The Ministry of Corporate Affairs (MCA) has recently issued draft rules for the acceptance of deposits by companies. The draft Companies (Acceptance of Deposit) Rules 2013 (Rules) defines 'deposit' as the receipt of money, by a company, by way of a deposit or a loan or in any other form, with the exclusion of certain borrowings, such as from banks, the government and other companies and by way of subscription to securities. If these Rules are notified, they would replace the Companies (Acceptance of Deposit) Rules of 1975, which are currently in force.
The Rules permit both private and public companies to accept deposits, but mandate that deposits may be accepted only after the company passes a general resolution and issues a circular or an advertisement to its members or the public, setting out details of its financial position, its credit rating, the number of depositors and the history of deposits previously made with the company. A copy of the proposed circular/advertisement must be filed with the Registrar of Companies at least 30 days in advance of its issuance by the company. In terms of acceptance of deposits, the Rules specify that private companies can now only accept deposits from its members, while public companies can only accept deposits from the public after meeting the prescribed net worth/turnover thresholds.
A significant feature of this proposed regulatory framework is that the Rules require the company to mandatorily enter into a deposit insurance contract to insure the principal amount and the interest payable to the depositors at least 30 days before the issue of the circular/advertisement inviting deposits. The Rules further require that the deposit insurance contract must expressly specify that if the company defaults in the repayment of the principal amount and the interest thereon, the depositor shall be entitled to the repayment of this amount from the Insurer. In addition, the premium on the deposit insurance purchased is to be borne by the company and is not to be recovered from the depositors.
If a company defaults in complying with the terms of the deposit insurance contract, the company shall either rectify the default immediately or enter into a fresh contract within 30 days. If the company fails to comply with the foregoing requirements within the specified time, the entire amount of the deposits must be repaid to the depositors within 15 days. In case this amount is not returned within 15 days, the company can be made liable to pay 15% interest per annum for the period of delay. In addition, the Rules specify penalties for default by which the company and each of its officers and other persons who violate these Rules could be fined up to Rs.10,000 and for continuing defaults, Rs.1,000 for every day the contravention continues.
The Rules have been introduced at a time when investor confidence is low, particularly, amongst small investors, following a number of recent scams. Press reports indicate that one such scam is estimated to have caused losses of up to US$4–6 billion to over 1.7 million depositors, most of which are from small towns and rural communities. The proposal to introduce mandatory insurance on deposits seems to be an effort by the MCA at restoring investor confidence in the wake of such scams. However, if these Rules are notified in their present form, Indian Insurers will have to either file new product offerings or amend their present product offerings in accordance with the requirements of the Rules.
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