Research Paper

in
CORPORATE LAWS - I

AN ANALYSIS OF THE LEGAL

REGIME OF
COMPANY DEPOSITS

Submitted By
Sachin Malhan
BLIG 757

Table of Contents
TABLE OF CASES

INTRODUCTION

The Coming into Vogue of Company Deposits

Thorns in the Side?
A Cause for Control
RESEARCH METHODOLOGY

WHAT CONSTITUTES A COMPANY DEPOSIT

What is a Deposit?
Constitution of Public
Loans and Deposits
Debentures and Deposits
Secured Deposits
DEPOSITS EXEMPT FROM THE REGULATORY FRAMEWORK

11

Status of Unclaimed Deposits

INVITATION OF DEPOSITS

13

INCORPORATION OF CREDIT-RATING IN DEPOSIT ADVERTISEMENTS

CRISIL

Ratings

15
FINALISATION OF MATTERS RELATING TO ACCEPTANCE OF DEPOSITS

Limits

on

Amounts

Invited

for

Acceptance

17

The FERA Factor

Penalty for Accepting Deposits in Excess of Limits
PAYMENT OF INTEREST

19

Penalties for Default

REMEDIES FOR REFUND OF DEPOSITS

20

Company Law Board

Writ Jurisdiction
THE CONTROVERSIAL RULE 3A

21

COMMERCIAL PAPERS

23

CONCLUSION

24

BIBLIOGRAPHY

26

Table of Cases

Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. Union of India,

(1983) 53 Comp. Cas. 904.

Annamalai v. Veerappa, AIR 1956 SC 12.

Delhi Cloth and General Mills Co. Ltd. v. Union of India, (1983) 54 Comp.
Cas. 674.

Durga Prasad Mandelia v. Registrar, (1987) 61 Comp. Cas 479.

Ittiavira Thomas v. Joseph Tile Works Ltd., AIR 1957 TLC 6.

Modi Carpets Ltd., [1991] 6 CLA 152 (CLB).

Modi Spinning & Weaving Mills Company Ltd. v. Union of India, AIR 1979 All
221.

Pure Drinks (New Delhi) Ltd, Patiala, (1992) 73 Comp Cas 190 (CLB).

Ram Janki Devi v. Juggilal Kamlapat, AIR 1971 SC 2551.

State of West Bengal v. Union of India, AIR 1996 Cal 181.

Vijay Kumar Gupta v. Eagle Paint & Pigment Industries P. Ltd., (1997) 13 SCL
179 (CLB).

INTRODUCTION
The Coming into Vogue of Company Deposits
The early 1960s saw the private sector face a cash crunch. As the five-year plans
swung into operation availability of finance to the private sector from traditional
resources began to fail to meet the growing demands of the companies.
Companies saw deposits from the public as a hassle free and easy way of
securing capital. The public that went in for this was happy with the offer since
the interests raised were higher than in the case of bank deposits and apparently
safer than the fluctuation of share values. Since it was a new practice there were
no legal restrictions or procedural hang-ups. More and more corporate
enterprises including trading and investment companies went in for this route of
raising capital.1
Thorns in the Side?
However this apparently pleasant state of affairs was constantly embittered by
the nefarious activities of mushroom companies that had the object of cheating
unwary public and who cashed in on the enthusiasm shown by the deposit
subscribing public. Since a legal was absent depositors began to get defrauded
frequently. What was even more worrisome than the actions of these defrauding
companies were the defaults of the genuine companies. These companies could
not honor their commitments to pay interest or repay deposits accepted by them
due to financial crunches.
A Cause for Control
In light of such a situation the RBI stepped in and assumed powers to regulate
acceptance of deposits by non-banking institutions through an amendment to the
Reserve Bank of India Act, 1934. RBI followed up the assumption of these
powers by issuing directives regulating the acceptance of deposits by NonBanking Financial, Non-Banking Non-Financial, Miscellaneous Non-Banking and
Residuary Non-Banking companies.2
All this while the principle Act governing the activities of companies i.e. the
Companies Act, 1956 remained devoid of any provision affecting the legal regime
1
2

Raghuraman, G., Company Deposits: Protection to Depositors, (1990) 1 Comp LJ 109.

