As a part of the Bi-monthly Monetary Policy on 6th June, 2019, the RBI’s review of Development and Regulatory Policies [https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47226] proposed to set up a working group to strengthen the regulatory framework for core investment companies (CICs). The RBI states: “Over the years, corporate group structures have become more complex involving multiple layering and leveraging, which has led to greater inter-connectedness to the financial system through their access to public funds. Further, in light of recent developments, there is a need to strengthen the corporate governance framework of CICs. Accordingly, it has been decided to set up a Working Group to review the regulatory guidelines and supervisory framework applicable to CICs.”
Core investment companies are group holding vehicles, which hold equities of operating or financial companies in a business group. These companies also give financial support in form of loans to group companies. However, CICs are barred from dealing with companies outside the group or engaging in any other business operation.
Currently as per the data as on 30th April, 2019, there are only 58 registered CICs in the country. There may be some unregistered CICs as well, since those not having “public funds” do not require registration.
If a CIC is not holding “public funds” (a broad term that includes bank loans, inter-corporate deposits, NCDs, CP, etc.), the CIC is exempt from registration requirement. Presumably such CICs are also excluded from any regulatory sanctions of the RBI as well. However, it is quite common for CICs to access bank loans or have other forms of debt for funding their investments. Such CICs require registration and come under the regulatory framework of the RBI, if their assets are worth Rs 100 crores or more.
Corporate governance norms applicable to systemically important NBFCs are currently not applicable to CICs.
The RBI has observed that CICs are engaged in layering of leverage. This observation is correct, as very often, banks and other lenders might have lent to CICs. The CICs, with borrowed money, use the same for infusing capital at the operating level below, which, once again, becomes the basis for leveraging. Thus, leveraged funds become basis for leverage, thereby creating multiple layers of leverage.
While agreeing with the contention of the RBI, one would like to mention that currently, the regulatory definition of CICs is so stringent that many of the group holding companies qualify as “investment companies” (now, credit and investment companies) and not CICs. There is a need to reduce the qualifying criteria for definition of CICs to 50% of investments in equities of group companies. This would ensure that a large number of “investment companies” will qualify as CICs, based on predominance of their investments, and would be viewed and regulated as such.
Prominent among the registered CICs are entities like Tata Sons, L&T Finance Holdings, JSW Investments, etc. The extension of corporate governance norms to CICs is unlikely to benefit any, but impact all.
The Reserve Bank has accordingly constituted the Working Group to Review Regulatory and Supervisory Framework for Core Investment Companies on 3rd July, 2019 [https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR43DDEE37027375423E989F2C08B3491F4F.PDF]. The Terms of Reference (ToR) of the Working Group are given below:
- To examine the current regulatory framework for CICs in terms of adequacy, efficacy and effectiveness of every component thereof and suggest changes therein.
- To assess the appropriateness of and suggest changes to the current approach of the Reserve Bank of India towards registration of CICs including the practice of multiple CICs being allowed within a group.
- To suggest measures to strengthen corporate governance and disclosure requirements for CICs
- To assess the adequacy of supervisory returns submitted by CICs and suggest changes therein
- To suggest appropriate measures to enhance RBI’s off-sight surveillance and on-site supervision over CICs.
- Any other matter incidental to the above.
As per the press release, the Working Group shall submit its report by October 31, 2019.
By Munmi Phukon
Principal Manager, Vinod Kothari & Company
How does a person get into the board of directors of a listed entity? Simply because he happens to be a majority shareholder, or the son of the promoter, or a morning-walk friend of the promoter? Or, is it that a listed company is expecting supervisory leadership to come from a body consisting of individuals with diverse skills and competencies? What are those key competences and skill sets required from directors, and which of the company’s directors possess which of these abilities? These are questions that listed entities and their stakeholders might have either not put before themselves, or even if considered, may not have had structured answers to these questions. However, come this year, every listed entity shall give a list of core skills/ expertise/ competencies of the Board members, and come next year, the names of the directors who actually possess such skills/ expertise/ competencies.
In the above para, one is referring to a new provision under Para C of Schedule V pertaining to the contents of corporate governance report which reads as follows:
“C. Corporate Governance Report: The following disclosures shall be made in the section on the corporate governance of the annual report.
(h) A chart or a matrix setting out the skills/expertise/competence of the board of directors specifying the following:
(i) With effect from the financial year ending March 31, 2019, the list of core skills/expertise/competencies identified by the board of directors as required in the context of its business(es) and sector(s) for it to function effectively and those actually available with the board; and
(ii) With effect from the financial year ended March 31, 2020, the names of directors who have such skills / expertise / competence.”
