ACCEPTANCE OF DEPOSITS BY COMPANIES - SUBSTANTIVE & PROCEDURAL LAW

The Companies Act 2013, consolidates provisions relating to acceptance of Deposits by Companies in 4 Sections, in particular from Sections 73 to 76 as contained in Chapter V. When sections 73 and 76 of the Act provides or law relating to issue of future deposits , Sections 74 and 75 deals with past deposits that exists at the time of commencement of the Act. Further the Companies (Acceptance of Deposits Rules) 2014 was notified and came into effect from 01.04.2014.

Definition of Deposits – Inclusions and Exclusions:

The term Deposits include, any receipt of money by way of deposit or loan or in any other form, by a company.[1]

However the following are excluded from the definition of deposits:

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

·         (ii) any amount received from foreign Governments, foreign or international banks, multilateral financial institutions, 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;

·          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, or a corresponding new bank as defined in Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980  , or from a co-operative bank ;

·         Any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf or any regional financial institutions or Insurance Companies or Scheduled Banks

·         Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines issued by the RBI

·         Any amount received by a company from any other company;

·         Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities.

Acceptance of future deposits – Conditions Precedent

Section 73 of the Act , provides for the manner in which Deposits are to be accepted by the companies.

A company can accept deposits only upon satisfaction of the following conditions:

·         Issuance of a circular to its members. Such notice shall include a statement showing

a)      the financial position of the company,

b)      the credit rating obtained,

c)      the total number of depositors

d)     amount due towards deposits in respect of any previous deposits accepted by the company

e)      such other particulars in such form and in such manner as may be prescribed;

·       Appointment of Deposit Trustees No company shall issue aforesaid circular or advertisement inviting secured deposits unless the company has appointed one or more deposit trustees for creating security for the deposits. [2]

·        filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;

·         Depositing such sum which shall not be less than 15% of the amount of its deposits maturing during a financial year and the financial year next following, in a scheduled bank in a separate bank account to be called as “Deposit repayment reserve account”. [3]Such amount shall not be used for any other purpose other than repayment of deposits.[4]

·          providing such deposit insurance in such manner and to such extent as may be prescribed;[5]

·       certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits;

·         Providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company.[6]

Unsecured Deposits:

Where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as ‘‘unsecured deposits’’ and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.[7]

Repayment of Deposits:

Every deposit accepted by a company shall be repaid with interest in accordance with the terms and conditions agreed upon. Where a company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal[8] seeking the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit. [9]

Non – Applicability of Section 73:

Section 73 (1) shall not apply to

a)      a banking company

b)      nonbanking financial company as defined in the Reserve Bank of India Act, 1934

c)      to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf. 

Acceptance of Deposits from Public:

Section 76 lays down conditions precedent for accepting deposits from persons other than its members. Section 76 applies to a Public Company having turnover/net worth as may be prescribed. The following are the ingredients of Section 76 for acceptance of deposits from public[10]:

·   Procedural Compliance : Compliance of Section 73(2) and subject to such rules as the Central Government may, in consultation with the RBI may prescribe.

·       Credit rating:  In Order to ensure safety of the deposit holders, Section 76 mandates that the company shall obtain the rating (including its net worth, liquidity and ability to pay its deposits on due date) from a recognized credit rating agency. Such rating shall be done in a periodical basis (every year during the tenure of deposits)  and shall be informed to the public.

·         Charge on assets: Every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

·         Applicability of Provisions pertaining to acceptance of deposits prescribed under Chapter V[11]

 Deposits Accepted Prior to the Commencement of this Act:

Section 74 of the Act provides for the following statutory requirements for deposits accepted prior to the commencement of the Act:

·         Filing of statement with ROC: The company is required to file with the Registrar a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayment.

·    Repayment of Deposits: The Company shall repay the same within one year from such commencement or from the date on which such payments are due, whichever is earlier.

    

      Grant of Further time: 

 The Tribunal may on an application made by the company, may grant further time for repayment of deposits after considering factors likethe financial condition of the company, the amount of deposit or part thereof and the interest payable thereon and such other matters.

Penality for Non – Compliance:

If a company fails to repay the deposit or part thereof or any interest thereon within the time specified in 74(1) or (2) as the case may be, the company shall, in addition to the payment of the sum due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees.

Every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.

Fraud:

Section 75 in addition to the remedy available for the aggrieved depositor under Section 74(3) provides additional remedy in event of fraud committed by the Company/ officers in charge of the Company in repayment of deposits.

If it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose,  every officer of the company who was responsible for the acceptance of such deposit shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.

 Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.

However remedy under this Section is available without prejudice to the provisions contained in Section 74(3) and section 447 of the Act.