Ibid; Also see Majumdar, A.K., Acceptance of Deposits by Companies, 50 Taxman 254 (1990).

of company deposits. This anomaly was rectified in 1974 by an amendment,

which inserted s.58A which in turn mandated the making of certain disclosures by
way of an advertisement which every company seeking deposits was expected to
issue. Importantly, the section empowered the Central Government to make rules
pertaining to the manner in which companies could accept deposits. 3
In 1975 the Central Government in exercise of its power under s.58A introduced
the Companies (Acceptance of Deposit) Rules, 1975.
The Sachar Committee Recomendations
The Sachar Committee which went into the simplification of the Companies and
MRTP Acts had looked into the various aspects of protection to deposit holders in
its report in 1978. They explained that though depositors were themselves
undertaking a risk by going in for unsecured deposits which came with higher
rates of interest it was still the duty of the legislators to educate and caution the
depositors about such risk. The Sachar Committee also recommended that some
effective be made available to aggrieved creditors.4
Thus though s.58A and the rules of 1975 ushered in an operative legal regime for
company deposits they left a fair bit to be desired in terms of dealing with the
consequences of default in repayment and in payment of interest. Successive
amendments in 1988 and in 1996 have remedied the situation to an extent by
invoking the control of the Company Law Board (as per the advice of the Sachar
Committee way back in 1978).

3
4

The Companies (Acceptance of Deposit) Rules, 1975 are a outcome of such an exercise of power.
Chandratre, K.R., Handbook on Company Deposits, Bharat Law House: New Delhi, 1994, p.4, 5.

Research Methodology
In this research paper the researcher has to strike a balance between the
procedural formalities and substantive intricacies of the legal regime of company
deposits. The law of company deposits spans not just one of the most exhaustive
sections in the Companies Act, 1956 in the shape of s.58A but also an entire set
of rules in the shape of the Companies (Acceptance of Deposit) Rules,1975. The
area is typically riddled with procedural formalities incorporated to safeguard the
interests of the public. There are substantial questions relating to the nature of
deposits, credit-rating trends and judicial attitudes towards constitutional
challenges to s.58A but an analysis of the regime entails an illustration of the
procedure.
Prior literature on this subject is restricted to reasons for the imposition of the
regime and instructions on how to go about the process of inviting deposits. As a
recourse a fair bit of statute analysis had to be undertaken by the researcher and
for a few issues reliance was placed purely on leading case law.
The method of research combined statute and case analysis wherever possible
with descriptive summarisation of necessary procedure to give the reader an idea
of the procedural depth of the subject.
In the opinion of the author this subject topic would make a suitable research
topic for a student undertaking a seminar.
The paper adopts a three-pronged approach;
1) What qualifies as a public deposit for the purposes of regulation?
2) What are the procedural formalities involved in inviting and accepting
deposits?
3) What are the main areas of contention and development?
The manner of footnoting is standard and uniformly followed.

What Constitutes a Company Deposit

What is a Deposit?
Section 58A offers no assistance in proffering an exhaustive definition of the term
deposit. According to the explanation deposit means any amount of money
borrowed by a company (but exclusive of exempt categories for the purposes of
s.58A). Rule 2(c) of the corresponding rules define a depositor as including any
person who has given a loan to a company. The best statutory definition is
proffered by the Reserve Bank of India Act, 1934 in which s.45-I(bb) states,
deposit shall include, and shall be deemed always to have included, any money
received by a non-banking institution by way of deposit, or loan or in any other
form, but shall not include amounts raised, by way of share capital, or
contributed as capital by partners of the firm. 5
It is an action that establishes the relationship of debtor and creditor or borrower
and lender.6

Constitution of Public
Since the regulations under s.58A of the Companies Act apply to invitations to
the public to deposit the scope of the expression public assumes critical
importance. The contentious question here concerns the status of the employees
of the company. The Department of Company Affairs vide clarification No,8/48 of
1984 stated that;
1) Public included a section of the public as well;
2) Neither sub-section (1) nor sub-section (2) of s.58A excluded from its ambit
the employees of the company. Thus employees are to be taken as public.
Since s.58A is attracted only if the invitation or acceptance is from the public
deposits accepted from friends, relatives and associates are not affected
(employee excluded). In such application upon request from the prospective
depositor it must be made clear that the form cannot be made available to a third
person because then it would enter the public sphere for the purposes of the law.

