A Critical Analysis of ‘Exempted Deposits’ and Related Disclosure Requirements
Gaurav N. Pingle (Practising Company Secretary)
With an objective of bringing in transparency and accountability, the Ministry of Corporate Affairs has introduced reporting of ‘deposits’ and ‘exempted deposits’ for certain companies. Based on analysis of statistical information, the Ministry observed that ‘exempted deposits’ were being misused by certain companies[1]. Accordingly, e-Form DPT – 3 was modified for reporting of ‘deposits’ and ‘exempted deposits’.
This article is an analysis of the definition of ‘deposit’ and ‘exempted deposits’ under Companies Act, 2013 and 1956, along with analysis of some unique transactions by companies.
Discussion on ‘Deposits’ under Cos. Act, 2013: Section 2(31) of the Companies Act, 2013 (‘the Act’) defines ‘deposit’ to include 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 RBI.
Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014 also defines ‘deposit’ to include any receipt of money by way of deposit or loan or in any other form, by a company, but does not include certain transactions (18 transactions, generally referred to as ‘exempted deposits’).
On the combined reading of section 2(31) of the Act and Deposit Rules, following are the essential features of the definition of ‘deposit’:
(i) The definition of deposit is an inclusive definition,
(ii) Loan received by a company is also a ‘deposit’,
(iii) ‘Any amount received by the company in any other form’ is subject to interpretation. In my view, the rule of ejusdem generis (meaning, things of the same kind or class rule) shall be applied for interpretation. Such rule of interpretation is applied when word or phrase in a statute of general meaning follows word or phrase of specific meaning. Therefore, ‘any receipt of money in any other form by a company’ shall be read in the context of ‘deposit’ or ‘loan’.
Discussion on ‘Deposits’ under Cos. Act, 1956: Under Companies Act, 1956, ‘deposit’ was defined in the Explanation appended to Section 58A as “For the purpose of this section, ‘deposit’ means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with RBI”. The definition under the erstwhile Companies Act was exhaustive in nature.
Understanding the meaning of ‘deposit’ under Companies Act, 2013 and 1956 is important as the ‘exempted deposits’ are ‘deposits’ by nature but are exempted from certain compliances under the Act. Also, for the purpose of filing e-Form DPT – 3 such distinction is relevant i.e. whether companies are required to report ‘exempted deposits’ accepted under Companies Act, 1956 (i.e. upto March 31, 2014)?
Discussion on ‘Exempted Deposits’ under Cos. Act, 1956 & Cos. Act, 2013: Under the Companies Act, 1956[2], there were only 11 transactions which were treated as ‘exempted deposits’. However under the Companies Act, 2013, there are 18 transactions which are treated as ‘exempted deposits’. Following are the additional transactions which are considered as ‘exempted deposits’ under Companies Act, 2013:
(i) Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by RBI;
(ii) Any amount accepted by Nidhi company u/s 406 of the Act,
(iii) Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982,
(iv) Any amount received by the company under any collective investment scheme in compliance with regulations framed by SEBI,
(v) An amount of Rs. 25 lacs or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue) in a single tranche, from a person;
(vi) Any amount received by a company from AIFs, Domestic VC Funds, InViTs, REITs and Mutual Funds registered with SEBI.
In certain cases, there are some additional riders to be complied with for acceptance of ‘exempted deposits’ under Companies Act, 2013 vis-à-vis Companies Act, 1956.
In relation to Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014, let’s discuss some unique transactions and their disclosure in e-Form DPT – 3:
(i) A company has borrowed funds from non-banking financial company: NBFC being a ‘company’, such transaction falls under ‘exempted deposits’ and shall be reported in e-Form DPT 3;
(ii) A company has received grants or subsidies from local authority or State Government or Industrial Development Corporation: The terms and conditions of the grants or subsidies shall be reviewed for determining whether the transaction falls under ‘deposits’ or ‘exempted deposits’ and shall be reported in e-Form DPT 3;
(iii) Indian subsidiary company has borrowed money under FEMA in the form of External Commercial Borrowings) from its parent company (which is incorporated outside India): Such transaction falls under ‘exempted deposits’ and shall be reported in e-Form DPT 3;
(iv) A company has availed inter-corporate loan facility from another company (none of the directors / shareholders are common): Such transaction falls under ‘exempted deposits’ and shall be reported in e-Form DPT 3;
(v) On March 20, 2019, a private company has offered equity shares on rights basis and entire share application money is collected by March 30, 2019. The equity shares are allotted on April 6, 2019: Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, shall be reported in e-Form DPT 3;
(vi) A private company has received money from director, however, such director has not given declaration that such money is not out of borrowed funds: For a private company, any amount received from director or relative of director is considered as ‘exempted deposits’, subject to the condition that such person gives a declaration that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others. Such declaration is an essential condition for treating the amount as ‘exempted deposit’. In this case, the private company has defaulted in compliance of the provisions of the Act;
(vii) A private company has received money from director’s relative, and such person has given declaration that such money is not out of borrowed funds: Under the Companies (Acceptance of Deposit) Rules, 2014, the amount is an ‘exempted deposit’ and shall be reported in e-Form DPT – 3;
(viii) A private company receives money from a person (who is a shareholder and director of the company): It is desirable to identify the capacity (i.e. as director or shareholder) in which such amount is received by the company. The limits and compliances are different for unsecured loan from director or shareholder to the company. In any case, the amount is an ‘exempted deposit’ and shall be reported in e-Form DPT – 3;
(ix) On September 5, 2018, a company has received an advance for supply of goods. The company has appropriated the necessary sum on December 31, 2018, however, invoice is not raised in this regard: Since the amount has been appropriated within a period of 365 days from the date of receipt of advance, such amount shall be reported as ‘exempted deposits’ in e-Form DPT – 3;
(x) On April 9, 2018, a company has received an advance for supply of goods. The company has appropriated the necessary sum on December 31, 2018, however, the goods are not delivered within a period of 365 days: Since the amount has been appropriated within a period of 365 days from the date of receipt of advance, such amount shall be reported as ‘exempted deposits’ in e-Form DPT – 3;
Reporting of ‘exempted deposits’: The newly introduced e-Form DPT – 3 can be filed for following purposes:
(i) One-time Return for disclosure of details of outstanding money or loan received by a company but not considered as deposits in terms of rule 2(1)(c) of Companies (Acceptance of Deposits) Rules, 2014,
(ii) Return of Deposit,
(iii) Particulars of transactions by a company not considered as deposit as per rule 2 (1) (c) of the Companies (Acceptance of Deposit) Rules, 2014,
(iv) Return of Deposit and Particulars of transactions by a company not considered as deposit.
Prior to the amendment to the Rules (i.e. Companies (Acceptance of Deposits) Amendment Rules, 2019, w.e.f. January 22, 2019), e-Form DPT – 3 was filed by companies as ‘Return of Deposits’. For such purpose, companies are required to mention object of the company, net worth (as per latest audited balance sheet), particular of deposits, particular of liquid assets, particular of charge, credit rating.
For reporting of the exempted deposits, private companies and public companies are required to report object of the company and net worth (as per latest audited balance sheet). Such information has no relevance for reporting of exempted deposits. These fields should have been omitted for reporting of exempted deposits.
The purpose of reporting exempted deposits (as it was recommended by the Committee to review the offences under the Act) is defeated taking into consideration the frequency of filing of e-Form DPT – 3 for ‘deposits’ and ‘exempted deposits’ for the same financial year. This issue could have been easily resolved by introducing separate e-Form for reporting of exempted deposits.