MCA Wants Companies To Declare Unpaid Non-deposits without Revealing Its Intention
A recent amendment, applicable with immediate effect, to the Companies (Acceptance of Deposits) Rules, 2014, requires companies to report certain amounts which are technically not categorised as ‘deposits’ under Rule 2(1)(c) of the Rules issued earlier in 2014. The ministry of corporate affairs (MCA) notification
prescribing amendments in the Companies (Acceptance of Deposits) Rules 2014 is applicable from 22 January 2019. Undoubtedly, the amendments are of much significance. However, what remained unrevealed is the intent behind this move.
As there is no declaration of the intent behind such a reporting requirement, what the ministry may gain from such reporting remains a secret. In the recent past also, the registrars of different jurisdictions have been circulating notices under Section 206 of Companies Act (CA) seeking detailed information related to financial transactions from various companies. The intent for such information also was not being mentioned in those notices. To what extent the registrars were successful in obtaining the required details through those notices is not known. Probably, by making the new reporting requirements a part of the law might help them in getting the relevant information on a regular basis at one place.
These amounts cover such items as bank loans, advance from customers, loans from group entities, non-convertible debentures (NCDs), compulsory convertible debenture (CCDs), shares, share warrants, and commercial papers, which are very common in day-to-day business, irrespective of their size and status and had, hence, been excluded in the original Rules from the term ‘deposits’. As per the new reporting requirements, the companies will have to disclose details of all these transactions even though these are not deposits.
Further, the amendments require reporting of the details of outstanding sums of receipt of money not considered as deposit as per the definition for the period starting from 1 April 2014 to the date of enforcement of the amendments. Evidently, this reporting has to be of the outstanding amounts lying with the company. Therefore, say for example, if the company had accepted money from another company as a loan in the year 2014 which has already been repaid in 2017, it will not require reporting.
What do these amendments talk about?
The amendments require reporting of the following by the companies with the registrar:
1. A one-time return which will give the details of the outstanding receipt of money or loan which have not been considered as deposits as per Rule 2(1)(c) of the Rules. For this, the period of such receipt of money or loan has to be considered from 1 April 2014 till the date of publication of the notification in the gazette, i.e., 22 January 2019 and which are outstanding as on the said date. The reporting has to be done within 90 days of the said publication.
2. A periodic return which will give the details of particulars of transactions which are not considered as deposits as per Rule 2(1)(c) of the Rules within 30th June of every year containing details as on 31st March.
Which companies will get hit by the amendments?
Seemingly, the amendments will hit almost all companies irrespective of the status thereof, i.e., public or private, as it is almost impossible to not have any receipt of money which will not fall under the list given under Rule 2(1)(c). However, the same Rules excludes a government company from the reporting requirement.
The banking and non-banking financial companies (NBFCs) are not required to observe the compliance of the provisions related to the acceptance of deposits in terms of the proviso to Section 73(1) of CA, 13.
Furthermore, apart from these two categories, Rule 1(3) of the aforesaid Rules exempts a housing finance company (HFC) from the applicability of the Rules. Though the amendments prescribe reporting requirements for every company other than a government company, since the Parent Provisions are not applicable to these companies, the amendments shall also not apply to them.
The Central government is empowered to specify other companies to whom the provisions of Chapter V shall not apply though no specification in this regard has been brought in till date.
The parent provisions
Section 2(31) of CA, 13 defines the term ‘deposit’ in an inclusive manner which provides that any receipt of money by way of deposit or loan by a company shall be termed as deposit. An extension to this definition has been provided in Rule 2(1)(c). Further, Sections 73 to 76A of CA, 13 contain the provisions relating to acceptance of deposits from members by private companies and from persons other than members by public companies and the procedural requirements for the same have been prescribed by the ministry through the Rules. Therefore, the reporting requirement comes from the Rules.
Rule 16 of the existing set of Rules requires filing of the return of deposits (e- form DPT-3) within 30th June every year by the companies accepting deposits.
Apparently, till date, the reporting requirement was applicable only to those companies which have accepted money considered as deposits as per the definition. Therefore, the reporting by other companies was not required. However, the amendment is seemingly intending to include those other companies too within its purview.