Supra n.4 at 5.
Shanbhogue, K.V. and Ganesan, K., Guide to Company Deposits and Commercial Paper, 3rd Edn.,
Wadhwa: Nagpur, 1990, p.59.
6

Loans and Deposits

The explanation to Section 58A of the Companies Act supplies a wide
connotation to the term deposit. It states that the term deposit means any
deposit of money with, and includes any amount borrowed by a company. Prima
facie, the explanation suggests that loans are also deposits within the meaning of
the Act. This conclusion seems to be reinforced by the definition of depositor
under Section2 (c) of the Acceptance of Deposits Rules. Depositor is defined to
include any person who has given a loan to the company.7
Thus we are left with a familiar but awkward situation where the relevant statutes
do not offer any help in drawing a distinction. The distinction is to be found in the
judgements of the Apex Court, which has repeatedly pointed out that the
distinction is fundamental.
In Annamalai v. Veerappa8, the Supreme Court observed that although, in a
particular case, the term loan may include deposits, every loan is not a
deposit. It indicated, in the course of drawing the distinction, that;

The person making the deposit has no right to call back the deposit;
The deposit does not become a debt until the period for which the money is
deposited expires and
As a consequence the creditor has no right to recover the money before the
deposit period concludes.

The Supreme Court has repeatedly held that whether a transaction is a loan or a
deposit will depend on the surrounding circumstances, the relationship and
character of the transaction and the manner in which the parties treated the
transaction.9
However despite this three-point distinction it cannot be concluded that there
exists no confusion since the two overlap considerably.

Chakraborti, A M, Taxman's Corporate Law, Taxman Allied Services (P) Ltd.: New Delhi, 1995, p.227.
AIR 1956 SC 12
9
Ram Janki Devi v. Juggilal Kamlapat, AIR 1971 SC 2551; Durga Prasad Mandelia v. Registrar, (1987)
61 Comp. Cas 479; cited from Chandratre, K.R., Handbook on Company Deposits, Bharat Law House:
New Delhi, 1994, p.7.
8

10

Debentures and Deposits

Thought the definition of debenture contained in clause (12) of section 2 is
inclusive it does not throw much light on the true nature of a debenture it clearly
categorizes a debenture as a kind of security. A debenture can be said to an
issue of security by a company for being put into the money market in order that
they remain transferable.10
A deposit differs from a deposit in certain fundamental respects;
A deposit receipt is not a security;
A deposit is not issued or put into the money market;
A debenture is transferable (secs.118, 111,112 and 113) while a deposit is not;
A debenture can be perpetual (s.120) while the very nature of deposits
implies a specific period;
There are also several statutory differences that set apart debenture from loans. 11

Secured Deposits
Normally deposits are unsecured but there is no bar under the rules to securing
of deposits though it is interesting to note that it was this unsecured nature of
deposits that spurred the imposition of the legal regime in the 1960s. However,
as per s.125 the charge created by securing the deposits has to be registered
with the Registrar of Companies.
Where security is to be given, a mention must be made in the advertisement
seeking deposits.12 Since under the Capital Issues (Control) Act, 194713 all issue
of capital involving securities has to be made with the consent of the Controller of
Capital Issues the same has to be obtained in the case of the secured deposits.

10

Ittiavira Thomas v. Joseph Tile Works Ltd., AIR 1957 TLC 6.

The Companies Act permits the re-issue of redeemable debentures (s.121) while a deposit can only be
renewed in accordance with rules made by the Central Government (s.58A (1)). The Act requires the
maintenance of register of debenture holders (s.152), issue of debenture certificates (s.113) and the calling
of meetings of debenture holder (s.170). None of these requirements apply to deposits.
12
A specimen statement of such a security notification is as follows;
The deposits are secured. The security is charge by way of hypothecation of the current assets of the
company. This charge is subject to the charges already created or which may hereafter be created in favour
of banks and financial institution. The charge has been registered with the Registrar of Companies,
..pursuant to the provisions of Section 125 of the Companies Act, 1956. Obtained from Shabhogue,
K.V., op.cit..
11

