Ankur Garg (Company secretary) 21 April 2010

ACCEPTANCE OF DEPOSIT U/S 58A - COMPANIES ACT, 1956

ACCEPTANCE OF DEPOSIT U/S 58A OF THE COMPANIES ACT, 1956

Frequently asked questions on acceptance of Deposits under Section-58A

Question:1 As per section 3(1)(iii)(d) of the Companies Act, 1956 a Pvt. Limited Company is prohibited from inviting or accepting deposits from persons other then its members, directors or their relatives. In the background of the term deposit not being defines under section 2 or 3(1)(iii) but defines u/s 58A. What the term used in section-3(1)(iii) implies?

Can a Pvt. Company borrow any amount specified under exempted categories in Rule 2(b)(i) to (xi) of deposit rules?

Answer:1 The term deposit is not defined u/s 2 or 3(1)(iii) of the Companies Act, 1956. It is defined in Deposit Rules, 1975. Pvt Company is governed by sec. 58A and rules there under. The same meaning is extended for the purpose of Section 3(1)(iii).

Yes, a Pvt. Co. can borrow any amount specified under exempted categories in Rule 2(b)(i) to (xi) of deposit rules, 1975. Also a Pvt. Co. can borrow inter corporate Deposit.

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Question:2 Subsequent to the amendment in sub clause (xi) of rule 2b w.e.f. September 25, 2002, the exemption available to public companies in respect to the acceptance of deposit from director was withdrawn. In case of a Public Company is already holding deposits from director, what is the legal provision in this regard. Whether the company is required to repay the amount and in what period? In case the company is not in a position to repay, whether the company can file the SLA and continue to hold the Deposit?

Answer:2 In case a public company is already holding public deposits from director, till the time of maturity the company is under no compulsion to repay the deposited amount. But in case no maturity period is specified the company has to refund the deposit amount within a reasonable period say, 6 months or at earliest possible time. If in case the company is not in a position to repay, the company has to file the SLA and continue to hold the deposit.

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Question:3 A Pvt Co. has accepted deposits from Shareholder/Director of the company. In case subsequent to the acceptance the depositor cease to be the shareholder/Director of the Company can Company continue to hold the deposit up to the completion of the tenure of the deposit.

Answer:3 A Pvt. Co. has accepted deposits from Shareholder/Director of the company and after acceptance of deposit, the depositor cease to be the Shareholder/Director of the company. The company can continue to hold the deposit up to the completion of the tenure of the deposit. It is even difficult for the company to repay the deposit since the funds are invested by the company keeping the maturity date in view.

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Question:4 In case of Joint holders, can a private company accept deposit from all the Joint holders or only the Joint holder or only the first name holder.

Answer:4 No unanimous consensus arrived till date. Some of the learned members were of the view that all Joint holders are members so company can accept from all Joint holders. But others disagree. According to them for the purpose of Companies Act, 1956 only first named holder is recognized for the purpose of Dividend, Voting rights etc. so company can accept deposit from only first named holder.

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Question:5 If a Company has financial problem which lead to default in the payment of deposits or violation of any provision of Section-58A. Can a company seek any relief under the provisions of the said section? What are the procedural requirements under Companies (Application for extension of time or exemption under section 58A) Rules?

Answer:5 Under section-58A (8), the Central Government may, if it considers it necessary for avoiding any hardships or for any other just and sufficient reason, by order, issued either prospectively or retrospectively from a date not earlier then the commencement of the Companies (Amendment) Act, 1974, grant extension of time to a company or class of companies to comply with, or exempt any company or class of companies from, all or any of the provisions of this section.

Thus, under section 58A (8) relief can be sought by the company by making an Application to the Central Government.

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Question:6 After accepting deposit the company has incurred losses due to which the company’s reserve and paid-up capital is depleted. As a result the deposit accepted have crossed maximum permissible limit. Is there a violation?

Answer:6 The company’s reserve and paid-up capital is to be considered only at the time of acceptance of Deposits. Moreover, as per DCA Circular No. 3/17/79-cl-X dated 30/06/1979 there is no contravention of provisions where due to losses deposits exceeds limits.

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Question:7 Mr. A has given a deposit of Rs. 15,000/- along with one of his friend as a joint holder. His friend also has given a deposit of Rs. 15,000/- along with Mr. A as a joint holder. That’s how both of them treat themselves as small depositors. Is this view correct?