Importance & objectives of having a diverse Board
The importance of a diverse and skilled Board is recognised around the world. It is more than a necessity considering the complex and dynamic business environment. The Board is the set of leaders who provide comprehensive guidance, support and direction to the company towards its success. The objective of having skilled Board is manifold considering the involvement of public money, be it of the public shareholders, lenders or other creditors. Stakeholders are concerned about the attitude of the firm towards corporate governance as a diverse set of individuals collectively known as Board cannot take a casual approach on the management of the firm sitting on the pile of public money. Therefore, it is always required for the NRC to have a clear view as to what is being expected from the directors, what would be the set of skills, competencies, expertise, knowledge etc. that would be possessed by the directors, whether the same is broad based and also, to ensure an effective evaluation mechanism.
What does law require?
Till the amendments in the Listing Regulations coming into force, Regulation 36 required disclosure of the nature of the expertise in specific functional areas of a proposed appointee including a person seeking re-appointment to the shareholders. Further, Rule 5 of the Companies (Appointment and Qualification of Directors) Rules provided the qualification of the independent directors as persons who shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
The new requirement of disclosure has been framed based on the Kotak Committee Recommendations whose rationale was primarily based on the fact that the existing requirement of law was not sufficient to the shareholders for their adequate analysis whether the Board of the company has sufficient mix of diverse expertise/ skill- sets.
The broad parameters
The Board is responsible for shaping the future of the organisation within its fiduciary characteristics. Therefore, identifying the key competencies of the Board members is very much essential to ensure that the qualified persons undertake this cardinal role. Globally, identifying the key competencies of Board members is considered as the step towards a successful Board. Broadly, the parameters for identifying key competencies or skill- set can be categorised as follows:
Industry knowledge/ experience
Having experience in and knowledge of the industry in which the organisation operates is one of the key competencies of a Board member. This is required for achieving the objectives of the organisation while operating effectively, responsibly, legally and sustainably. The Board members are required to demonstrate an understanding of-
- the relevant laws, rules, regulation policies applicable to the organisation/ industry/ sector and level/ status of compliances thereof by the organisation
- the best corporate governance practices, relevant governance codes, governance structure, processes and practices followed by the organisation
- business ethics, ethical policies, codes and practices of the organisation
- the structures and systems which enable the organisation to effectively identify, asses and manage risks and crises
- international practice
Technical skills/ experience
To assist with the ongoing aspects of Board’s role, the members are required to possess technical/ professional skills and specialist knowledge. The directors need to be able to obtain, analyse, interpret and use information effectively to develop plans and take appropriate decisions. In order to assess possession of such skills, the person will be required to have knowledge about-
- how to interpret financial statements and accounts in order to assess the financial health of an organisation
- the sources of finance available to an organisation and their related merits and risks
- how to assess the financial value of an organisation and potential business opportunities
- importance of information technology in the organisation
- marketing or other specific skills required for the effective performance of the organisation
Behavioural competencies/ personal attributes
Displaying high standards of conduct, ability to take responsibility for their own performance etc. are some of the behavioural competencies which the directors are required to possess. Interpersonal skills such as good communication skills, relationship building capacity etc. will come under this category. In brief, the following will be sub- sets under this head-
- Integrity and ethical standards
- Mentoring abilities
- Interpersonal relations
- Managing people and achieving change
- Curiosity and courage
- Genuine interest
- Active contribution
To create and implement effective strategies, a thorough knowledge of the strategic process is required. The ability to think strategically enables directors to propose ideas, options and plans that take advantage of available opportunities while reflecting a broad and future-oriented perspective. Having an understanding of the need for a clear vision and purpose to guide the strategy, models and methods of strategic analysis, option analysis the factors involved in successful strategy implementation by the directors is required for giving a strategic direction to the organisation. The sub- sets under this head may be as below:
- Strategic thinking
- Vision and value creation
- Strategy Development
- Strategy implementation and change
Mind- set or attitude
An ethical mind- set demonstrates a high standards of conduct. Further, professional attitude and independent mind- set enables director to provide the challenge and rigour required to help the Board achieve a comprehensive understanding of information and options, as well as high standards of decision-making. The head may be segregated into the following:
- Performance oriented
- Aware of self and others
Other skills may include decision making, communication, leadership, influencing, risk oversight, risk management, stakeholder relations etc. Good decision-making skills is required in order to arrive at a course of action in a timely manner that provides a clear direction and moves the organisation forward. Similarly, strong leadership skills enable directors to solve problems, cope up with the crises and change, and inspire others to follow them in pursuit of the values and goals of the organisation. The ability to build good networks and relationships within and beyond the organisation is important for the director to gain influence, have impact and progress organisational goals. The ability to communicate effectively through a variety of modes and channels and with a range of audiences is necessary for directors to work successfully with others and to fulfil their duties on the Board. Directors need to understand how to deliver effective leadership, build good stakeholder relations and develop a strategically aligned and values-based organisational culture in order to achieve good organisational performance. Therefore, the sub- sets hereunder may be-
- decision making skills
- communication skills
- leadership skills
- risk oversight
- risk management skills
- stakeholder relations
Suggestive format of reporting
|Broad parameter||Specific skills/ expertise/ competency
|Director 1||Director 2||Director 3|
Industry knowledge & experience
|Understanding of the relevant laws, rules, regulation policies applicable to the organisation/ industry/ sector and level/ status of compliances thereof by the organisation
|Understanding of the best corporate governance practices, relevant governance codes, governance structure, processes and practices followed by the organisation
|Understanding of business ethics, ethical policies, codes and practices of the organisation
|Understanding of the structures and systems which enable the organisation to effectively identify, asses and manage risks and crises
|Understanding of international practice
The amendments require listing out of the key skills/ competencies of the Board as a part of the corporate governance report for FY 18-19. From subsequent FYs, the disclosure will have to be by way of a matrix signifying the directors actually carrying such skills. It is anticipated that such a disclosure will help the shareholders to analyse the diversity of expertise/ skill – sets of the Board. This is believed that disclosure of each of the skills against the directors will make them responsible for each of the skills. Therefore, a director will not be able to escape responsibility with the shield of immunity provided by law which is circumstantial.