13

11

Deposits Exempt from the Regulatory Framework

For the purposes of the Rules certain categories of borrowings are excluded.
Therefore, none of the restrictions specified in the rules specified in the Rules
(limitation on amount of deposits, terms of deposit, interest ceiling etc.) are
applicable to these exempt deposits. Therefore exempt deposits can be accepted
freely as usual.14
The following deposits are exempt; 15
Amounts Received from the Government16

Amounts Received from Foreign Sources17

Loans from Banks18

Loans from Institutions19

Deposits by Wholly Owned Government Financial Companies

Notified Financial Companies/ Public Financial Institutions

Amount Received from another Company (Inter-Company Deposits) 20

Amount Received from Employee by way of Security Deposit 21

Amount Received from Agents22

Advances against Orders (for supply of goods etc.) 23

Subscriptions to Securities24

Calls in Advance of Shares25

Trust Moneys26

Money in Transit27

Amount Received from Directors28

Shareholders Money29

14

They, are still obviously subject to other restrictions such as articles of association and memorandum of
association.
15
Supra n.6 at 78-85.
16
Rule 2(b)(i).
17
Rule 2(b)(i).
18
Rule 2(b)(ii).
19
Rule 2(b)(iii).
20
Rule 2(b)(iv).
21
Rule 2(b)(v).
22
Rule 2(b)(vi).
23
Rule 2(b)(vi).
24
Rule 2(b)(vii).
25
Rule 2(b)(vii).
26
Rule 2(b)(viii).
27
Rule 2(b)(viii).
28
Rule 2(b)(ix).
29
Rule 2(b)(ix).

12

Secured Bonds or Debentures30

Convertible Bonds or Debentures31

Promoters Unsecured Loans32

Earlier Deposits33

Status of Unclaimed Deposits

Deposits that have matured but have not been claimed by the depositors are
known as unclaimed deposits. The importance of qualifying the status of these
deposits arises in the context of the determination of the ceiling (imposed by the
rules) on receivings by way of deposits.
If the unclaimed deposits are X and the ceiling is 5X then the company can
further accept only 4X (i.e. 5X - X). However if the unclaimed deposits can be
treated as monies held in trust then they are exempt for the purpose of the rules
and can be discounted in the ascertainment of the ceiling.
The Company Law Board has issued such a clarification 34, which has sorted out
the dispute in a manner unfavourable to companies holding unclaimed deposits.
According to the circular both unclaimed and unpaid deposits are to be taken into
account for computing the ceiling on deposit holdings.
Thus having regard to the clarification it is advisable that companies in their
accounts show unclaimed matured deposits under Fixed Deposits.

30

Rule 2(b)(x).
Rule 2(b)(x).
32
Rule 2(b)(xi).
33
Explanation in Rule 2(b).
34
Circular No. 8/13 of 1986 c.f. Supra n.6 at 92.
31

13

Invitation of Deposits
Before a company allows or invites any other person to invite deposits, on its
behalf, it must issue an advertisement including therein a statement illustrative of
the financial position of the company and other particulars prescribed under the
rules vide Section 58A(2). Of course such requirement need not be fulfilled by
exempt deposits.
The advertisement must contain a reference to the condition subject to which
deposits shall be accepted and the date on which it was approved by the
directors (as per rule 4(2)) and the particulars to be mandatorily included are:

Name of the Company

Date of Incorporation of the Company

The Business carried on by the Company

Brief Particulars of the management of the Company

Details of Directors of the Company

Profit Accounts for three financial years

Dividends declared in respect of the three aforesaid years

Summarised financial position35

Ceiling on amounts that may be raised by deposits and present deposit

holdings

Declaration of no overdue deposits or in the case of overdue deposits;

indication of the same

Declaration of compliance with regulations. 36

It is important to note that the above list of what can be included in the
advertisement under S.58A. It is merely indicative of the mandatory
requirements. A company may include any other statement, not amounting to
mis-statement under S.58B, which inspires confidence in the creditworthiness
and investor-friendliness of the advertising company. It is for this purpose that
such as CRISIL ratings are frequently exercised. Besides the above listed
mandatory requirements the company must also include information

35
36

Rule 4(2)(h) of the Rules.

