company Deposits
Corp Law Company Deposits
in
CORPORATE LAWS - I
Submitted By
Sachin Malhan
BLIG 757
3
Table of Contents
TABLE OF CASES 3
INTRODUCTION 4
The Coming into Vogue of Company Deposits
Thorns in the Side?
A Cause for Control
RESEARCH METHODOLOGY 6
WHAT CONSTITUTES A COMPANY DEPOSIT 7
What is a Deposit?
Constitution of “Public”
Loans and Deposits
Debentures and Deposits
Secured Deposits
DEPOSITS EXEMPT FROM THE REGULATORY FRAMEWORK 11
Status of Unclaimed Deposits
INVITATION OF DEPOSITS 13
INCORPORATION OF CREDIT-RATING IN DEPOSIT ADVERTISEMENTS
CRISIL Ratings
15
FINALISATION OF MATTERS RELATING TO ACCEPTANCE OF DEPOSITS
Limits on Amounts Invited for Acceptance
17
The FERA Factor
Penalty for Accepting Deposits in Excess of Limits
PAYMENT OF INTEREST 19
Penalties for Default
REMEDIES FOR REFUND OF DEPOSITS 20
Company Law Board
Writ Jurisdiction
THE CONTROVERSIAL RULE 3A 21
COMMERCIAL PAPERS 23
CONCLUSION 24
BIBLIOGRAPHY 26
4
Table of Cases
INTRODUCTION
1
Raghuraman, G., “ Company Deposits: Protection to Depositors”, (1990) 1 Comp LJ 109.
2
Ibid; Also see Majumdar, A.K., “Acceptance of Deposits by Companies”, 50 Taxman 254 (1990).
6
Thus though s.58A and the rules of 1975 ushered in an operative legal regime for
company deposits they left a fair bit to be desired in terms of dealing with the
consequences of default in repayment and in payment of interest. Successive
amendments in 1988 and in 1996 have remedied the situation to an extent by
invoking the control of the Company Law Board (as per the advice of the Sachar
Committee way back in 1978).
3
The Companies (Acceptance of Deposit) Rules, 1975 are a outcome of such an exercise of power.
4
Chandratre, K.R., Handbook on Company Deposits, Bharat Law House: New Delhi, 1994, p.4, 5.
7
Research Methodology
In this research paper the researcher has to strike a balance between the
procedural formalities and substantive intricacies of the legal regime of company
deposits. The law of company deposits spans not just one of the most exhaustive
sections in the Companies Act, 1956 in the shape of s.58A but also an entire set
of rules in the shape of the Companies (Acceptance of Deposit) Rules,1975. The
area is typically riddled with procedural formalities incorporated to safeguard the
interests of the public. There are substantial questions relating to the nature of
deposits, credit-rating trends and judicial attitudes towards constitutional
challenges to s.58A but an analysis of the regime entails an illustration of the
procedure.
Prior literature on this subject is restricted to reasons for the imposition of the
regime and instructions on how to go about the process of inviting deposits. As a
recourse a fair bit of statute analysis had to be undertaken by the researcher and
for a few issues reliance was placed purely on leading case law.
The method of research combined statute and case analysis wherever possible
with descriptive summarisation of necessary procedure to give the reader an idea
of the procedural depth of the subject.
In the opinion of the author this subject topic would make a suitable research
topic for a student undertaking a seminar.
What is a Deposit?
Section 58A offers no assistance in proffering an exhaustive definition of the term
“deposit”. According to the explanation deposit means any amount of money
borrowed by a company (but exclusive of exempt categories for the purposes of
s.58A). Rule 2(c) of the corresponding rules define a “depositor” as including any
person who has given a loan to a company. The best statutory definition is
proffered by the Reserve Bank of India Act, 1934 in which s.45-I(bb) states,
“deposit shall include, and shall be deemed always to have included, any money
received by a non-banking institution by way of deposit, or loan or in any other
form, but shall not include amounts raised, by way of share capital, or
contributed as capital by partners of the firm.”5
It is an action that establishes the relationship of debtor and creditor or borrower
and lender.6
Constitution of “Public”
Since the regulations under s.58A of the Companies Act apply to invitations to
the public to deposit the scope of the expression “public” assumes critical
importance. The contentious question here concerns the status of the employees
of the company. The Department of Company Affairs vide clarification No,8/48 of
1984 stated that;
1) Public included a section of the public as well;
2) Neither sub-section (1) nor sub-section (2) of s.58A excluded from it’s ambit
the employees of the company. Thus employees are to be taken as “public”.
Since s.58A is attracted only if the invitation or acceptance is from the public
deposits accepted from friends, relatives and associates are not affected
(employee excluded). In such application upon request from the prospective
depositor it must be made clear that the form cannot be made available to a third
person because then it would enter the public sphere for the purposes of the law.
5
Supra n.4 at 5.
6
Shanbhogue, K.V. and Ganesan, K., Guide to Company Deposits and Commercial Paper, 3rd Edn.,
Wadhwa: Nagpur, 1990, p.59.