Answer:7 As per section-58AA which deals with the concepts of small depositors both Mr. A and his friend are treated as small depositor.

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Question:8 A small depositor means a depositor who has invested in a financial year a sum not exceeding Rs. 20,000 in a company and includes his successors, Nominees and legal representatives. Who will be considered as a successor and legal representative since nothing has been specified?

For example Mr. A has given a deposit of Rs. 15,000/- in his own name and deposit of Rs. 15,000/- each in the names of his wife, son, daughter, son-in-law, daughter-in-law and two grand children. Which all deposit are to be aggregated to arrive at his status of small depositor?

Answer:8 Successor and his legal representative is not defined in the Companies Act, 1956. Since Mr. A has given a deposit of Rs. 15,000/- in his own name he is considered as a small depositor as defined in section-58AA. His wife and son will be treated differently. This is only when Mr. A dies who will be his successor and his legal representative is decided.

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Question:9 Section-58AA prohibits the company to accept further deposits from small depositors if the default in payment persists. Does it mean that inspite of the default the company can accept deposits of value of more than Rs. 20,000/-?

Answer:9 Under Section-58A (2) no company shall invite any deposit unless the company is not in default in the payment of any deposit/part thereof and any interest thereupon in accordance with the terms and conditions of such deposits. Since, section prohibits only to invite deposits in cases of defaults. Further Company Law Board (CLB) in such cases may allow company to accept deposits as restriction is only on invitation.

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Question:10 Sub section (7) of Section 58AA states that where a company had accepted deposits from small depositors and subsequent to acceptance of deposits obtains loans for the purpose of working capital from any bank, it shall first utilize the funds so obtained for the repayment of the small deposits before applying any such funds for any other purpose. What does this section imply, whether the company is required to utilize the funds to repay the deposits if they are due for payments or otherwise in case the company has defaulted in repayment of the principal or interest to the small depositors the section will apply?

In such a case whether the bank can take any action against the company for diversion of funds as loan was obtained for the business requirements and not for repayments of deposits.

Answer:10 Under Section 58AA (7), the company is required to utilize the funds to repay the deposits if they are due for payment. Generally unsecured loans, which are short term loans, are part of working capital. The bank and customer have cordial relationship. If bank is convinced he allows returning deposits otherwise the company has to borrow from elsewhere and repay the deposits and then utilize the balance amount as working capital.

Yes, indeed the bank can take action against the company for diversion of funds as loan was obtained for the business requirements and not for repayment of deposits.

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Question:11 Acceptance of Deposits through commercial paper whether fall within the preview of deposits under section 58A of the companies Act, 1956

Answer:11 Acceptance of Deposits through commercial paper are exempted vide Notification No. GSR 1075(E) dated 29/12/1989.

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Forum where aggrieved deposit holder can approach for relief:

The depositor can approach Company Law Board (CLB) in the prescribed Form No- 4 mentioned in Companies Regulation along with prescribed fee s. And CLB depending on the case direct company to repay within the period prescribe by CLB.

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Reply Follow

10 Replies

(Guest)

Mr.Ankur - My client had invested in a finance company (Limited) and it was matured in the year 2000, but the company defaulted and he did not get the money back. Can he claim the deposit by moving the CLB now and if the company goes into liquidation, can he claim the deposit amount now by filing claim before OL? is there any limitation (like CPC 3 years for money suit) applicable to depositors of a defunct company? Plz clarify.

KUNJAR SHAH (PROPRIETOR) 06 May 2010

Mr.Ankur. I am little bit confused. Is deposit accepted from directors(Shareholders) by public company be considered while calculating limit of 10% of paid up share capital and free reserves as per Deposit (Acceptance of Deposits) Rules, 1975?

Sir its too urgent.

Ankur Garg (Company secretary) 07 May 2010

INTER CORPORATE LOANS

Kindly appreciate, A public and private limited company can take loan from other company and body corporate and the same would be covered under section 372A as an inter corporate loan. The above is exempt from the deposit rules, 1975.

A public and private company can also take loan from Banks/PFIs under the same section 372A as an inter-corporate loan.

But if such company takes loan from an individual the same would be considered as public deposit under section 58A read with Companies (Acceptance of Public Deposit) Rules, 1975.

As per the definition of deposit given in Rule 2 of the said rules “deposit means any deposit of money with and include any amount borrowed by, a Company but does not include certain amounts.