Rule 4(2) of the Rules.

14

corresponding to the type of deposit scheme proffered and any statutorily

specified terms thereof.37
Since the provisions of the Act relating to prospectus are applicable so far as
they may be to 58A advertisements the scope of the extra information that may
be given is roughly set out.38

37

For instance in the case of a secured deposit a statement expressing that intention must be made. Such a
statement assumes mandatory nature.
38
S.58B of the Companies Act, 1956.

15

Incorporation of Credit-Rating in Deposit

Advertisements
With a view to create confidence in the minds of prospective depositors ensuring
better response to offers of deposits companies now seek credit ratings and
place the same in the advertisements seeking deposits. 39 The credit rating must
be received from an agency recognized by the central government.
At present there are three credit-rating agencies in India, they being,
Credit Rating Information Services Ltd. (CRISIL)
Investment Information and Credit Rating Agency of India (ICRA)
Credit Analysis and Research Ltd. (CARE)
Ratings are based on objective analysis of information, as also clarifications
obtained from the concerned company and other sources.
CRISIL Ratings
CRISILs prime objective is to rate debt obligations of Indian companies. Its
ratings provide a guide to the investors as to the risk of timely payment of interest
and principal on a particular debt instrument. Besides rating deposit schemes
CRISIL also rates debentures, short-term instruments and preference shares.
A CRISIL rating relates specifically to a particular debt instrument and is not a
rating for the company as a whole. The rating is not a recommendation to invest
or not to invest but merely to help the prospective investor make the correct
investment choice.
CRISIL adopts a two-pronged approach in considering the credit-worthiness of
the borrowing company;
Business Analysis
Financial Analysis
In its Business Analysis it considers;

39

Industry Risk (nature and business of competition; key success factors;

demand supply position; structure of industry; Government policies)

Vijia Kumar, N., Company Deposits From window-dressing to credit rating, 5 Sebi & Corporate
Laws 73 (1995).

16

Market Position of the Company within the Industry (market share;

competitive advantages; selling and distribution arrangements; product and
customer diversity)
Operating Efficiency of the Company (location advantages; labour
relationships; cost structure and manufacturing efficiency as compared to
those of competitors)
Legal Position (terms of prospectus, trustees and their responsibilities;
systems for timely payment and for protection against forgery/fraud)

In its Financial Analysis CRISIL considers;

Accounting Quality (misstatement of profits; auditors qualifications;
methods of income recognition; inventory valuation and depreciation policies;
off balance sheet liabilities)
Earnings Protection (sources of future earnings growth; profitability ratios;
earnings in relation to fixed income charges)
Adequacy of Cash Flows (in relation to debt and fixed and working capital
needs; variability of future cash flows; capital spending flexibility; working
capital management)
Financial Flexibility (alternative financing plans in times of stress; ability to
raise funds; ARP (Asset Reemployment Potential))
The above-mentioned list is not exhaustive of the factors considered by CRISIL. 40

Rating symbols for deposit schemes are as follows 41;

Rating
Indications regarding Degree of Safety
FAAA
Degree of Safety regarding timely payment of interest and principal is
very strong
FAA
Degree of Safety regarding timely payment of interest and principal is
strong. However relatively weaker than FAAA rating holders
FA
Degree of Safety regarding timely payment of interest and principal is
satisfactory. Changes in circumstances can affect these issues more
than those in higher rated categories
FB
Degree of Safety regarding timely payment of interest and principal is
inadequate. Issues are susceptible default

40
41

Other factors to be considered depends on type of company.

Obtained from Supra n.6 at 96.

