Deposits in Start Ups
On 7th September 2020, the Ministry of Corporate Affairs (MCA) notified the Companies (Acceptance of Deposits) Amendment Rules, 2020. A look at the background to enable better understanding of the amendment to deposit rules.
- A Deposit means and includes any receipt of money by way of deposit or loan in any other form excepting items mentioned in Rule 2 (1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 or such categories as may be prescribed by the RBI.
- The MCA and the RBI govern the acceptance of deposits of companies – public and private. Rules relating to deposits are not applicable to certain entities such as (i) Banking companies (ii) NBFCs (iii) Housing finance company and (iv) Government companies.
- Sections 73, 74 & 76 of the Companies Act, 2013 together with the Rules govern the acceptance or otherwise of Deposits from public. Accordingly, a Private company cannot accept or renew deposits except by obtaining prior consent of members in a general meeting, filing the Form DPT-1 within the stipulated time and depositing the requisite percentage to a separate account called deposit repayment reserve account and repayment with agreed interest rate.
- Certain amounts received by the companies are NOT considered as deposits. Such amounts are covered under Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules, 2014. They are:(i) Any amount received from the central government, state government, local authority or any statutory authority or authority constituted under an Act of Parliament.
(ii) Any amount received from foreign governments, foreign banks, multilateral financial institutions, 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.
(iii) Any amount received as loan from banks including 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 and the Reserve Bank of India Act, 1934
(iv) 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 Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934
(v) Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification by the RBI.
(vi) Any amount received by a company from any other company
(vii) Any amount received and held pursuant to an offer for subscription to any securities, including share application money or advance towards allotment of securities pending allotment. Such amount should be used only for allotment of securities applied for. If such securities are not allotted within 60 days from date of receipt of money, then it should be refunded within 15 days thereafter, then it will be treated as deposit.
(viii) Any amount lent by the director or a relative of the director to the company. Such person was a director at the time of lending the amount to the company.
(ix) Any amount raised by issue of bonds or debentures by creating charge on the assets of the company referred to in Schedule III excluding intangible assets, bonds, debenture, or CCDs within 10 years.
(x) Any amount received from an employee not exceeding his annual salary in the nature of non-interest-bearing security deposit
(xi) Any non-interest-bearing amount received and held in trust
(xii) Any amount received in the course of business; or as an advance for supply of goods or provision of services in the or a security deposit for the performance of contract for supply of goods / provisions of services. Such amount will not be considered a deposit only for a period of 365 days. Thereafter it will be considered as deposit.
(xiii) Any amount received as unsecured loans from promoters subject to fulfilment of certain conditions.
(xiv) Any amount accepted by a Nidhi company in accordance with the rules made under the Companies Act, 2013
(xv) Any amount received by way of subscription in respect of a
Chit Fund Act, 1982
(xvi) Any amount received by the company under Collective Investment Scheme in compliance with SEBI.
(xvii) An amount of Rs 25 Lakhs or more received by a start-up company, by way of convertible note (convertible into equity shares or repayable within a period not exceeding 5 years*** from the date of issue in a single tranche, from a person.
***(This sub rule was amended on 7th September 2020)
- In the following situations, private companies are exempted from complying with the conditions under section 73
(i) When a private company accepts deposits up to 100% of aggregate paid up capital + free reserves + securities premium; or
(ii) If the private company is a start up, then for a period of 5 years from date of incorporation, it can accept unlimited amount; or
(iii) which fulfils all the below conditions –
a) Which is not an associate or a subsidiary company of any other company.
b) If the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid-up share capital or Rs. 50 crores, whichever is lower and
c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section.
The Latest amendment – Companies (Acceptance of Deposits) Amendment Rules, 2020
Rule 2 (1) (c) contains those amounts which are not considered deposits under the Companies Act, 2013. Hitherto, Rule 2 (1) (c) (xvii) contained that an amount of Rs 25 Lakhs or more received by a start-up company, by way of convertible note (convertible into equity shares or repayable within a period not exceeding 5 years*** from the date of issue in a single tranche, from a person will not be considered as a deposit.
With effect from 7th September 2020, the MCA amended Rule 2 (1) (c) (xvii) Companies (Acceptance of Deposits) Rules, 2014. Such Rules are called the Companies (acceptance of Deposit) Amendment Rules 2020.
The amendment has replaced the phrase “5 years” with “10 years” in Rule 2 (1) (c).
Effect of the amendment
- This means that a startup can receive a sum of Rs 25 lakhs or more by way of a convertible note. Such convertible note will be converted into equity shares or repayable within 10 years from the date of issue. This will not be considered as a Deposit. This means that startup can raise money in the form of convertible notes which are convertible or reputable up to 10 years.
- The limits of total deposit from members does not apply to a private company which is a start-up for 10 years from date of its incorporation. This means that a start -up private company can accept deposits from its members without any limit till 10 years from its incorporation.
The notification further amends the clarification to the definition of “Start-up”. Accordingly, the amended definition reads as follows: ”start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number “G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
At the outset, the Companies Act, 2013 along with their Rules had provided enough time for start-ups to accept amounts without being considered as deposits. The latest amendments have doubled the time given to startups (from 5 years to 10 years) to accept such amounts which are not deposits and carry on their business. Startups have been given more relaxations to carry on with ease their business without the burden of compliance. A welcome relief in challenging times.
For notification refer: