FAQs on Corporate Social Responsibility

Injeti Srinivas’s Committee: Changes recommended in provisions of Corporate Social Responsibility

Analysis of Companies (Amendment) Act, 2019

Highlights of Companies (Amendment) Bill, 2019

by Vinod Kothari 

The Companies (Amendment) Bill, 2019 has been placed before the Parliament[1] on 25th July, 2019. While the Bill, 2019 is largely to enact into Parliamentary law the provisions already promulgated by way of Presidential Ordinance, the Bill also brings some interesting changes.

The key feature of the Bill is to replace the existing system of judicial prosecution for offences by a departmental process of imposition of penalties. As a result, while the monetary burden on companies may go up, but offenders will not be having to face criminal courts and the stigma attached with the same.

Some of the other highlights of the changes are as follows:

Dematerialisation of securities may now be enforced against private companies too

It is notable that amendments were made by the Companies (Amendment) Act, 2017 effective from 10th September, 2018 effective from 2nd October, 2018, whereby all public unlisted companies were required to ensure that the issue and transfer of securities shall henceforth be done in dematerialised mode only. This provision alone had brought about major cleansing of the system, as in lots of cases, shareholding records included men of straw.

However, the reality of India’s corporate sector is private companies, constituting roughly 90% of the total number of incorporated companies.

The provision of section 29 is now being extended to all companies, public and private. This means, that the Govt may now mandate dematerialisation for shares of private companies too. Whether this requirement will be made applicable only for new issues of capital by private companies, or will require all existing shares also to be dematerialised, remains to be seen, but if it is the latter, the impact of this will be no lesser than “demonetisation-2” at least for the corporate sector. Evidently, all shareholders of all private companies will have to come within the system by getting their holdings dematerliaised.

CSR is now mandatory, and unspent amounts will go to PM’s Funds

When the provision for corporate social responsibility was introduced by Companies Act 2013, the-then minister Sachin Pilot went public to say, the provision will follow what is globally known as “comply or explain” (COREX). That is, companies will not be mandated to spend on CSR – the board report will only give reasons for not spending.

Notwithstanding the above, over the last few months, registry offices have sent show-cause notices to thousands of companies for not spending as required, disregarding the so-called reasons given in the Board report.

Now, the rigour being added takes CSR spending to a completely different level:

  • If companies are not able to spend the targeted amount, then they are required to contribute the unspent money to the Funds mentioned in Scheduled VII, for example, PM’s National Relief Fund.
  • Companies may retain amounts only to the extent required for on-going projects. There will be rule-making for what are eligible on-going projects. Even in case of such on-going projects, the amount required will be put into a special account within 30 days from the end of the financial year, from where it must be spent within the next 3 years, and if not spent, will once again be transferable to the Funds mentioned in Schedule VII.
  • Failure to comply with the provisions makes the company liable to a fine, but very seriously, officers of the company will be liable to be imprisoned for upto 3 years, or pay a fine extending to Rs 5 lacs. Given the fact that the major focus of the Injecti Srinivas Committee Report, which the Ordinance tried to implement, was to restrict custodial punishment only to most grave offences involving public interest, this by itself is an outlier.

Unfit and improper persons not to manage companies

The concept of undesirable persons managing companies was there in sections 388B to 388E of the Companies Act, 1956. These sections were dropped by the recommendations of the JJ Irani Committee. Similar provisions are now making a comeback, by insertions in sections 241 to 243 of the Act. These insertions obviously seem a reaction to the recent spate of corporate scandals particularly in the financial sector. Provisions smacking similar were recently added in the RBI Act by the Finance Bill.

The amendment in section 241 empowers the Central Govt to move a matter before the NCLT against managerial personnel on several grounds. The grounds themselves are fairly broadly worded, and have substantial amplitude to allow the Central Govt to substantiate its case. Included in the grounds are matters like fraud, misfeasance, persistent negligence, default in carrying out

obligations and functions under the law, breach of trust. While these are still criminal or quasi-criminal charges, the  notable one is  not conducting the business of the company on  “sound business principles or prudent commercial practices”. Going by this, in case of every failed business model, at least in hindsight, one may allege the persons in charge of the management were unfit and improper.

Once the NCLT has passed an order against such managerial person, such person shall not hold as a director, or “any other office connected with the conduct and management of the affairs of any

Company”. This would mean the indicted person has to mandatorily take a gardening leave of 5 years!

Disgorgement of properties in case of corporate frauds

In case of corporate frauds revealed by investigation by SFIO, the Govt may make an application to NCLT for passing appropriate orders for disgorgement of profits or assets of an officer or person or entity which has obtained undue benefit.

[1] https://www.prsindia.org/sites/default/files/bill_files/Companies%20%28Amendment%29%20Bill%2C%202019_0.pdf

Applicability of NFRA Rules on overseas subsidiaries and associates: Conflict between the Rules and FAQs

Pammy Jaiswal

Partner, Vinod Kothari and Company

 

Background

National Financial Reporting Authority (‘NFRA’) being a quasi-judicial authority has been empowered by the Central Government to independently regulate and monitor the accounting and auditing standards (‘A&AS’). The intent of NFRA is to oversee the quality of A&AS of large entities as mentioned under Rule 3 (1) of the NFRA Rules.

Evidently NFRA intends to oversee the A&AS of large entities in terms of being listed or the size of the company or being functionally different entities like electricity companies or insurance companies, etc. Such entities have the presence of its subsidiaries and associates all around the world which may be contributing materially in terms of Rule 3 (1) (e) of the NFRA Rules to the net worth and turnover of the Indian parent entity.

While the last date for filing one time return by bodies corporate is approaching fast i.e. 31st July, 2019, there seems to a lot of ambiguity in the applicability of the NFRA Rules.

This note has been prepared with the intent to showcase the conflict between the provisions of the Companies Act, 2013 (‘Act’) read with its allied Rules and the FAQs issued by NFRA.

Various Provisions of the Act applying to bodies corporate

  • Applicability section of the Act

The first section of the Act laying down the applicability of the Act clearly mentions the following under clause (f) of sub-section (4) – such body corporate, incorporated by any Act for the time being in force, as the Central Government may, by notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in the notification.”

This provision makes it very clear that the Ministry of Corporate Affairs (‘MCA’) has been vested with the powers of applying the provisions of the Act to any bodies corporate. Further, the provision is also quite clear that such body corporate may be either incorporated under the Act or any other Act. This implies that even for foreign companies, the MCA has the power to apply the provisions of the Act subject to the changes as may be notified.

  • Definition of the term body corporate

Section 2 (11) defines the term ‘body corporate’ to include a company incorporated outside India. Here also, the intent of law is explicitly clear to cover the bodies corporate governed by foreign laws.

  • Chapter 22 of the Act

Section 379 (2) of the Act provides that a foreign company which is substantially owned and controlled by an Indian citizen or by an Indian company is required to comply with the provisions of the Act as mentioned thereunder.

Areas of conflict

While the consolidated financial statements of the Indian parent entities include the accounts of the subsidiaries and associates also, it cannot be argued that the quality of auditing and accounting is anywhere less relevant than the A&AS of the Indian parent. Therefore, it seems in fitness of things under clause (e) of Rule 3 (1) of the NFRA Rules to include foreign subsidiary and associates if they fulfil the condition of materiality under the said Rules (foreign subsidiaries and associates whose income or net worth exceeds 20% of the consolidated income and net worth of the Indian parent [‘material subsidiaries and associates]).

However, the FAQs[1] issued by NFRA have taken a different stand altogether with respect to the applicability of the NFRA Rules. It states that only those material subsidiaries and associates are covered under the scope which are having place of business in India.

While it sounds very surprising that if this wouldn’t have been the case, the condition of the foreign subsidiaries and associates which has an Indian parent, doing business back in India is very unlikely.

In any event, if merely by not having a business in India absolves the material subsidiaries and associates from the overview of the NFRA that would frustrate the whole intent and objective of the NFRA and allow such subsidiaries and associates to escape from the regulation of NFRA by virtue of the additional clause in the FAQs.

It seems that this condition of having business in India should have either be mixed with section 379 of the Act which talks about foreign companies having business in India or should may have actually been intended to be referred to the Indian parent’s business in India.

Further, if the question is one of jurisdiction as of how the Act extends its application to foreign bodies corporate not having business in India is concerned, it may be noted that section 1 (4) of the Act allows the Central Government to extend the provision of Act to bodies corporate, and it may therefore, it may be construed that in a manner of speaking is actually extended to foreign bodies corporate which have a business connection in India by virtue of having an Indian parentage.

Conclusion

One of the major questions in front of the stakeholders is the jurisdiction of NFRA which the FAQs have seemingly restricted to bodies corporate having place of business in India. However, considering the other provisions of the Act, it is quite clear that NFRA has been constituted not only to govern the auditors registered in India but also those in abroad as MCA has left number of provisions open under the Act which applies to bodies corporate.

If one interprets the applicability of NFRA on Indian bodies corporate, the whole intent and object of setting this regulatory body will get frustrated.

 

[1] https://nfra.gov.in/sites/default/files/FAQ.pdf

Anomaly relating to much awaited e-form DPT-3

By CS Smriti Wadehra | corplaw@vinodkothari.com

 

Introduction

MCA on January 22, 2019 had issued a Notification[1] prescribing certain amendments in the Companies (Acceptance of Deposits) Rules, 2014 (‘Rules’) requiring every company (except government companies) to file:

  • a return of deposit;
  • particulars of transaction not considered as deposit; or
  • both

It is a one-time filing return, specifying the details of outstanding receipt of money or loan which have not been considered as deposits under the Rules. For filing the said dorm, the Rules specified that the reporting should be of receipt of money or loan from April 1, 2014 till January 22, 2019 and which are outstanding as on the date of filing. Further, the reporting should be done within 90 days from January 22, 2019. However, the e-form for such filing was not released by MCA.

Thereafter, on April 30, 2019, MCA vide its Notification[2] dated April 30, 2019 notified the Companies (Acceptance of Deposits) Second Amendment Rules, 2019, according to which the reporting in the one-time return (i.e., e-form DPT-3) has to be done for receipt of money or loan from April 1, 2014 till March 31, 2019. Also, the filing due-date has been extended to ninety days from March 31, 2019.

This extension was much required as the electronic version of the said form was not released by MCA. However, MCA has on the same day released the e-form as well and hence, we shall now discuss the requirements of the said form.

Requirement of Law

Referring to the erstwhile notification read with the recent general circular of MCA dated April 13, 2019, we may summarise the reporting requirement of e-Form DPT-3 as under:

  1. One time return giving 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 the period from 1st April, 2014 till 31st March, 2019;
  2. 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;
  3. Return for deposit which is to be filed within 30th June of every year.

At the advent of notification of the Rules, companies were under ambiguity as to how the reporting of such one-time return shall be done. Further, the e-Form also required auditor’s certificate as an attachment, but it was unclear that whether companies whwich have not received any amount as deposit were also required to provide an auditor’s certificate in this regard. Moreover, there were confusion as whether companies have to provide audited figures in the said form or otherwise. However, the e-Form was expected to clear these confusions.

Anomaly in e-Form

Even after the release of the much awaited form, the anomaly still exists. Following are the certain ambiguities in the e-Form, for which MCA’s clarification shall be awaited:

a)    Whether DPT-3 required to be filed twice?

Rule 16 of Companies (Acceptance of Deposits) Rules, 2014 provides:

“Explanation.- It is hereby clarified that Form DPT-3 shall be used for filing return of deposit or particulars of transaction not considered as deposit or both by every company other than Government company.”

Further, the provisions of Rule 16A of Companies (Acceptance of Deposits) Rules, 2014 provides:

“Every company other than Government company shall file a onetime return of outstanding receipt of money or loan by a company but not considered as deposits, in terms of clause (c) of sub-rule 1 of rule 2 from the 01st April, 2014 to the date of publication of this notification in the Official Gazette, as specified in Form DPT-3 within ninety days from the date of said publication of this notification along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.”

On the combined reading of the aforesaid provisions, we understand that companies have to file e-Form DPT-3 as an annual requirement only, as  a return of deposit of transactions not considered as deposits every year by 30th June and also as a one-time return of outstanding money not considered deposits from 01.04.2014 to 31.03.2019. However, the e-Form as well as the Rules does not specify any such requirement. Accordingly,  companies are still under the ambiguity as – whether  filing of only  one-time return shall suffice for this financial year or two separate filing has to be done.

b)    Requirement of attaching auditor’s certificate

The e-Form DPT-3 requires companies to attach auditor’s certificate. Though not mandatory attachment, the companies are unclear as to whether the amount to be mentioned in the return has to be audited by a statutory auditor and a certificate of auditor has to be attached in each case or management certified accounts shall suffice? The e-Form does not clarify the instance.