17

Finalisation of Matters relating to Acceptance of

Deposits

Limits on Amounts Invited for Acceptance

The various types of deposits are divided into two categories, which are subject
to different quantitative limitations. 42
The table below represents the categorisation; 43
Category and Accorded Limitations
Category I Deposits
The limit is 10 % of the aggregate of
the paid-up capital and free reserves 44
as reduced by accumulated balance of
loss, balance of deferred revenue
expenditure and other intangible assets

Category II Deposits
25% of the aggregate of the paid-up
capital and free reserves as reduced by
accumulated balance of loss, balance
of deferred revenue expenditure and
other intangible assets

42

Types of Deposits
Deposits
against
unsecured
debentures
Deposits from Shareholders
Deposits guaranteed by persons who
were directors, managing agents or
secretaries of company at the time of
the guarantee
Short-term deposits of 3 months or
more but less than 6 months of the
above categories up to 10% but within
15%45

All Other Deposits

Rule 3
See supra n.6 at 99.
44
See next sub-chapter on how this is arrived at.
45
Rule 3(1)(2); As from April 1st 1981, only the following categories of short term deposits can be
accepted;
(1) deposits against unsecured creditors;
(2) deposits from shareholders;
(3) deposits guaranteed by a director of the company or by its managing agent at the relevant time.
43

18

Calculation of Paid-up Capital and Free Reserves

The aggregate of paid-up capital and free reserves (for the purposes of
calculating the ceiling) is arrived at as per the latest audited balance sheet. 46
Audited balance sheet is one which has been audited by the statutory auditors
for the purpose of laying down before the annual general meeting and on which
the auditors should have given a report in terms of s.227 of the Companies Act. 47
Free reserves means reserves of funds not set-aside for any specific purpose. 48

The FERA Factor

While finalizing the terms, the conditions, if any, imposed by the RBI under
s.26(7) of the Foreign Exchange Regulation Act, 1973 on certain companies
should be kept in mind and incorporated in the terms and conditions governing
the acceptance. Section 26(7) mandates that no company (other than a banking
company) in which the non-resident interest 49 is more than forty percent shall
borrow money from a person resident in India, or accept a deposit of money from
such person without the permission of the RBI.

Penalty for Accepting Deposits in Excess of

Limits
Acceptance of deposits beyond prescribed limits is an offence by way of Rule
3(ii) and Rule 11 of the Companies Acceptance of Deposits Rules, 1975. The
entire amount borrowed by a company in excess of the permitted limits and
treated as deposits under Rule 2 (b)(ix) would be repayable within 30 days with
interest at the market rate subject to a ceiling envisaged in the rules. 50

46

Explanation to Rule 3.
Supra n.6 at 99.
48
The term free reserves is defined under s.373 explanation (b) as being those reserves which as per the
latest audited balance sheet of the company, are free for distribution as dividend and shall include balance
to the credit of securities premium account but shall not include share application money.
49
For the purpose of this section non-resident interest means participation in the share capital or entitlement
to the distributable profits of a company by any individual or company resident outside India or any
company not incorporated under any law in force in India or any branch of such company whether resident
outside India or not.
50
Vijay Kumar Gupta v. Eagle Paint & Pigment Industries P. Ltd., (1997) 13 SCL 179 (CLB).
47

19

Payment of Interest
Interest is normally paid annually or half-yearly. It may be paid on specific dates
or on the expiry of some period. Payment on fixed dates is usually preferred
because it facilitates processing and control.

Default in Payment of Interest

When a company defaults in the payment of interest, there is no contravention of
the Act or the Rules but a cause of action will arise because the default would
amount to a breach of contract. The depositor may file a civil suit for the amount
due and damages, if any.51
Under s.434 of the Companies Act it is provided that a company will be deemed
to be unable to pay its debts if the creditor, to whom an amount of not less than
500 rupees is due from the company, serves a notice on the company.
In light of the remedies presently available it would seem reasonable for the
Rules to incorporate a remedial provision with regard to non-payment of interest.

51

Supra n.6 at 193.

