With many new concepts in the Act, and many departures from the provisions of the Act of 1956, this article discusses in detail two very intriguing questions pertaining to the definition of deposits as now provided under the Act of 2013: firstly, whether or not the issuance of unsecured optionally convertible debentures can be treated as acceptance of deposits by the issuing company; and secondly, whether payment of a sum by one Indian company to another Indian company either as share application money or for subscription for debentures or advances for goods/ services/properties or security deposit will be covered under the definition of “deposit” under the Act of 2013.
The Companies Act, 2013 (“Act of 2013”), an Act enacted replacing the Companies Act, 1956 in major parts, had been in the offing for quite some time, and has seen much discussion, debate, and opinions from parties on both sides of the table. The Act, which has been notified in some parts on 12th September 2013, and then with effect from 1st April 2014, has also seen notification of rules under the Act by the Ministry of Corporate Affairs (MCA). The notified sections replace the corresponding sections of the Companies Act, 1956 (“Act of 1956”), although some provisions of the latter still remain in force.
Acceptance of Deposits as understood in general parlance, are the funds procured by any company in the form of a loan etc. for repayment with interest at a future date. The Companies Act, 2013 and the rules thereunder provide for specific conditions subject to which a company may accept deposits. Rule 2(1) (c) of the Companies (Acceptance of Deposits) Rules, 2014 (“Deposits Rules, 2014”), notified under Chapter V of the Act of 2013, provides a detailed definition of „deposits‟, and forspecific exclusions from the definition thereof. As per the provisions of the Act of 2013, deposits may be accepted by a company either from its members or persons other than its members i.e. the general public. However, a private company cannot accept deposits from the public, being one of the very conditions to its incorporation as a private company under the Act of 2013. Further, only those public companies may accept deposits from the public in which the net worth or turnover is equal to or more than the prescribed net worth or turnover.
These provisions are however not applicable to:
Meaning of ‘Debentures’ and exclusion thereof from Deposits
As far as the question of exclusion of issuance of optionally convertible debentures (unsecured) from the definition of deposits is concerned, analysis of the definition of „debenture‟ under Section 2 (30) of the Act of 2013, and the specific exemption under definition of „deposit‟ under Rule 2 (1) (c) of the Deposits Rules, 2014 becomes imperative. The Act of 2013 provides detailed provisions regarding the terms and conditions for the issue of debentures by a company, as well as the rights it may carry under law and section 2(30) of the Act of 2013 defines a „debenture‟ as including debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
(ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking paripassu withthe first charge on any of the 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 five 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;”
Debentures issued by a company may either be of secured nature or unsecured nature.
Issuance of Secured/Unsecured Debentures Thus, following are the qualifications for the debentures issued to be exempt from being considered a deposit under the Act: a) The amount should have been raised by way of issue of secured bonds or secured debentures; and
OR
They should be convertible within five years. The Deposits Rules, 2014 provide that only the bonds and debentures of secured nature shall not be treated as deposits. Thus it is to be noted that companies shall not issue debentures by merely creating subsequent subordinate charges on the same property, since the requirement of the law is to create a first charge or a charge ranking paripassu with the first charge.
Further, it may be inferred that the position under the Act of 2013 with respect to issuance of unsecured debentures is that they shall be treated as deposits. Here it is pertinent to mention that unsecured debentures were also not covered in the amounts exempted from the meaning of deposits under rule 2(b) (x) of the Companies (Acceptance of Deposits) Rules, 1975, notified under section 58- A of the Act of 1956.
Optionally convertible debentures are debt securities which allow the investor toconvert the debt into equities of the issuing company at a price which is normally decided at the time of the issue. In contrast to this, compulsorily convertible debentures‟ are debt securities compulsorily converted into equity shares after a specified time at an agreed price.
The Deposits Rules, 2014 exempt those debentures from the definition of deposits as are compulsorily convertible into shares of the company within five years. It is to be noted that under the 1956 Act and the Companies (Acceptance of Deposits) Rules, 1975, such debentures, as with an option to convert them into shares in the company, were also exempt from the purview of being considered as deposits. However, under the Act of 2013, only such debentures as are compulsorily convertible into shares of the company within five years are exempted.