Further, companies which shall be filing that they have not accepted any deposit or the money accepted does not qualifies to be a deposit – in such case, it is still unclear whether the auditor’s certificate certifying the company’s declaration is required or not.

Conclusion

Despite the time taken by the Ministry for coming up with the e-Form, we understand that there are still many irregularities in the e-Form as discussed briefly in our note and which has to be addressed by the Ministry. Meanwhile, considering the first day of deployment of this e-Form, we assume that there will be certain revision in the said form which might address the ambiguities.

You may also read our article on “MCA requires reporting of ‘what is not a deposit’ here- Link to the article


[2]
http://www.mca.gov.in/Ministry/pdf/CompaniesAcceptanceDepositsSecAmendRules_01052019.pdf[1] http://www.mca.gov.in/Ministry/pdf/AcceptanceDepositsAmendmentRule_22012019.pdf

MCA requires reporting of ‘what is not a deposit’!

–updated as on 4th May, 2019

By Munmi Phukon- Principal Manager, Vinod Kothari & Company

munmi@vinodkothari.com

Introduction

The Ministry on 22nd January, 2019, issued a Notification[1] prescribing certain amendments in the Companies (Acceptance of Deposits) Rules, 2014  effective from the same date which have further been amended vide another Notification[2] dated 30th April, 2019 (Subsequent Notification). Undoubtedly, the amendments are of much significance. However, what remained unrevealed is, the intent.

What do these amendments talk about?

The amendments are requiring 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 1st April, 2014 till 31st March, 2019 (earlier this date was the date of publication of the Notification in the Gazette i.e. 22nd January, 2019) and which are outstanding as on the said date. The reporting has to be made within 90 days from 31st March, 2019 as per the subsequent Notification.
  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

Which all 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 having any receipt of money which will not fall under the list of Rule 2(1)(c). However, the same exclude a Government company from the reporting requirement.

Whether the amendments will apply to banking companies, NBFCs etc.?

In regard to banking companies and NBFCs, these companies are not required to observe the compliance of the provisions related to 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 an 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) (covered in later part of the article). Further, Sections 73 to 76A of CA, 13 provide the provisions related 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 of 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 all transactions are enlisted in Rule 2(1)(c)?

Rule 2(1)(c) defines the term ‘deposit’ in an exclusive manner and enlists nineteen transactions which are not treated as deposits. Below is the list of the items that are excluded from the term ‘deposit’-

  1. Amount received from CG, SG etc.:

Any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government, or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature;

  1. Amount received from foreign Governments/ banks etc.:

Any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;

  1. Amount received as loan from banking companies:

Any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation. Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (a) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934);

  1. Amount received as loan from PFIs:

Any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934);

  1. Amount raised through issuance of commercial paper:

Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India;

  1. Inter- corporate deposits:

Any amount received by a company from any other company;

  1. Amount received as subscription money for securities:

Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for;

Explanation.- For the purposes of this sub-clause, it is hereby clarified that –

(a) Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.

Provided that unless otherwise required under the Companies Act, 1956 (1 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or rules or regulations made thereunder to allot any share, stock, bond, or debenture within a specified period, if a company receives any amount by way of subscriptions to any shares, stock, bonds or debentures before the 1st April, 2014 and disclosed in the balance sheet for the financial year ending on or before the 31st March, 2014 against which the allotment is pending on the 31st March, 2015, the company shall, by the 1st June 2015, either return such amounts to the persons from whom these were received or allot shares, stock, bonds or debentures or comply with these rules.

(b) any adjustment of the amount for any other purpose shall not be treated as refund.

  1. Amount received from directors/ relative of directors:

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;

  1. Amount raised by issue of secured bonds/ debentures:

Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years:

Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;

  1. Amount raised through issuance of unsecured listed NCDs:

Any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India.

  1. Non-interest bearing security deposit received from employees:

Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;

  1. Non-interest bearing amount held in trust:

Any non-interest bearing amount received and held in trust;

  1. Advance from customers:

Any amount received in the course of, or for the purposes of, the business of the company,

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance:

Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty five days shall not apply:

(b) as advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against such property in accordance with the terms of agreement or arrangement;

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

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

(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;

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

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

Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules:

Explanation.- 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.

  1. Amount brought by the promoters:

Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfilment of the following conditions, namely:-

(a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;

(b) the loan is provided by the promoters themselves or by their relatives or by both; and

(c) the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

  1. Any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act;
  2. Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982 (40 of 1982);
  3. Any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India;
  4. Amount received by start- up company by way of convertible note:

An amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person.

