CERTAIN EXCEPTIONS TO DEPOSIT UNDER THE COMPANIES (ACCEPTANCE OF DEPOSITS) RULES, 2014 – A CRITICAL ANALYSIS.

[Umesh Vyas]

CERTAIN EXCEPTIONS TO DEPOSIT UNDER THE COMPANIES (ACCEPTANCE OF DEPOSITS) RULES, 2014 – A CRITICAL ANALYSIS.

Definition of “Deposit”  

Section 2(31) of the Companies Act,2013, defines Deposit as :

“Deposit” includes 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 Reserve Bank of India.

There are three things to be treated as deposit: (1) Deposit, (2) Loan, (3) receipt of money in other form.

As against this, section 58A of the Companies Act, 1956 ] Explanation to section 58A] defines the term “Deposit” 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 or amount as may be prescribed in consultation with Reserve Bank of India.”  

This definition is in two parts (1) Deposit of money and (2) any amount borrowed.

It is observed that except third category under the Companies Act, 2013 i.e. “receipt of money in other form”, definition of deposit under 2013 Act and 1956 Act are same.

The purpose of the ‘Act’ for regulating deposit is to protect public at large who park their valuable saving in the form of ‘Unsecured deposit’ with great amount of trust, and in turn, some mala fide Companies got vanished with hard earned money of common man. 

It was the era of such Companies especially Fin-Lease Companies in early 90’s, and later, ‘Satyam’ episode put last nail in the coffin to shake trust of common man who is investing their small saving in the corporate world.

Consequently, the Companies Act,2013 became more stringent in many aspects inter-alai for provisions related to acceptance of deposit.  

The negative effect of this new deposit provisions are harsh on the small Companies 

However, rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014, have specifically excluded some categories of receipt of money from definition of deposit which are received under customary business practice and frequently take place in the ordinary course of business.

Clause (i) to (xviii) of the rule 2(1)(c) enlists exempted categories of deposit.

Here focus of discussion is on clause (c)(xii) of  sub-rule 1(1) of rule 2 of the Companies (Acceptance of Deposits) Rules, 2014. 

This sub-clause (xii) specifically exempts some business transactions from purview of the term “Deposit” by stating that “ any amount received in the course of , or for the purpose of, business of the Company--

(xii) (a) Excludes any advance received by the Company for supply of Goods or provision of services, which shall be essentially be appropriated against supply or goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance.

That means any advance received as above, shall be adjusted against supply of goods or provision of services within three hundred and sixty five days, it may fall between two financial years. Example: such advance is received on 5th of May,2013, it falls within f.y.2023-24 and 2024-25. If it is not adjusted on or before 4th May,2024, it will be treated as deposit in term of the aforesaid provision.  

Further, if such advance is subject matter of any legal proceedings before any court of law, such time limit of three hundred and sixty five days shall not apply.

(xii)(b) Advance received in connection of consideration of immovable property under an agreement or arrangement, and such advance is adjusted against such property in accordance with terms of an agreement or arrangement.

For example: An advance amount received on sale of/proposed sale of an immovable property under “Banakhat” (An initial agreement of immovable property signed between buyer and seller), and such advance shall be adjusted against consideration  for   sale of  said immovable property at time of execution of sale deed, it is not deposit under provisions of this rule. 

(c) as security deposit for the performance of the contract for supply of goods or provision of services.

In the course of business, accepting “Security Deposit” for performance of commercial contract (whether formal written contract or an oral contract)  between   parties to the contract is normal business practice.

The expression “Security Deposit” is not defined in the Companies Act,2013 or in the Companies (Acceptance of Deposits) Rules, 2014.

When the word is not defined in the Act itself, it is permissible to refer to dictionaries to find out the general sense in which that word is understood in common parlance. However, in selecting one out of various meaning of a word, regard must always be had to the context as it is a fundamental rule that “ the meaning of words and expressions used in an Act must take their colour from the context in which they appear. 

The Black’s Law Dictionary, 10th edition, defines it as “Money placed with a  person as earnest money or security for the performance of a contract. The money will be forfeited if the depositor fails to perform.”    

There is no law in this subject and it is solely governed by  the terms contract between the parties. It mainly depends upon the practice prevailing and the agreement between the parties. The basic purpose of “Security Deposit” is assuring the performance of the contract by the party which is required to give security deposit. Sometimes , security deposit is given by the seller of the goods or services or property and sometimes by the buyer of the goods or services or property.

The amount received by the Company as a form of security deposit under Works Contract Agreement/ Agency Agreement of under franchisee agreement between the parties are in the nature of  “Security Deposit”, as the sole purpose of such deposit is to secure performance of the contract entered between the parties, which are eligible for exemption under this rule.

(d) as advance received under long term projects for supply of capital goods except those covered under item (b) above.

That may be advance received for development of  large real estate projects under terms of contract, Or under contract for development of large scale manufacturing plant under “Engineering Procurement Contract” (‘EPC’ Contract) 

(e) as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;

This refers to advance received by the Company under agreement of  warranty/ extended warranty, and or after sale services to be provided to the customer of the Company. Range of such contracts for warranty varies from home and office appliances to large scale machineries, or after sale services in case of  sale of products like software. 

This includes advance received under a warranty contract as well as contract for maintenance of such products after a warranty period.

This exemption from deposit is subject to condition that money shall be received as per a written agreement or arrangement between the parties and  the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less.

Here, in above item (e) criteria for exemption to amount received as an advance, from purview of deposit, is duration of provision of services unlike date of receipt of amount by the Company, which differs from other exemptions as discussed above.  

(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government.

This exemption refers to advance received by the Company which is mainly in the utility sectors like telecommunication, supply of gas or electricity, and companies dealing in securities i.e share brokers under license issued by Securities and exchange Board of India (SEBI). 

(g) as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications.

This refers to advance received by the print media or electronic media Companies which collects subscription money in advance. 

It covers advance received by print or electronic media company as an advance subscription money for providing News paper/ magazine/ journals etc., whether such receipts are for its printed version or for electronic version, from customers, which shall be adjusted against receipt of such publication. 

Further it is provided that in case such advance amount received is refundable with or without interest in case of the company accepting the money, does not have necessary permission or approval, whenever required, to deal in the goods or properties or services for which money is taken, then the amount received shall be deemed to be deposit under this rule. 

For example: A Company is dealing in the goods like Gas or other petroleum products which are subject to regulatory permissions, and such permissions or license get cancelled not can’t get renewed, in the rems of contract, advance received from customers are subject to refund, such advance shall be deemed to be deposit on the expiry of fifteen days from the date they become due for refund.  

Explanation to sub-clause (xii) provides that for the purposes of this sub-clause the amount shall be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.

© Umesh Vyas, B.Com., LL.B., FCS