Section 74 and 75 of new Companies Act classify any default in repayment of deposits accepted before the enforcement of Act, as liable to be termed as fraud under section 447 if it can be proved that the intent behind accepting such deposits was to defraud depositors
The Companies Act, 2013 (Act, 2013) and its allied rules have re-enforced what used to be the starting lines in every question paper – “go through every line carefully….”. With a hurried attempt to meet the enforcement date of 1 April 2014 the Ministry of Corporate Affairs (MCA) at the last minute has come out with the final draft of rules. The allied rules carry such myriad provisions that it has become necessary to peruse each and every line to understand the intent and probable impact of the same.
One such provision is a seemingly innocuous provision of Explanation (a) to Rule 2 of Companies (Acceptance of Deposits) Rules, 2014. It reads as any amount:
“received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever.”
Key features of gold purchase schemes
Such schemes promise the last installment as free or waived after the payment of all the previous installments. That is, the investor pays for say the first 11 installments and the company shall then pay the 12th installment. It is up to the investor to purchase any jewellery at the prevailing price from the company only. The amount accumulated can thus be used only to purchase in kind and is not refundable in cash.
Can such gold purchase schemes be treated as advances?
Surely not. Advances are always against some pre-identified goods or service. The question of determining the goods and services at a later date does not arise at all and neither does the element of “returns” does not arise at all. Thus, even if it is argued that the gold purchase schemes are in the nature of advances, the argument can easily be struck down as there can be no promise or offer to give returns in case of advances.
Were such gold purchase schemes regulated so far?
- Nothing but pooling in of funds
- entrustment of money to someone such that the investors are not the ones who are managing their own money
- Although it may be argued by companies floating such gold jewellery schemes that there is not sharing of returns in such cases as the amount received from each investor is earmarked, yet this may not be enough to rule out that gold purchase schemes are in effect Collective Investment Schemes as defined in section 11AA of SEBI Act, 1992.
Thus, even if regulators have washed their hands off in deciding the true character of such gold purchase schemes, the fact remains that the investment of investors was at large risk as there was nothing stopping such companies from ending their operations overnight and walking away with the hard earned money.
How does Act, 2013 come into the fore?
The explanation reproduced above shows how gold purchase schemes from 1 April 2014 shall be taken to deposits. The reproduced text shows that where any amount:
- is received by a company whether in installments or other wise
- the receipt is towards some promise or offer to give returns
- such returns may be in cash or in kind
- returns will be received at the end of a particular period
- the accounting for such amounts may be done in any manner
Then the same shall be taken to be a deemed deposit and to all such deposits the elaborate provisions under Deposit Rules, 2014 shall apply.
But the question arises that even if such schemes are covered under the definition of deposit would they remain legal? The answer is to this is no and here is why. Under Rule 3(6) of Companies (Acceptance of Deposits) Rules, 2014, no company can accept deposit, which carries a rate of interest more than what has been prescribed by RBI for deposit accepting non-banking financial companies (NBFCs).
We have drawn the internal rate of return (IRR) of such schemes considering a monthly deposit of Rs1,000:
As per
information available on RBI’s site, the present rate of interest on deposits cannot be more than 12.5% at present. This clearly shows that the present jewellery schemes may actually be promising returns under a scheme which is illegal. Thus, such schemes seem to be a complete impossibility.
Additionally, companies offering such deposit schemes will also have to comply with requirements like creation of deposit redemption reserve, appointment of deposit trustee, create deposit insurance among others.
In the run up to the enforcement of the Act, 2013 and usual year end pressures, companies and their secretarial departments will also have to take note of such provisions. It remains to be seen if companies have already taken note that such schemes are no longer unregulated. To conclude as the position remains now such schemes are deposits from 1 April 2014. What is even more important is to take note of the provisions of section 74 and 75 of Act, 2013 which classify any default in repayment of deposits accepted before the enforcement of Act, 2013 as liable under section 447 which pertains to “fraud” if it can be proved that the intent behind accepting such deposits was to defraud depositors.
(
Nivedita Shankar is a Company Secretary and works as senior associate at Vinod Kothari & Company)
The demo table is excellent, but there is a small error. The scheme is that you contribute say @ Rs.1000 pm for 11 months, the company pays the same amount in the 12th month, and then after completion of 1 year you get Rs.12,000 worth of gold article. The IRR calculation should be 1000 (11 times), then Rs. 0, and then -12000 which calculates to 14.88%. In the table the 12th row should be blank, i.e., you have not contributed, and a 13th row should be added to with -12,000 (you received)= Now the IRR is 14.88% pa. Try this in an Excel sheet and see for yourself. The concept is you are paying at the beginning of each month, for 11 months and receiving at the END of 12th month i.e., beginning of 13th month, which is exactly 1 year of start. Thanks !
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http://www.youtube.com/watch?v=y-T1tFhGB...
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