20

Remedies for Refund of Deposits

Company Law Board

Prior to 1988 the legal regime of company deposits was devoid of any effective
remedial provisions for the aid of aggrieved depositors. The Companies
(Amendment) Act, 1988 remedied that situation by introducing sub-section (9) to
s.58A. Vide the effect of these recent amendments the Company Law Board is
now equipped with suo moto powers with regard to ordering the repayment of
deposits.52
Sub-section (9) of s.58A provides that where a company has failed to repay any
deposit or part thereof in accordance with the terms and conditions of such
deposit, the Company Law Board (CLB) may (if it is satisfied, either on its own
motion [suo moto] or on the application of the depositor, that it is necessary to do
so to safeguard the interests of the company, the depositors or in the public
interest) direct, by order, the company to make repayment of such deposit or part
thereof forthwith or within such time and subject to such conditions as may be
specified in the order.
In Modi Carpets Ltd.53 it was held that the CLB, on its own motion, can call
details of all the outstanding deposits of the company and issue directions for
their directions for their discharge in the order of the maturity dates together with
the respective simple interest.
As regards Non-Banking Financial Companies (NBFCs) the CLB has been
empowered by the insertion of s.45QA in the Reserve Bank of India Act, 1997 to
order repayment of deposits. This action can be taken suo moto or on the
application of the depositor.

Writ Jurisdiction
In State of West Bengal v. Union of India54, the Calcutta High Court allowed a
writ petition filed in the interest of depositors by way of public interest litigation
and observed that the mere existence of an alternative remedy did not deter
effective writ jurisdiction. It said that since the remedy must not be merely
alternative but also efficacious an alternative remedy defeating writ jurisdiction
cannot be said to be there in the Companies Act which incorporates insufficient
remedies.
52

Supra n.7 at 74
[1991] 6 CLA 152 (CLB).
54
AIR 1996 Cal 181.
53

21

Rule 3-A of the Companies (Acceptance of Deposits)

Act, 1975: A Permanent Bone of Contention
In Modi Spinning & Weaving Mills Company Ltd. v. Union of India55, the validity
of rule 3-A was first questioned. The matter was re-agitated in Ahmedabad
Manufacturing and Calico Printing Co. Ltd. v. Union of India56 and then finally
settled by the Supreme Court in Delhi Cloth and General Mills Co. Ltd. v. Union
of India57. Since the issues were common they are addressed together.
The suspect rule provides that every company accepting deposits should
maintain some liquid assets by depositing or investing [10%] 58 of the amount
collected by way of public deposits in a bank or in securities of the Central
Government.
The contentions of the petitioners were twofold;
1. Rule 3A did not relate to invitation or acceptance of deposits but affected their
utilisation and thus was ultra vires the power under s.58A
2. Rule 3A was arbitrary and injured the very purpose of taking deposits i.e.
making available funds and thus it was unreasonable and hence struck down
by Art.14 of the Constitution.
In response to the first question the Supreme Court held that Rule 3A cannot be
said to have no nexus to the objects sought to be achieved by s.58A since the
rule extends protection to the depositor in accordance with the purpose of s.58A.
It said that s.58A was designed to introduce some measure of control over nonbanking companies and rule 3A was one such condition that made would make
available a small portion of the deposit available to the depositor (if the company
failed in its obligation). It said that an implicit part of acceptance was the
condition that repayment of the deposit would be made and made at the time of
the maturity. Thus, it could not be said that rule 3A bore no relation to the theme
of s.58a and was ultra vires the same.
In response to the second contention the Supreme Court said that requiring the
company to invest or deposit 10% of its deposits maturing in a year with
55

AIR 1979 All. 221.

(1983) 53 Comp. Cas. 904.
57
(1983) 54 Comp. Cas. 674.
58
Now the figure is 15% vide the Companies (Acceptance of Deposits) Amendment Rules, 1992.
56

22

prescribed institutions did not amount to a deprivation of funds of the company.

The 10% amount is an earmarked fund necessary to fulfil the protective purpose
of s.58A of the Act.
Thus the validity of rule 3A stands judicially affirmed and re-affirmed.

23

Commercial Papers : A Practice in Vogue

The commercial paper (CP) is an unsecured promissory note issued by
corporate borrowers to meet their short term requirement of funds. Although it is
new to the Indian Money Market the instrument is most likely to play an important
role in the generation of funds. Commercial paper borrowings are deposits
exempt from the purview of s.58A and thus the corresponding rules. 59
By exempting CPs from the purview of s.58A, raising of funds by way of
commercial papers is subject to regulation by the directions of the Reserve Bank
of India.
All Indian companies wishing to raise deposits by issue of commercial paper
have to comply with the Non-Banking Companies (Acceptance of Deposits
through Commercial Paper) Directions, 1989. By a general permission the RBI
has permitted Indian Companies to raise funds from NRIs by issue of
untransferable commercial papers.60

59
60

Nathan, Joseph, Commercial Papers: Salient Feature and Tax Implications, 51 Taxmann 170 (1990).
Notification No.FERA 85/89-RB of 9th October, 1989.