Which transactions are enlisted in Rule 2(1)(c)?
Rule 2(1)(c) defines the term ‘deposit’ in an exclusive manner and enlists 19 transactions which are not treated as deposits. Below is the list of the items that are excluded from the term ‘deposit’ subject to the conditions/ exceptions mentioned thereunder-
a. Amount received from Central government, state government etc;
b. Amount received from foreign governments/ banks etc;
c. Amount received as loan from banks, banking companies etc;
d. Amount received as loan from private finance initiatives (PFIs), any regional financial institutions or insurance companies or scheduled banks;
e. Amount raised through issuance of commercial paper;
f. Inter- corporate deposits;
g. Amount received as subscription money for securities pending allotment;
h. Amount received from directors/ relative of directors in case of a private company;
i. Amount raised by issue of secured bonds/ debentures;
j. Amount raised through issuance of unsecured listed NCDs;
k. Non-interest bearing security deposit received from employees;
l. Non-interest bearing amount held in trust;
m. Advance from customers;
n. Amount brought by the promoters;
o. Any amount accepted by a Nidhi;
p. Any amount received by way of subscription in respect of a chit;
q. Any amount received by the company under any collective investment scheme;
r. Amount received by start- up company by way of convertible note;
s. Amount received from Alternate Investment Funds (AIFs), venture capital funds (VCFs) real estate investment trusts (REITs) etc.
The Concept of Deposit
Undoubtedly, deposit is a broader term and includes an advance as well a loan. However, one has to evaluate the factual terms for such determination, as a deposit is a money for money transaction and it includes a loan in substance too. A money-for-money transaction appears when it is apparent that what comes in is money and what goes out is also in the form of money. Having said so, an advance extended for a specific purpose cannot be treated as a deposit; however, an advance without such a specific purpose shall be nothing but a deposit.
Similarly, in case of share application, money against which shares have not been allotted for long shall take the form of a deposit. Therefore, advance without purpose or share application money pending allotment for long and similar transactions, though not loan per se, are a loan in substance, hence will get covered under the concept of deposit. However, where there is no loan or a loan in substance, the same cannot be a money-for-money transaction and hence will come out of the purview of being deposits.
Seemingly, the list mentioned in Rule 2(1)(c) is an attempt to cover a loan in substance too.
What will be the consequences for non- reporting?
Section 76A and Rule 21 are concerned about the penal consequences. Section 76A imposes huge fines on the company as well as on the officers for accepting deposits in contravention of the prescribed manner or conditions in the chapter and the Rules and also in case of failure in repayment of deposits. Further, in case of officers, the offence is non- compoundable as it involves fine and imprisonment both. The Section provides the following:
a. On the company: A fine of minimum Rs1 crore or twice the amount of deposit so accepted, whichever is lower, which may extend to Rs10 crore; and
b. On the officers of the company who is in default: imprisonment up to seven years and with a fine of not less than Rs25 lakh which may extend to Rs2 crore.
From the above-mentioned clauses, it can be construed that the penal provisions provided in Section 76A shall apply only to those companies which have accepted money falling under the purview of deposits as per the definition. Therefore, if a company accepted money (e.g., inter-corporate deposit (ICD)) which falls under the exclusion list, it shall not be subjected to the penal consequences of Section 76A as ICD is not a deposit.
On the other hand, on a reading of the language, Rule 21 seems to cover any other person also in its purview. The Rule provides fine for any other person apart from the companies covered in Sections 73 and 76, which contravenes any of the provisions of the Rules for which no punishment is provided in the Act. Therefore, for the applicability of Rule 21, one has to see the compliance requirements of the Rules also. Since the new reporting requirement has been made a part of the Rules which applies to all companies (excluding certain categories mentioned above), the consequences of Rule 21 will apply to those companies also. Rule 21 prescribes a fine which may extend to Rs5,000 and in case of continuing violation a further fine which may extend to Rs500 for every day after the first day of such contravention.
(The author is principal manager, Vinod Kothari & Company.)