Whether loans and borrowing are considered as deposits under Companies Act, 2013?
It is one topic of corporate finance that sends businesspersons, investors, and practitioners round in circles, i.e., the classification of loans and borrowings under the Companies Act, 2013. Specifically, everyone ponders: "Are loans and borrowings are deposits under the Companies Act, 2013?" It is a vital question as classification has a tremendous impact on compliance requirement, penalty, and reporting for Indian companies.
Let's find out more of what the Companies Act, 2013 and the rules that accompany it have to say about deposits, and where loans and borrowings come in.
What is a Deposit under the Companies Act, 2013?
Section 2(31) of the Companies Act, 2013 defines "deposit" as any money received by a company by way of deposit or loan or in any other manner. This seemingly broad definition is, however, qualified by certain exceptions under the Companies (Acceptance of Deposits) Rules, 2014.
In effect, all loans and borrowings are not deposits. Between that received as deposits and that which is not so regarded, the law discriminates on the basis of nature, source or terms.
Why This Classification is Important
Considering an amount to be a deposit has varying conditions of compliance:
- Filing of form like DPT-3 on annual basis
- Restrictions on persons who can give deposit to company
- Placing a cap on the amount that can be received
- Repayment, interest, not to mention other conditions
A failure to adhere to deposit regulations attracts severe penalties in terms of imprisonment and fines for defaulting officers.
Are Borrowings and Loans Deposits?
Now the fun part. Loans and borrowings are not deposits in the sense of the term. Whether they are to be treated as deposits or not depends on the type of lender, terms of agreement, and whether the amount is within the excluded categories of amounts prescribed under the Companies (Acceptance of Deposits) Rules, 2014.
- Loans from Directors
- A declaration in writing by the director that the amount is not being lent out of borrowed funds.
- The notice is issued in the Board report of the company.
- Shareholder Loans (of Private Companies)
- The shareholder has held the shares for a minimum period of 90 days before taking the loan.
- The loan is taken as per guidelines under Rule 2(1)(c)(vii) of the Companies (Acceptance of Deposits) Rules, 2014.
- Bank and Financial Institution Borrowings
- Scheduled banks
- Public financial institutions
- Insurance companies
- RBI-registered NBFCs
- Inter-Corporate Loans
- External Commercial Borrowings (ECBs)
- Trade Advances and Security Deposits
- They are returned within 365 days.
- They are legitimate commercial transactions.
Where money is lent to a private or public company by its director, it is not a deposit where:
The exception appreciates that directors may lend finance to the company without resort to rules of deposit subject to availability of the source.
Members' loan (i.e., shareholders' loan) in the event of private limited companies is not treated as deposits if:
But when it comes to listed companies, these exceptions stand unless the person is also a director.
Any amount borrowed from:
cannot be regarded as a deposit. It is a commercial borrowing and business necessity, and hence law specifically excludes it.
Advances between two companies are not a deposit under the Act, if both are registered companies. It facilitates simple inter-company financial dealings, especially in group companies.
Foreign funds received as ECBs under RBI rules are not a deposit. It creates a foreign capital inflow under a captive regime.
Money obtained in the ordinary course of business — e.g., advance payment for goods/services, or security deposits — aren't a deposit given:
Unless these are made after the allowed period, they can be considered deposits.
As per section 2(31) of The Companies Act, 2013, 'deposit' any amount of money received as a deposit or loan or otherwise by a company, but after loan does not form part of deposit as per Reserve Bank of India:
- any amount received from central or state government directly or indirectly.
- any amount received from foreign government or Multinational foreign institutional or from any other Multinational bank or foreign citizen or foreign collaboration or from any other source from foreign.
- any amount in the form of loan or financial assistance or credit limit from any bank or state government or from any subsidiary company or state government bank or central government or from public financial institution.
- any amount received by way of commercial paper or by way of any other instrument according to the guidelines released by Reserve Bank of India –
- any amount received by a company from any other company (Inter Corporate Loan).
- any such amount received as application money or subscription money against any security equity of debenture or against any other type of security received as per offer letter or received in advance.
When Loans Are Deposits?
Unless the above exceptions and conditions are satisfied, even a loan or borrowing can be regarded as a deposit. For example:
- When the source of funds is not disclosed on making a director's loan.
- When an advance remains unsettled for 365 days and does not represent an underlying transaction.
- If by chance money is borrowed by a private company from a general public or non-member.
Here, the money becomes a 'deemed deposit', liable to be followed and subject to sanctions.
Conclusion
Generally, all borrowing and loans is not deposits under the Companies Act, 2013. The statute has a list of exceptions, particularly for directors' money, members (where the company is private), banks, financial institutions, and other companies.
But companies should be on their guard. Even outright borrowings can fall within the definition of deposits when they are poorly documented and disclosed. Specialist advice and strict compliance monitoring are necessary in order to avoid unintended transgressions.