24

In Conclusion
The Role of the Company Law Board
In Pure Drinks (New Delhi) Ltd, Patiala61, the Company Law Board declared that
there was no merit in the contention that the CLB had no power to frame a
scheme for payment to depositors and that it could pass orders only on individual
applications.62
By virtue of the amendment in 1988 the CLB has powers to act suo moto or on
application of depositors.
Earlier, the power of the CLB under sub-section (9) was restricted in respect of
non-banking non-financial companies but now as a consequence of the insertion
of s.45QA in the RBI Act, 1934 (vide amendment in 1997) the CLB can also
check NBFCs.
All the above developments are indicative of the growing power of the CLB in
controlling the financial activities of these companies. The last 10 years have
seen the CLBs functions diversify to the extent of checking what are purely
financial activities of companies.

Provisions in the pending New Companies Bill

The Companies Bill, 1993 contains a salutary provision in clause 444
a. enabling depositors to appoint a nominee who may claim the amount in the
event of the death of the depositor;
b. debarring a company which has failed to repay any deposit or any part
thereof or interest thereon from accepting further deposits till the default is
made good; and
c. making it mandatory that a credit rating certificate shall be obtained by the
company from a credit rating agency recognised by the Central Government
in this behalf.
Clause (b) is greatly appreciated because it places at par defaults in payment of
interest and payment of deposits. By constantly according the two different
gravity the legislature has weaned away the rights of the person wrongfully
deprived of his interest. Now the company faces the same consequence for both.

61

(1992) 73 Comp Cas 190 (CLB).

Chandrachud, Y.V. and Dugar, S.M., Ramaiyas Companies Act, 14th Edn., Wadhwa: Nagpur, 1998,
p.529.
62

25

Clause (c) is an excellent improvement because it allows the public to evaluate

the credit worthiness of a company by using a standard benchmark which would
over a period of time become easily identifiable to the public. 63
However, since the transition from a Bill to an Act is as uncertain as it gets all we
can do is cross our fingers.

63

See chapter on Credit Ratings.

26

BIBLIOGRAPHY
Articles

Majumdar, A.K., Acceptance of Deposits by Companies, 50 Taxman 254

(1990).

Nathan,

Joseph,

Commercial

Paper

Salient

Features

and

Tax

Implications, 51 Taxman 170 (1990).

Raghuraman, G., Company Deposits: Protection to Depositors, (1990) 1

Comp LJ 109.

Sahai, R.N., Invitation and Accepting of Public Deposits by a Company, 18

Corporate Law Advisor 78 (1995).

Vazifdar, N.J.N., Acceptance of Deposits, Chartered Secretary, September

1997.

Vijia Kumar, N., Company Deposits From window-dressing to credit rating,

5 Sebi & Corporate Laws 73 (1995).

Books

Chakraborti, A M, Taxman's Corporate Law, Taxman Allied Services (P) Ltd.:

New Delhi, 1995.

Chandratre, K.R., Handbook on Company Deposits, Bharat Law House: New

Delhi, 1994.

Farrar, J H et al, Farrar's Company Law, 3rd Edn., Butterworths: London,

1991.

Pennington, R, Company Law, 7th Edn., Butterworths: London, 1995.

Ramaiya, A, Guide to Companies Act, 14th Edn., Wadhwa and Co.: Wadhwa,
1998.

Shanbhogue, K.V. and Ganesan, K., Guide to Company Deposits and

Commercial Paper, 3rd Edn., Wadhwa: Nagpur, 1990.

27

Singh, Avtar, Company Law, 12th Edn., Eastern Book Company: Lucknow,
1999.

Miscellaneous

Sachar Committee Report, 1978.

Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973.

Non-Banking Financial Companies (Reserve Bank) Directions, 1966.

Non-Banking Non-Financial Companies (Reserve Bank) Directions, 1966.

The Companies (Acceptance of Deposit) Rules, 1975.

The Companies Act, 1956.

The Reserve Bank of India Act, 1934.