Munmi Phukon, Principal Manager
Vinod Kothari & Company
The Ministry of Corporate Affairs, on 30th May, 2019 issued a Notification amending Schedule VII of the Companies Act, 2013 (Act) which seeks to include disaster management, including relief, rehabilitation and reconstruction activities under CSR activities. The amendment is very crucial considering the recent history of natural disaster the country had witnessed and this was always an expectation of the corporate sector from the Government.
Provisions of law
The Act through Section 135 puts a social obligation on certain class of companies on the basis their turnover and net profits to spend 2% of the average net profits of past 3 years in the activities mentioned in the Schedule. However, the contribution to any disaster management/ relief activities was not specifically covered in the Schedule except for Prime Minister’s National Relief Fund. This was an insufficiency of law due to which the companies were, in a way, forced to restrict themselves to the PM’s Fund despite of their wish to contribute in other funds or to decline the benefit which the society deserves in such circumstances.
The two- fold benefit
Seemingly, the amendment has come out with a relief to the corporates as well as to the society at large. Therefore, the benefit is said to be a two- fold benefit which, in one hand, will ensure welfare of the society and the environment in need and in the other, it will help the corporates deployment of the minimum allocated CSR fund in needy areas in a more effective way.
By CS Megha Saraf (firstname.lastname@example.org)
The Securities Exchange Board of India (“SEBI”) formulated a Corporate Governance Committee (“CG Committee/ Committee”) under the Chairmanship of Shri Uday Kotak to amend/insert new provisions in the existing SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”). With a vision to enhance the standards of corporate governance of listed entities, several recommendations were made by the CG Committee in its Report dated October 2017 which were kept open for public comments/ suggestions. Out of the several recommendations made by the Committee, many of them were accepted with or without modifications and necessary amendments were brought in the Listing Regulations vide SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018 dated 9th May, 2018 enforcing them in tranches.
However, certain recommendations though accepted, were left with SEBI for implementation by way of circulars from time to time. In view of this, SEBI Circular SEBI/HO/CFD/CMD/CIR/P/2018/79 dated 10th May, 2018 (“Circular”) was issued requiring the listed entities having subsidiaries to adopt a Group Governance Policy in order to enhance the standards of corporate governance at a group level. Group Governance Policy is required when there is a “large number” of subsidiaries in a group.
This article seeks to lay down rules/guidance as to how to decipher the meaning of the “large number” in context of a group. In essence, whether there may be numerical number, which may, in absolute terms, be regarded as large, or whether the determination of large number is relative, and will depend on various factors. If so, what are those factors? In short, this article gets into the unclear question of how to determine whether a particular group has a large number of subsidiaries.
–updated as on 4th May, 2019
By Munmi Phukon- Principal Manager, Vinod Kothari & Company
The Ministry on 22nd January, 2019, issued a Notification prescribing certain amendments in the Companies (Acceptance of Deposits) Rules, 2014 effective from the same date which have further been amended vide another Notification 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-
- 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.
- 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’-
- 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;
- 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;
- 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);
- 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);
- 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;
- Inter- corporate deposits:
Any amount received by a company from any other company;
- 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.
- 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;
- 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;
- 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.
- 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;
- Non-interest bearing amount held in trust:
Any non-interest bearing amount received and held in trust;
- 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.
- 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;
- Any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act;
- Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982 (40 of 1982);
- Any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India;
- 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,-
- “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;
- “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.
- 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:
- 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
- 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.
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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