There are certain amounts which are not considered as deposit as per the rules above and such amount includes inter corporate transaction hence amount taken by company/bank and PFI from other corporate are not considered as deposit.

On the other hand amount taken by public company from individual is not covered in the exemption given by the said rule, hence amount taken by public company from individual is considered as deposit under section 58A read with Companies (Acceptance of Public Deposit) Rules, 1975.

A Public or Private limited company can take unsecured loan from its directors and the same would not be covered under section 58A and other deposit provisions as such transaction is exempt by deposit rules 1975.

LOAN FROM INDIVIDUALS/OUTSIDERS

Appreciate further a private limited company can take unsecured loan from its shareholders, directors and their relatives and the same would not be covered under section 58A and other deposit provisions as such transaction is exempt by deposit rules 1975.

But if a private company takes unsecured loans from persons other than its shareholders, directors and their relatives the same would be considered as deposit under section 58A read with Companies (Acceptance of Public Deposit) Rules, 1975.

Regards

Ankur Garg (Company secretary) 07 May 2010

But if a public company take a unsecured loan from its director who is also a shareholder than the exemption mentioned above is not available and the same would be considered as a public deposit and accordingly considered while calculating limits.

Best Regards

Keyul Dedhia (Employment) 19 August 2010

Dear Sir,

Can you provide DCA Circular No. 3/17/79-cl-X dated 30/06/1979.

Regards,

Keyul

Mayur (Student) 06 July 2012

Mr. Ankur Garg -

Can Private Ltd. Company whose main object is Investment & Financing.....Can accept loan from outsiders other than director, relative or members...is there any special exemption for Investment & Finance Comapny...??

Thanks in advance..

Mayur Shah

Satish (CS) 12 February 2013

Dear Sir,

As per deposit rules 1975, rule 2 (b) (iv) which reads as "any amounts received by the Company from any other Company" has been omitted by the Companies(Acceptance of Deposits) Amendment Rules, 1981(w.e.f. 1-4-1981).

Now will the acceptance of money from Pvt Ltd., by a Pvt. Ltd., will be a Deposit?

Hetal (manager) 30 March 2013

Sir

Please guide me.

an unlisted limited company having c/f loss of 19 lacs . authorized capital or paid up capital 75 lacs and take unsecured loans from member,director and others individual of rs . 2 crore.. so it is violation of section 58A

furhter limited company has no any secured loans. company require to file lieu of prospectus ? furhter is there any violation of law.. i.e. unsecured loans from others and memebrs.

company can take unsecured loan without filing of prospectus ?

company can take any amount of loans ... furhter company doing business as share broker, portfolio manager.

please reply as soon.

PC Agrawal (PCS) 07 April 2013

Public Deposits - Acceptance of ‑ Scope and provision of Companies (Acceptance of Deposits) Rules, 1975 explained

Rule 3(1)(b) : WHETHER RETENTION OF BALANCE PAYMENT OF DEPOSIT AMOUNTS TO RENEWAL

Query : The constituent company has incurred losses in the last year and its paid‑up capital and reserves have depleted. As a result, the deposits already accepted by the company have crossed the maximum permissible limit prescribed under the Rules. The deposits accepted by the company are for a period exceeding six months. There is no specific provision either under the Rules governing acceptance of deposits or in the terms and conditions under which deposits have been accepted by the company prohibiting a part payment by the company against the deposit amount to those who are willing to accept the same. The question that arises for consideration is whether the company concerned can in such a case resort to part payments both to satisfy the depositors willing to accept such part payments as also to bring down the deposits remaining with it within the limits prescribed by law. Incidentally, a question would also arise whether by making such part payments and keeping the balance amount of deposits, the company would have by implication renewed the balance amount of deposits ?

Answer : If the deposits were accepted at a point of time when they were within limits, they are to be repaid according to the date of maturity. If due to subsequent losses, etc., the deposits already accepted exceed the limit, which has become reduced due to losses, there is no contravention of the provisions of the Rules.

Letter : No. 3/17/79‑CL‑X, dated 30‑6‑1979.

Huzefa (cs) 16 July 2013

Hello Sir My query is

A company when it was a private ltd has taken unsecured loan from its direcotr, shareholder and their relative and continue to remain with us.now the company has become a public company will section 58 and deposit rule become applicable on it.if no kindly give the relevant extract

Thanks

please reply as soon as possible