Amendment to CAD Rules

MCA has vide its notification dated 29th June, 2016 amended the Companies (Acceptance of Deposits), Rules, 2014. The gist of the amendments are as follows:

1)Rule 2(1)(c )(ix) has been amended to provide that “any amount raised by the issue of bonds or debentures secured by  a first charge or a charge ranking pari passu with the  first charge  on any  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 ten years:”.

Earlier this limit was five years. So bonds or debentures as above compulsorily convertible within ten years will not be considered as a deposit.

2) A new item of exemption from deposits has been introduced as clause (ixa) as follows:

“(ixa) any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India” –

so NCDs listed on stock exchanges are not deposits within the meaning of the Act and the Rules.

3) Rule 2(1)(c )(xi) has been amended as follows:

“(xi) any non-interest bearing amount received and held in trust;”.

Earlier it was received or held in trust. Now both conditions need to be satisfied i.e. received and held in trust.

4) Rule 2(1)(c )(xii) has been amended as follows: –

additional three items have been added as exemptions viz.

“(e) as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;

(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;

(g) as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications; ” –

so all these items will not be considered as deposits and will be exempt from the definition of deposits as per the Act and the Rules.

5) Further in the explanation below the proviso to Rule 2(1)(c )(xii) the words “referred to in the first proviso” has been deleted. This is more of a technical deletion in nature.

6) In Rule 2(1)(c )(xiv) the explanation below this clause has been amended as follows:

Explanation.- For the purposes of this clause, any amount.-
(a) received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or

(b) any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer,
shall be considered as deposits unless specifically excluded under this clause. 

Earlier it read as “shall be treated as a deposit”.

7) Additional exemptions to deposits has been given as follows in Rule 2(1)(c) as follows after sub clause (xiv):

(xv) any amount received by way of subscription in respect of a chit under the Chit Fund Act,1982 (40 of 1982);

(xvi) any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India

(xvii) an amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person.

Explanation.-

  1. “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number C.S.R. 180(E) dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and lndustry;
  2. “convertible note’ means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

(xviii)  any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds registered with SEBI in accordance with regulations made by it.”.

  1. Rule 3(3) has been amended as follows:

(3)  No company referred to in sub-section (2) of section 73 shall accept or renew any deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds thirty five per cent. of the aggregate of the paid-up share capital and free reserves of the company.

Earlier the limit was 25% of the aggregate of paid up share capital and free reserves of the company.

  1. A proviso has been added to Rule 3(3) as follows:

“Provided that a private company may accept from its members monies not exceeding one hundred per cent of aggregate of the paid up share capital, free reserves and securities premium account and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified.”

  1. Rule 3(8) has been amended as follows:

“(8).- (a) Every eligible company shall obtain at least once in a year, credit rating for deposits accepted by it and a copy of the rating shall be sent to the Registrar of Companies along with the return of deposits in Form DPT-3

(b) The credit rating referred to in clause (a) shall not be below the minimum investment grade rating or other specified credit rating for fixed deposits, from any one of the approved credit rating agencies as specified for Non-Banking Financial Companies in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 199g, issued by the Reserve Bank of India, as amended from time to time..

Earlier there was no stipulation that the credit rating should be investment grade rating.

  1. Rule 4(2) has been amended as follows:

(2) Every eligible company intending to invite deposits shall issue a circular in the form of an advertisement in Form DPT-1 for the purpose in English language in an English newspaper having country wide circulation and in vernacular language in one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated, and shall also place such circular in the website of the company, if any.

The provision regarding English language newspaper having country wide circulation and the circular to be placed on the company’s website is a new provision.

  1. The proviso to Rule 5(1) has been amended as follows:

“Provided that the companies may accept deposits without deposit insurance contract till the 31st March, 2017 or till availability of a deposit insurance product, whichever is earlier.”

Earlier the time limit was 31st March, 2016.

13.  A new Rule 16A has been added as follows:

“16A. Disclosures in the financial statement.-

(1) Every company, other than a private company, shall disclose in its financial statement, by way of notes, about the money received from the director.

(2) Every private company shall disclose in its financial statement, by way of notes, about the money received from the directors, or relatives of directors.”

  1. An additional paragraph has been added in the Annexure in form DPT-1, which is the advertisement for acceptance of deposits as follows:

“6. DISCLAIMER.- It is to be distinctly understood that filing of circular or circular in the Form of advertisement with the Registrar should not in any way be deemed or construed that the same has been cleared or approved by the Registrar or Central Government. The Registrar or Central Government does not take any responsibility either for the financial soundness of any deposit scheme for which the deposit is being accepted or invited or for the correctness of the statements made or opinions expressed in the circular or circular in the Form of advertisement. The depositors should exercise due diligence before investing in the deposits schemes.”

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