9
The person making the deposit has no right to call back the deposit;
The deposit does not become a debt until the period for which the money is
deposited expires and
As a consequence the creditor has no right to recover the money before the
deposit period concludes.
The Supreme Court has repeatedly held that whether a transaction is a loan or a
deposit will depend on the surrounding circumstances, the relationship and
character of the transaction and the manner in which the parties treated the
transaction.9
7
Chakraborti, A M, Taxman's Corporate Law, Taxman Allied Services (P) Ltd.: New Delhi, 1995, p.227.
8
AIR 1956 SC 12
9
Ram Janki Devi v. Juggilal Kamlapat, AIR 1971 SC 2551; Durga Prasad Mandelia v. Registrar, (1987)
61 Comp. Cas 479; cited from Chandratre, K.R., Handbook on Company Deposits, Bharat Law House:
New Delhi, 1994, p.7.
10
not;
A debenture can be perpetual (s.120) while the very nature of deposits
There are also several statutory differences that set apart debenture from
loans.11
Secured Deposits
Normally deposits are unsecured but there is no bar under the rules to securing
of deposits though it is interesting to note that it was this unsecured nature of
deposits that spurred the imposition of the legal regime in the 1960s. However,
as per s.125 the charge created by securing the deposits has to be registered
with the Registrar of Companies.
Where security is to be given, a mention must be made in the advertisement
seeking deposits.12 Since under the Capital Issues (Control) Act, 194713 all issue
of capital involving securities has to be made with the consent of the Controller of
Capital Issues the same has to be obtained in the case of the secured deposits.
10
Ittiavira Thomas v. Joseph Tile Works Ltd., AIR 1957 TLC 6.
11
The Companies Act permits the re-issue of redeemable debentures (s.121) while a deposit can only be
renewed in accordance with rules made by the Central Government (s.58A (1)). The Act requires the
maintenance of register of debenture holders (s.152), issue of debenture certificates (s.113) and the calling
of meetings of debenture holder (s.170). None of these requirements apply to deposits.
12
A specimen statement of such a security notification is as follows;
“ The deposits are secured. The security is charge by way of hypothecation of the current assets of the
company. This charge is subject to the charges already created or which may hereafter be created in
favour of banks and financial institution. The charge has been registered with the Registrar of Companies,
……..pursuant to the provisions of Section 125 of the Companies Act, 1956.” Obtained from Shabhogue,
K.V., op.cit..
13
11
12
For the purposes of the Rules certain categories of borrowings are excluded.
Therefore, none of the restrictions specified in the rules specified in the Rules
(limitation on amount of deposits, terms of deposit, interest ceiling etc.) are
applicable to these exempt deposits. Therefore exempt deposits can be accepted
freely as usual.14
The following deposits are exempt;15
Amounts Received from the Government16
Amounts Received from Foreign Sources17
Loans from Banks18
Loans from Institutions19
Deposits by Wholly Owned Government Financial Companies
Notified Financial Companies/ Public Financial Institutions
Amount Received from another Company (Inter-Company Deposits)20
Amount Received from Employee by way of Security Deposit21
Amount Received from Agents22
Advances against Orders (for supply of goods etc.)23
Subscriptions to Securities24
Calls in Advance of Shares25
Trust Moneys26
Money in Transit27
Amount Received from Directors28
Shareholders Money29
14
They, are still obviously subject to other restrictions such as articles of association and memorandum of
association.
15
Supra n.6 at 78-85.
16
Rule 2(b)(i).
17
Rule 2(b)(i).
18
Rule 2(b)(ii).
19
Rule 2(b)(iii).
20
Rule 2(b)(iv).
21
Rule 2(b)(v).
22
Rule 2(b)(vi).
23
Rule 2(b)(vi).
24
Rule 2(b)(vii).
25
Rule 2(b)(vii).
26
Rule 2(b)(viii).
27
Rule 2(b)(viii).
28
Rule 2(b)(ix).
29
Rule 2(b)(ix).
13
30
Rule 2(b)(x).
31
Rule 2(b)(x).
32
Rule 2(b)(xi).
33
Explanation in Rule 2(b).
34
Circular No. 8/13 of 1986 c.f. Supra n.6 at 92.
14
Invitation of Deposits
Before a company allows or invites any other person to invite deposits, on its
behalf, it must issue an advertisement including therein a statement illustrative of
the financial position of the company and other particulars prescribed under the
rules vide Section 58A(2). Of course such requirement need not be fulfilled by
“exempt” deposits.
The advertisement must contain a reference to the condition subject to which
deposits shall be accepted and the date on which it was approved by the
directors (as per rule 4(2)) and the particulars to be mandatorily included are:
It is important to note that the above list of what can be included in the
advertisement under S.58A. It is merely indicative of the mandatory
requirements. A company may include any other statement, not amounting to
mis-statement under S.58B, which inspires confidence in the creditworthiness
and investor-friendliness of the advertising company. It is for this purpose that
such as CRISIL ratings are frequently exercised. Besides the above listed
mandatory requirements the company must also include information
35
Rule 4(2)(h) of the Rules.
