Question

Definition of relative of directors under acceptance of deposits act

Answer 1

If the Act and Rules are anyway inching back to the pre-2014 scenario, was the new Companies Act 2013 needed at all?

The Companies Act, 2013 (Act 2013) caused major shocks and massive problems of compliance as it was implemented from 1 April 2014. One of the major areas that caused problems of compliance to small and private companies was the amended rules applicable for acceptance of ‘deposits”. It was not just an issue of compliance – it is something that shook the finances of small and private companies as most private companies were using borrowings from directors, relatives, friends and relatives as a means to provide working capital support to their businesses.

After causing heartburn for more than a year, thankfully, the rules are now restoring to the position that prevailed prior to the implementation of the new Act 2013, thus raising an interesting question that pops up time and again – if the Act/Rules are anyways inching back to the pre-2014 scenario, was the new Act needed at all?

Deposits from directors’ relatives exempted:

The Ministry of Corporate Affairs (‘MCA’) vide its notification dated 15th September 2015 has issued the Companies (Acceptance of Deposits) Second Amendment Rules, 2015.

Deposits from directors in case of all types of companies, public or private, were exempted under the original Companies (Acceptance of Deposits) Rules, 2014.

Now, amount received from the relatives of directors have been excluded from the purview of definition of ‘deposits’, by insertion of the following words-

any amount received from a Person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company:

Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board's report.

Deposits from shareholders in case of private companies:

Earlier, vide an Exemption Notification dated 5 June 2015, the MCA has exempted private company from accepting any amount from its members, subject to a condition that such amount shall not exceed 100% of the net worth.

There is confusion in the notification – since it exempts companies only from provisions of section 73(2), and not from the Companies (Acceptance of Deposits) Rules, 2014. The rules lay a condition that the amount of deposit accepted by companies cannot exceed 25% of net worth. Therefore, the notification laying a limit of 100% seems to be inconsistent.

Existing deposits from shareholders:

MCA vide the General Circular 05/2015 dated 30 March 2015, granted relief to private companies from complying with the conditions specified under Section 73(2) by clarifying that such amounts received from directors and directors’ relatives and members under the provisions of the Act 1956 will not constitute as deposits under Act 2013.