Thus, where even under the previous law, it had been clarified that debentures shall remain exempted from being considered as deposits only so long as they are convertible, and once such period of conversion is over, it was to acquire the character of a deposit under law. Now, where compulsory convertible debentures exceeding a tenure of five years are issued, they will be considered as „deposits‟under the Act of 2013 and shall not be exempted from being treated as such. Further, optionally convertible debentures issued by a company shall be treated as deposits under the purview of the Act of 2013 and the rules thereunder, irrespective of the tenure of such instruments.
Now, to proceed to the second relevant question, as to whether payment of sum by one Indian company to another Indian company either as subscription for debentures or otherwise will be covered under the definition of “deposit”, consideration is to be given to rule 2(c) (vi) of the Deposits Rules, 2014 under which “any amount received by a company from any other company” is not considered as a deposit.
In addition to above discussed exemption, another category of amount is exempted under rule 2(1)(c)(vi), in terms of which, deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include any amount received by a company from any other company. In other words, any amount received by a company from any other company shall not be considered as deposit in terms of the said rule 2(1) (c) (vi) of the Deposits Rules, 2014. Following are the components of the provision for the amount to be exempted from the definition of deposit:
Thus like in the previous law, a specific exemption has been provided under the Act with respect to receipt of any amount by the company from any other company, since such transaction were governed under the provisions of section 372A pertaining to inter-corporate loans under previous law and under provisions of section 186 under the new law. Again, the term Loan‟ had been defined under explanation to section 372A of the previous law as “loan includes debentures or any deposit of money made by one company with another company, not being a banking company”
Section 186 of Act of 2013 regulates the giving of any loan by a company to any person or other body corporate, and any guarantee or providing any security in connection with a loan to any other body corporate or person, and acquire the securities of any other body corporate by way of subscription, purchase or any other means, whether directly or indirectly, exceeding 60% of its paid- up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.
It is to be noted here that, like sections 292 and 372A of the Act of 1956, section 186 of the Act of 2013 provides for restrictions imposed only on the lending company (and hence the company giving the deposit) and only section 180(1)(c) imposes restrictions on the borrower company (and hence the company accepting deposits). The position with respect to exempting money received by one company from another company as deposit is required to be interpreted as being included as a loan, and required to be in compliance with the requirements of section 179, 180(1)(c) and 186 of the Act of 2013, applicable to borrowings and inter corporate loans.
A cardinal rule of interpretation, harmonious interpretation, is that when there are in a statute two provisions which are in conflict with each other such that both of them cannot stand, they should, if possible, be so interpreted that effect can be given to both and the construction which renders either of them inoperative and useless should not be adopted except in the last resort. One application of this rule is that when there is a law generally dealing with a subject and another dealing particularly with one of the topics comprised therein, the general law is to be construed as yielding to the special in resects of the matters comprised therein.
It is important to point out the case of Maharashtra State Board of Secondary and Higher Secondary Education v. Paritosh Bhupesh Kumarsheth, where the Hon’ble Supreme Court of India ruled that it is a well-established doctrine ofinterpretation “that the provisions contained in a statutory enactment or in rules/ regulations framed thereunder have to be so construed as to be in harmony with each other and that where under a specific section or rule a particular subject has received special treatment, such special provision will exclude the applicability of any general provision which might otherwise cover the said topic.”
Thus, in a situation where unsecured optionally convertible debentures have been issued by a company to another company, the rule of harmonious construction leads to a broad and liberal construction, that both the exemptions as provided under rule 2(1)(c)(vi) of the Deposits Rules, 2014, pertaining to, receipt of any amount by the company from any other company‟ and under rule 2(1)(c)(ix) of the Deposits Rules, 2014 pertaining to „issue of secured debentures or bonds or compulsory convertible debenture or bonds within five years‟, are to be read together in a manner that effect shall be given to both and neither provision shall become inoperative or redundant.
Interpreting the provisions of the Act of 2013, and reading them understanding the intent of law, both the exemptions provided under rule 2(1)(c)(vi) and rule 2(1)(c)(ix) of the Deposits Rules, 2014 are to be read together and given effect to, both being specific in nature. The Companies Act, 2013 is a legislation that restricts, as well as opens vistas of scope for interpretation, and has led many companies and groups in the country to re- think their structures and strategies, given the changes in the scope and working of the law. What is now required is proper planning, and ensuring that the new law is duly complied with, and the intent of the law to further disclosures and curb frauds is lived upto.
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