Notifications & Circulars on Acceptance of Deposits – A Snapshot:

·         Amounts received by private companies prior to 16t April, 2Ol4 shall not be treated as 'deposits' under the Companies Act, 2013 and Companies (Acceptance of Deposits) Rules, 2014 subject to the condition that relevant private company shall disclose, in the notes to its financial statement for the financial year commencing on or after 1^st April, 2014 the figure of such amounts and the accounting head in which such amounts have been shown in the financial statement.Any renewal or acceptance of fresh deposits on or after 1st April, 2014 shall, however, be in accordance with the provisions of Companies Act, 20 13 and rules made thereunder[12]

·          A depositor is free to file an application under section 73(4) of the said Act, with the Company Law Board if the company fails to make repayment of deposits accepted by it. Further the company may also file application under section 74(2) of the said Act with the Company Law Board seeking extension of time in making the repayment of deposits accepted by it before the commencement of the provisions of the said Act. Also there is no bar on the Registrar of Companies for filing of prosecution against a company if such company fails to make repayment of deposits accepted by it under the provisions of the Companies Act, 1956 or Companies Act, 2013.[13]

SAVITHA G ARUN

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[1] Rule 2 (c) of Companies (Acceptance of Deposits) Rules, 2014

[2] Rule 7 of Companies (Acceptance of Deposits) Rules, 2014

[3] Rule 13 of Companies (Acceptance of Deposits) Rules, 2014

[4] Section 73 (5) of Companies Act 2013

[5] Rule 5 of Companies (Acceptance of Deposits) Rules, 2014

[6] Rule 6 of Companies (Acceptance of Deposits) Rules, 2014

[7] Proviso to section 73

[8] NCLT is yet to be constituted

[9] Section 73 (4) of Companies Act 2013

[10] Section 76(1)

[11] Section 76(2) and Rule 19 of Companies (Acceptance of Deposits) Rules, 2014

[12] General Ctrcular No. O5/2O15 dated 30.03.2015

[13] General Ctrcular No. O9/2O15 dated 18.06.2015

TRANSFER & TRANSMISSION OF SHARES – LAW & PRACTICE

Section 56 of the “”New Act” [Companies Act 2013], substitutes of old provisions pertaining to transfer and transmission of shares of a company. It is pertinent to note that Section 56 not only provides provisions for transfer of shares but also for the transfer of Interest in a Company which does not have a share capital.

 Though Section 44 of the Companies Act 2013, categorically placed “shares” as movable properties and are feely transferred, procedure involved in transfer and transmission of shares will not end in mere delivery of share certificates / instruments of transfer to the transferee.

Transfer of shares unlike transfer other movable properties involve the third party (Company) approval other than the transferor and the transferee. Also the definition section of Private Limited Company[1], places restrictions upon the transfer of shares held in a Private Limited Company.

Transfer of Shares – Law:

Section 56 of the Companies Act 2013, provides for the manner in which transfer of shares of a company be effected. Accordingly the procedure involved in transfer of shares of a company includes the following:

·         Production of Instrument of Transfer, in prescribed form (SH 4) either by the transferor or transferee. The instrument shall contain the name and particulars of the transferor and the transferee, along with the particulars of the share transferred.

·         Such instrument has to be duly executed and stamped as based on the value of shares that are transferred.

·          Share certificates / Letter of allotment of shares has to be delivered along with the instrument. In event of loss of instrument / the same has not been delivered within the prescribed period, the transfer may be effected on such terms as to indemnity as the Board may deem fit.

Transfer of Partly paid up shares:

In the words of Section 56(3), a transfer of partly paid up shares of a company shall be registered only upon issuance of notice to the Transferee and a no objection has to be obtained from him within two weeks from the issuance of the notice.

Delivery of share certificates:

Certificates of securities transferred or transmitted shall be delivered to the transferee within one month from the date of receipt of the instrument of transfer/transmission[2]. In case of securities dealt in a depository, then the details of such transfer shall be intimated to the depository immediately.

Refusal of Registration:

Shares of a public limited company are freely transferable. However, restrictions on transfer of shares shall be placed upon a Private Limited Company. In addition to the statutory provisions, transfer of securities of a private Limited Company are governed by the procedure prescribed in the Articles of Association of the Company.

The Board of Directors of a Company are vested with power to refuse the registration of transfer of shares of a Private Limited Company.[3]

Section 58 of the New Act provides the procedure on refusal of registration of shares. Accordingly, a Private Limited Company can refuse to register transfer/ transmission of shares by intimating the same within 30 days from the date of receipt of the instrument of transfer of intimation of the transmission. On refusal of registration of transfer, the Board is bound to provide reasons for such refusal.

Appeal by the Aggrieved Member:

Section 58(3) provides the mechanism for a member aggrieved by the act of the Company in refusing registration to redress the grievance. The transferor aggrieved by the refusal of transfer of shares or transmission as the case may be can file an appeal to the Tribunal within 30 days from the date of receipt of intimation refusing registration of transfer of shares. In case of no reply from the Board, then the member has a right to Appeal to the Tribunal within a period of 60 days from the date on which the instrument of transfer / transmission was delivered to the Company.

In case of transfer of shares of a public company, a member can appeal against the refusal of registration of shares within a period of 60 days from the date of receipt of refusal of transfer / transmission as the case may be. In case if there is no reply, then such appeal can be made within a period of 90 days from the date on which the instrument of transfer / transmission was delivered to the Company.

Court’s power to intervene:

The Tribunal after hearing both sides may either dismiss the Appeal or pass the following Order:

•       Direct the Company to register the transfer / transmission. Upon such Order the registration has to be made within 10 days from the date of the Order.
•     Direct rectification of Register.
•       Award damages to the aggrieved member, if any.

Any person contravening the Order of the Tribunal shall be punishable with an imprisonment of not less than 1 year but up to 3 years and a fine of not less than 1 lakh rupees but up to 5 lakhs rupees.

In Bajaj Auto Limited vs Company Law Board[4], the Supreme Court held that, if the power of the Board of Directors to refuse registration is not found in the interest of the Company, then the Court can interfere in the registration. The Board of Directors have a duty to act bonafide and in the interest of the Company and shareholders.

Judicial intervention is warranted when the refusal for transfer is based on irrelevant consideration. Refusal on frivolous ground was held void.[5]

Stamp Duty on Transfer of shares:

Stamp Duty for Shares are calculated on basis of consideration received on such transfer. A stamp duty of Rs 0.25 for every Rs 100 is chargeable as Stamp duty. In case of shares transferred without proper consideration ( Gift of shares), then the market value of shares are required to be considered for calculation of Stamp duty.

It is pertinent to note that Section 8A of the Indian Stamp Act exempts payment of Stamp Duty for securities issued in electronic form  provided the consolidated stamp duty is already paid. Also shares transferred between a Depository and the beneficial owner will not attract Stamp duty.

Liability to Pay Stamp duty:

According to the provisions of Section 29 of the Stamp Act, unless there is an agreement to the contrary,the expenses relating to the Stamp Duty are to be borne by the person executing the document. In the case of transfer of shares of a company it is the seller who is responsible for payment of stamp duty. [6]

The transferee is not liable for stamp duty on a mere fact that instrument for transfer of shares is required to be executed both by the transferor and transferee.[7] Section 17 of the Stamp Act makes it clear that any instrument chargeable with duty, should be stamped before the instrument is signed. However in practice this may also be borne by the transferee.

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[1] Section 2 (68) of the Companies Act 2013

[2] Section 56(4)(c)

[3] Section 58(2) of the Companies Act 2013.

[4] AIR 1999 SC 345

[5] Techno electric & Engg company Limited Vs Payal Singh, (1992) 1 Comp. L.J 334 (Cal)

[6]  Union of India vs. Kulu Valley Transport Ltd. (1958) 28 Comp. cas. 29

[7] Mrs. G.R. Parry vs. Union of India (1962) Comp. cas. 145

Independent Directors & Comapnies Act - An Analysis

The Concept of “Independent Directors” though not mandated by the Companies Act 1956,is not new to the Corporate scenario. Before the enactment of Companies Act 2013, the Clause 49 of the listing agreement contained the code of appointment of independent directors to the Board of listed companies.

The concept of Independent Director has now become a mandatory requirement under the Companies Act 2013.

Scope of Section 149 :

Section 149 of the Companies Act 2013 deals with provisions relating to the Appointment of Board of Directors. Sub sections (6) to (13) of the Section 149 provides for the qualification, term, liability, code of conduct and other aspects relating to the Independent Director.

Rule 4 of The Companies Appointment and Qualification of Directors) Rules, 2014[1]:

The following class or classes of companies shall have at least two directors as independent directors

  (i) the Public Companies having paid up share capital of ten crore rupees or more; or

  (ii) the Public Companies having turnover of one hundred crore rupees or more; or

 (iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:

 Qualifications of an ‘I.D’:

According to Section 149(6), the following persons (other than a Managing Director or Whole Time Director of a Company) are eligible to be appointed as independent directors of a Company:

a)      A person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience

b)      A person who is or was not a promoter of the company or its holding, subsidiary or associate company;

c)      A person who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

d)     A person who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

e)      A person none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

f)       A person who, neither himself nor any of his relatives--

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of--

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non profit organisation that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company; or

g)      A person who possesses such other qualifications as may be prescribed.

The Ministry of Corporate Affairs has clarified that, the term “Pecuniery Relationship” does not include transactions at “Arms length” price and they are excluded from Section 149 (6) [2]

Declaration by the Independent Director:

According to Section 149 (7),  Every I.D,

·         At the first Board meeting after his appointment, and

·         First Board meeting in every financial year or

·          whenever there is any change in the circumstances which may affect his status as an independent director

Shall give a declaration that he meets the criteria of independence as provided in sub-section (6) of Section 149.

Term of office:

·         As per the provisons of Section 149 (10) an I.D shall hold office for a term up to five consecutive years on the Board of a company.

·         An I.D is eligible for re-appointment on passing of a special resolution by the shareholders. Such appointment shall be disclosed in the Board's report.

·         According to Section 149 (11), No I.D,  shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. [ Provided during the said period of three years, he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.]

·         The provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of I.D’s. – Section 149 (13)

Liabillity :

The 2013 Act , while providing provisions relating to the I.D’s have also provided a shield to safeguard such directors from liability. Section 149 (12) draws a line of demarcation between acts committed within and outside the knowledge and consent of the I.D’s in determining the liability of the I.D’s. Accordingly an I.D is liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Though the wordings of the section with regard to the determination of liability of the I.D is vague and broad, the burden of proof is on the person who is desirous of imposing the liability on the I.D.

Other Provisions:

·         Subsection 8 of Section 149 connects with Schedule IV which provides for a comprehensive code of conduct with respect to the I.D.

·          Subject to the provisions of sections 197 and 198, an I.D shall not be entitled to any stock option. However he may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.[3]

Highlights of Schedule IV of the Act:

1.      The Code provides for guidelines for professional conduct of the I.D, which entrust fiduciary responsibility upon those directors to exercise their powers and duties in a bonafide and diligent manner.

2.      The Code enunciates the roles and functions of the I.D, where the I.Ds are required to take up different roles as a moderator, scrutiniser, a mediator etc ensuring effective functioning of the Board proceedings and safeguard the stakeholders interest.

3.      The Code lists the duties of the I.Ds right from periodical attendance and reporting of the Board Proceedings to acting as a Check point in preventing as to be filled any unfair practices etc happening in the Board and in the Company.

4.      The Code provides for the manner of appointment, removal and resignation of the IDs where in event of appointment, a letter of appointment containing various provisions relating to his appointment is mandatory[4]. In event of resignation / removal his place has to be filled up within 180 days from such resignation / removal. The MCA has clarified that, appointment of I.Ds who appointed before the commencement of this Act will not be considered for the purpose of calculating their tenure and fresh appointment has to be made under Section 149 (10) & (11) read with Schedule IV.[5]

5.       The code madates the meeting of the I.Ds without the presence of other directors of the Company atleast once in a year to review the activities of the Board throughout the year.

6.      The performance evaluation of the I.D shall be done by the Board excluding the director being evaluated and based on the report of such evaluation, the continuation of the I.D in the Company shall be determined.

In conclusion, it is very understood that the object behind the concept of Independent Directors as mandated by the legislation, is highly relevant for fair and ethical corporate governance, protection of Minority stakeholders’ interest and also it acts as a check point in conduct of affairs of the Board.

As pointed out in JJ Irani Committee Report, “The concept of Independence is not to be viewed merely as independence from promoters interest but from the point of view of the vulnerable stakeholders who cannot otherwise get their voice heard  ”, the new law has taken into consideration so many checkpoints before drafting the provisions relating to I.D’s.

However the question that whenever the compliance of this law is both in letter as well as in spirit has to be answered only over a period of time. Also the fact that the executive and wholetime directors’ fear of losing their confidentiality in entry of an external director who overlooks their proceedings cannot be ignored in a short period of time. To fill up the requirements, it needs as many independent directors as possible.

Also the fear of the Companies in finding a person of Expereince and expertise in the field is also to be noted here, as

Further the challenge lies in the hands of the I.D’s who are appointed with slightly over mounted responsibilities and when they overcome the same and contribute to the clean corporate governance.

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[1] As amended upto November 2014

[2] MCA Circular No. 14 of 2014 dated 9th June 2015

[3] MCA Circular No. 14 of 2014 dated 9th June 2015

[4] MCA Circular No. 14 of 2014 dated 9th June 2015

[5] MCA Circular No. 14 of 2014 dated 9th June 2015