Explanation.- For the purposes of this sub-clause,-

  1. “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 180(E) dated 17th, February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry;
  2. “convertible note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.
  3. Amount received from AIFs, VCFs REITs etc.:

Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts, Real Estate Investment Funds and Mutual Funds registered with the Securities and Exchange Board of India in accordance with regulations made by it.

Explanation.- For the purposes of this clause, any amount.-

(a) received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or

(b) any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer, shall be treated as a deposit.

The concept of Deposit

Undoubtedly, deposit is a broader term and includes an advance as well 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 come 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 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 are though not loan per se, but 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 provides 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:

  1. On the company: A fine of minimum one crore rupees or twice the amount of deposit so accepted, whichever is lower, which may extend to ten crore rupees; and
  2. On the officers of the Company who is in default: imprisonment upto seven years and with a fine of not less than twenty five lakh rupees which may extend to two crore rupees.

From the above, 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. ICD) which falls under the exclusion list 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 every companies (excluding certain categories mentioned above), the consequences of Rule 21 shall apply to those companies also. Rule 21 prescribes a fine which may extend to five thousand rupees and in case of continuing violation a further fine which may extend to five hundred rupees for every day after the first day of such contravention.

Whether NIL reporting shall also be required?

In view of the language of the Rules, the one- time return is required to be filed for the outstanding amounts, if any, with the company. Therefore, where no such amount is outstanding, the company will not be required to file the return. Same rationale shall apply to the annual return also.

Whether filing of two DPT-3 i.e. w.r.t. the one- time return as well as the annual return as on 31st March, 2019 will be required for FY 18-19?

On perusal of the latest version of the e- form that has been made available w.e.f. 1st May, 2019, it is understood that the one- time return requires display of only the aggregate quantum of the exempted deposits [i.e. falling under Rule 2(1)(c)] and not the detailed break-up of the transactions.  Further, this return shall be filed for the amounts accepted on or after 1st April, 2014 till 31st March, 2019 and outstanding as on 31st March, 2019 as required under the newly inserted Rule 16A. On the other hand, the annual return requires the detailed break-up of the exempted deposits as on 31st March, 2019 as per the proviso to Rule 16.

In view of the aforesaid discussions and in absence of any clarification in this regard, it seems that the companies will be required to file two returns, one as the one- time return and the other as the annual return.

Conclusion

The exclusion list as provided in the Rule covers certain items which, in day to day business, are very common for each type of entities irrespective of its size, status etc.. To mention the most common ones are, bank loans, advance from customers, loans from group entities, NCDs, CCDs, shares, share warrants, commercial papers etc. Considering the new reporting requirements, the companies will have to disclose details of all these transactions even though the same 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 1st April, 2014 to 31st March, 2019. 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 a company as a loan in the year 2014 which has already been repaid in 2017 shall not require reporting.

As there is no utterance of the intent behind such a reporting requirement, what will the Ministry gain from such reporting also remains a secret. In the recent past also, the Registrars of different jurisdictions have been circulating notices under Section 206 of CA, 13 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 on obtaining the required details through those notices are not known. Probably, by making the new reporting requirements a part of law will benefit them from getting those information on a regular basis at one place.

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Link to our other related articles:

http://vinodkothari.com/2013/03/on-the-meaning-of-deposit-f-or-deposit-regulations/

http://vinodkothari.com/2018/07/amendments-deposits-corporatisation-of-unregistered-entities/

http://vinodkothari.com/2014/07/deposit-rules-2014-what-is-in-it-for-real-estate-developers-and-investors/

http://vinodkothari.com/2017/09/mca-liberalizes-acceptance-of-deposits-from-members/

http://vinodkothari.com/2015/04/mca-provides-relief-in-tranches-amends-deposit-rules-2014/

http://vinodkothari.com/2014/05/advance-appropriated-against-goods-and-services-are-not-deposit/

http://vinodkothari.com/2015/09/deposit-rules-roll-back-to-status-quoante-deposits-from-relatives-of-directors-exempted/

Link to our other write ups:

http://vinodkothari.com/resources/

 

[1] http://egazette.nic.in/WriteReadData/2019/195975.pdf

[2] http://www.mca.gov.in/Ministry/pdf/CompaniesAcceptanceDepositsSecAmendRules_01052019.pdf