Public deposits

Public deposits are an important source of financing the medium-term and long-term requirements of a
company. The term 'public deposit' implies any money received by a company through the deposits or loans
collected from the public. The public includes the general public, employees and shareholders of the
company but excludes the money received in the form of shares and debentures. In India, this method of
raising finance has gained a lot of importance because of the several advantages relating to public deposits:-

It is an easier method of mobilising funds, especially during periods of credit squeeze.

The administrative cost of deposits for the company is lower than that involved in the issue of
shares and debentures. The procedure of inviting public deposits is also simpler and involve lesser
formalities.

The rate of interest payable by the company on public deposits is lower than the interest on loans
from banks and other financial institutions. Such an interest is a tax deductible expense.

It helps the company to borrow funds from a larger segment of public and thus reduces the
dependence of the company upon financial institutions.

It also enables the company to create contact with a large number of investors.

It ensures the availability of funds for a longer duration and provides flexibility to the financial
structure of the company. There is no risk of over-capitalisation and the deposits can be repaid
when they are not required.

There is no dilution of shareholders' control as the depositors have no voting rights and cannot
interfere with the internal management of the company.

But this mode of financing through public deposits has its own limitations:-

As the public deposits are more likely to be affected by the uncertain conditions in the economy, the
depositors response may vary accordingly. They may also tend to withdraw their deposits if the
company is not performing well.

Public deposits with the companies may cause a diversion of resources into non-priority and
undesirable areas.

Professional investors may not like to invest in such deposits as there is no or less chance for capital
appreciation.

As public deposits are unsecured, the depositors may have to bear the risk of loss of money in the
event of failure of the company.

Their widespread use restricts the growth of a healthy capital market. They also tend to distort the
interest rate pattern of the economy and may result in the dearth of sound industrial securities.

Regulating Public Deposits

The public deposits are regulated by the provisions of the Companies Act and the Companies (Acceptance
of Deposit) Rules,1975. According to them, the following amounts are not included in the expression
'deposits':-

Any amount received from the Central Government or a State Government, local authority, foreign
Government, any foreign citizen or authority or any other source whose repayment is guaranteed by
the Central Government or a State Government

Any amount received as a loan from any banking company, State Bank of India or its subsidiaries, a
nationalised bank or co-operative bank

Any amount received as a loan from any of the notified financial institutions

Any amount received by a company from any other company

Any amount received from an employee of the company by way of security deposit

Any amount received by way of security or as an advance from any purchasing, selling or other
agents in the course of or for the purposes of the business of the company

Any amount received by way of subscriptions to any shares, stock, bonds or debenture pending the
allotment of such shares, etc., and calls in advance on shares

Any amount received in trust or any amount in transit

Any amount received from directors of the company or from its shareholders by a private company

Any amount of unsecured loans brought in by the promoters in pursuance of stipulations of financial
institutions or loans provided by the promoters themselves and/or by their relatives but not by their
friends and business associates.

Under the Companies Act and the rules framed thereunder, the invitation and acceptance of deposits by
companies is subjected to the following conditions:-

Companies are not permitted to raise unlimited amounts of fund through public deposits. The
aggregate of all outstanding deposits cannot exceed certain prescribed percentage of the paid up
capital and free reserves of the company.

Invitations of deposits by a company can be made only by means of an advertisement specifying

the financial position, management structure and other particulars relating to a company. A
company which has defaulted in repayment of deposit or interest thereon is prohibited from inviting
deposits.

The depositors shall fill the application form supplied by the company. The company in return issues
a deposit receipt which is an acknowledgement of debt by the company. The terms and conditions of
the deposit are printed on the back of the receipt. The company shall maintain a register of deposits
containing the prescribed particulars and file returns of deposits duly certified by their auditor with a
Registrar on or before 30th June of every year.

The interest to be allowed on such deposits by the company must be in accordance with the rate
fixed by the Government. The rate of interest on deposits also varies depending upon the period of
deposit and the reputation of the company.

The Companies (Amendment) Act,2000 has inserted certain new sections, in order to protect the
interests of small depositors. The expression 'small depositor' means ''a depositor who has deposited (in a
financial year) a sum not exceeding twenty thousand rupees in a company and includes his successors,
nominees and legal representatives". In case of any default by the company in paying back to them, it shall
inform the Company Law Board within sixty days from the date of default. The Company Law Board will
then direct the company to repay to small depositors within a period of thirty days from the date of receipt
of intimation of default. On failure to comply with the orders of the Board, the company and its directors
shall be punishable with imprisonment and payment of daily fine during the period in which such non-
compliance continues. However, if such a defaulting company wants to invite deposits from small depositors,
it shall state the complete nature of default in all its future advertisements and application form.

Besides, the Reserve Bank of India issues directives from time to time for regulating public deposits.
These are aimed at safeguarding the interest of the public and to give them a feeling of security in investing
in the public deposits. These regulations pertain to:-

The ratio of deposits to the paid-up capital and free reserves of the company

The maximum duration of the deposits

Obligation to invest a specified percentage of the deposit in a current or other account with a
scheduled bank free from any charge or lien, or in approved securities which shall be used only for
the repayment of deposits

The filing of periodical returns with the RBI, giving the required information about public
deposits/loans as well as furnishing of certain specified information on its financial position and
working.

http://www.archive.india.gov.in/business/growing_business/public_deposits.ph
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