What is the Legal Framework for Acceptance of Deposits by Non-Banking Companies?

Introduction

The financial services in India are increasingly categorised by diverse entities engaging in various activities beyond traditional banking. Among these entities are non-banking companies, which play a significant role in mobilizing savings and providing financing options to individuals and businesses. These companies, which do not possess a banking license, have the potential to accept deposits from the public. Therefore, the acceptance of deposits by non-banking companies is governed by a multifaceted legal regime designed to ensure transparency, safeguard depositor interests, and maintain financial stability. These principles are enshrined under the Companies Act, 2013, and the rules made under the Companies (Acceptance of Deposits) Rules, 2014. The Reserve Bank of India (RBI) also plays a crucial role, particularly in its oversight of non-banking financial companies (NBFCs). While NBFCs operate under different regulations, their activities may intersect with those of miscellaneous non-banking companies, adding another layer of complexity to the regulatory framework.

Meaning of Non-Banking Companies

• The non-banking companies conduct financial activities like traditional banks but do not hold a banking license or function as banks.
• These companies include private limited companies, public limited companies, and partnerships, and usually offer services related to investment, finance, and other financial activities.
• They encompass investment companies, financial companies, insurance companies, and micro-finance companies.

Legal Framework for Acceptance of Deposits

1. The Companies Act, 2013

The provisions governing non-banking companies are set forth under the Companies Act, 2013, which lays down the conditions under which companies can accept deposits from the public. In Re Bimla Kothari vs. Unitech Ltd. 2017[1], it was held that “there is no categorisation or difference between deposits accepted prior to or after the Act.”

• Definition of Deposits: The definition of “deposit” is given under Section 2(31) of this Act refers to any amount received by a company in the form of a deposit, loan, or any other form of borrowing.
• Prohibition on acceptance of deposits: Section 73(1) of the Act prohibits companies from accepting deposits from the public except as provided under the Act. However, certain companies are exempt from this provision.
• Acceptance Limits for Deposits[2]:
  • Under Section 73(2) of the Act, a company is prohibited from accepting or renewing deposits from its members if the total amount of such deposits, combined with any outstanding deposits on the date of acceptance or renewal, exceeds 35% of the aggregate of its paid-up share capital, free reserves, and securities premium account.
  • Specifically, no eligible company can accept or renew deposits from its members if the amount of these deposits exceeds 10% of the same aggregate.
  • Additionally, eligible companies are restricted from accepting or renewing any other type of deposit if the total, along with outstanding deposits of that nature, exceeds 25% of the aggregate.
  • For government companies eligible to accept deposits under Section 76, the limit is also set at 35% of the aggregate of their paid-up share capital, free reserves, and securities premium.
  • These limits are intended to promote financial stability and responsible borrowing practices.
• Terms and Conditions for Acceptance of Deposits:
  • A company, after passing a resolution in a general meeting and in accordance with rules outlined in the Companies (Acceptance of Deposits) Rules, 2014, may accept deposits from members after consultation with the Reserve Bank of India.
  • A company must issue a financial statement in a circular to the public, showing the company’s financial position, and other particulars as prescribed in Form DPT-1, under Rule 4 of the Companies (Acceptance of Deposits) Rules, 2014.
  • Companies must file a return of deposits with the Registrar of Companies within thirty days of the end of each financial year.
• Penalties for Contravention of Provisions of Acceptance of Deposits[3]:
  • If a company accepts, or allows any other person to accept deposits in violation of Sections 73 or 76 of the Companies Act, or fails to repay the deposit or any interest due within the specified time granted by the Tribunal, it faces significant penalties.
  • The company may be fined an amount that is not less than Rs 1 crore or twice the amount of the deposit accepted (whichever is lower), with a maximum fine up to Rs 10 crores.
  • Additionally, any officer of the company who is in default may face imprisonment for up to 7 years and a fine ranging from 25 lakhs to 2 crores.
  • If it is proven that the defaulting officer knowingly or wilfully contravened these provisions with the intent to deceive the company, its shareholders, depositors, creditors, or tax authorities, they may also be subject to action under Section 447 of the Act.

2. The Depository Act, 1996

While the Depository Act itself does not directly govern the acceptance of deposits by non-banking companies, it plays a crucial role in regulating securities and protecting investor interest. It establishes guidelines for the issuance, holding, and transfer of securities that may be relevant when a non-banking company seeks to raise funds through deposits.

Role of the Reserve Bank of India

The RBI has established a comprehensive regulatory framework overseeing the operations of NBFCs, including their ability to accept deposits. This framework aims to ensure that these companies operate in a safe and sound manner, protecting the interests of depositors. The RBI regularly monitors NBFCs through inspections, audits, and reporting requirements. It assesses their financial performance, risk management practices, and adherence to regulations, helping to maintain transparency and accountability in deposit acceptance. This regulatory supervision is essential for maintaining the integrity and stability of the broader financial system, safeguarding the interests of depositors, and promoting confidence in non-banking financial services.

Conclusion

The legal system regulating deposits by various non-banking firms in India aims to strike a balance between depositors’ interests and the operational requirements of these entities. The Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014, offer a detailed framework that establishes approved practices, sets boundaries on deposits, and specifies consequences for non-compliance with regulations. These rules are in place to safeguard depositors, promote openness, and uphold financial stability. Moreover, even though non-banking firms can conduct activities resembling those of traditional banks, they are restricted by specific regulations due to the absence of a banking license, especially when it comes to raising funds through deposits. The supervision of non-banking financial companies (NBFCs) by the Reserve Bank of India strengthens the regulatory environment, offering protection through consistent monitoring and compliance inspections. As the financial landscape continues to evolve, ongoing vigilance and adaptation of these regulations will be essential to address emerging challenges and ensure the continued stability and integrity of non-banking financial services in India.   

[1] [2017] 136 CLA 74 NCLT (New Delhi).

[2] ICSI Company Law & Practice 296.

[3] ICSI Company Law & Practice 302.