36
Rule 4(2) of the Rules.
15
37
For instance in the case of a secured deposit a statement expressing that intention must be made. Such a
statement assumes mandatory nature.
38
S.58B of the Companies Act, 1956.
16
CRISIL Ratings
CRISIL’s prime objective is to rate debt obligations of Indian companies. It’s
ratings provide a guide to the investors as to the risk of timely payment of interest
and principal on a particular debt instrument. Besides rating deposit schemes
CRISIL also rates debentures, short-term instruments and preference shares.
A CRISIL rating relates specifically to a particular debt instrument and is not a
rating for the company as a whole. The rating is not a recommendation to invest
or not to invest but merely to help the prospective investor make the correct
investment choice.
CRISIL adopts a two-pronged approach in considering the credit-worthiness of
the borrowing company;
Business Analysis
Financial Analysis
39
Vijia Kumar, N., “Company Deposits – From window-dressing to credit rating”, 5 Sebi & Corporate
Laws 73 (1995).
17
40
Other factors to be considered depends on type of company.
41
Obtained from Supra n.6 at 96.
18
42
Rule 3
43
See supra n.6 at 99.
44
See next sub-chapter on how this is arrived at.
45
Rule 3(1)(2); As from April 1st 1981, only the following categories of short term deposits can be
accepted;
(1) deposits against unsecured creditors;
(2) deposits from shareholders;
(3) deposits guaranteed by a director of the company or by it’s managing agent at the relevant time.
19
46
Explanation to Rule 3.
47
Supra n.6 at 99.
48
The term free reserves is defined under s.373 explanation (b) as being “those reserves which as per the
latest audited balance sheet of the company, are free for distribution as dividend and shall include balance
to the credit of securities premium account but shall not include share application money.”
49
For the purpose of this section non-resident interest means participation in the share capital or entitlement
to the distributable profits of a company by any individual or company resident outside India or any
company not incorporated under any law in force in India or any branch of such company whether resident
outside India or not.
50
Vijay Kumar Gupta v. Eagle Paint & Pigment Industries P. Ltd., (1997) 13 SCL 179 (CLB).
20
Payment of Interest
51
Supra n.6 at 193.
21
Writ Jurisdiction
In State of West Bengal v. Union of India54, the Calcutta High Court allowed a
writ petition filed in the interest of depositors by way of public interest litigation
and observed that the mere existence of an alternative remedy did not deter
effective writ jurisdiction. It said that since the remedy must not be merely
alternative but also efficacious an “alternative remedy” defeating writ jurisdiction
cannot be said to be there in the Companies Act which incorporates insufficient
remedies.
52
Supra n.7 at 74
53
[1991] 6 CLA 152 (CLB).
54
AIR 1996 Cal 181.
22
In Modi Spinning & Weaving Mills Company Ltd. v. Union of India55, the validity
of rule 3-A was first questioned. The matter was re-agitated in Ahmedabad
Manufacturing and Calico Printing Co. Ltd. v. Union of India56 and then finally
settled by the Supreme Court in Delhi Cloth and General Mills Co. Ltd. v. Union
of India57. Since the issues were common they are addressed together.
The suspect rule provides that every company accepting deposits should
maintain some liquid assets by depositing or investing [10%]58 of the amount
collected by way of public deposits in a bank or in securities of the Central
Government.
In response to the first question the Supreme Court held that Rule 3A cannot be
said to have no nexus to the objects sought to be achieved by s.58A since the
rule extends protection to the depositor in accordance with the purpose of s.58A.
It said that s.58A was designed to introduce some measure of control over non-
banking companies and rule 3A was one such condition that made would make
available a small portion of the deposit available to the depositor (if the company
failed in it’s obligation). It said that an implicit part of “acceptance” was the
condition that repayment of the deposit would be made and made at the time of
the maturity. Thus, it could not be said that rule 3A bore no relation to the theme
of s.58a and was ultra vires the same.
In response to the second contention the Supreme Court said that requiring the
company to invest or deposit 10% of it’s deposits maturing in a year with
55
AIR 1979 All. 221.
56
(1983) 53 Comp. Cas. 904.
57
(1983) 54 Comp. Cas. 674.
58
Now the figure is 15% vide the Companies (Acceptance of Deposits) Amendment Rules, 1992.
23
59
Nathan, Joseph, “Commercial Papers: Salient Feature and Tax Implications”, 51 Taxmann 170 (1990).
60
Notification No.FERA 85/89-RB of 9th October, 1989.
25
In Conclusion
61
(1992) 73 Comp Cas 190 (CLB).
62
Chandrachud, Y.V. and Dugar, S.M., Ramaiya’s Companies Act, 14th Edn., Wadhwa: Nagpur, 1998,
p.529.
26
However, since the transition from a Bill to an Act is as uncertain as it gets all we
can do is cross our fingers.
63
See chapter on Credit Ratings.
27
BIBLIOGRAPHY
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