COMPANY LAW

Section 73 of Companies Act,

2013
Introduction
For the smooth conduct of the business, a company requires capital. The
most practised method of raising funds by the company is issuing shares and
debentures. However, there is a third category of raising capital viz.
‘deposits’. A deposit is the amount lent to a company in the form of a short-
term loan for backing any urgency in the company. The person who deposits
the sum is known as the ‘depositor’. Lending the sum makes the depositor a
creditor of the company. This article discusses the relevant rules, regulations,
and provisions relating to deposits.

Furthermore, the invitation and acceptance of deposits are governed by

Sections 73-76 of the Companies Act, 2013 and the Companies (Acceptance
of Deposits) Rules, 2014 made under Chapter V of the Act. It prohibits the
acceptance of deposits other than those of members based on regular
resolution or “eligible company” that must meet specific requirements
outlined in the rules. Under the rules, eligible companies must have certain
net assets and turnover. In contrast, public deposits significantly affect how
companies process and accept deposits. This rule aims to strike a balance
between:

 Promote company financing.

 To protect the interests of depositors against society.
Section 73 is the basis for scrutiny of how Indian companies raise their funds
through public deposits while adhering to strict regulations. In order to
ensure transparency and protect the rights of depositors, it defines specific
conditions, eligible companies, exempted deposits, prohibition on
acceptance, eligible depositors, punitive measures, and necessary
compliance for receiving deposits from the public.

What is a deposit
According to Section 2(31) of the Companies Act 2013, “deposit” includes
any receipt of money by way of deposit or loan or in any other form by a
company, but does not include such categories of amount as may be
prescribed in consultation with the Reserve Bank of India. In other words, any
receipt of money by the company from a depositor is called a deposit. The
deposited amount held by the company is always recorded on the liabilities
side of its balance sheet. Besides, deposits are one of the sources of capital
financing. Unlike equity holders, depositors neither have any ownership claim
nor any voting rights in the management of the company. However, deposits
can be converted into shares according to the company’s policies.

A company’s reliance on public deposits as a source of short-term financing is

essential. These public deposits provide a practical means of addressing
urgent financial needs without turning to debentures and shares. Moreover,
deposits enable companies to diversify their funding sources and lessen their
reliance on funding from financial institutions. To maintain stakeholder
confidence and reduce financial risks, companies must follow regulatory
guidelines and ensure transparency and prudent management of public
deposits.

Types of deposits
There are two types of deposits:

Secured deposit: A deposit that creates a charge over any tangible asset of
the company is known as a ‘secured deposit’. In any contingency, the
depositor can claim this charge over the allotted asset to recover his
deposited amount. In case, the company is unable to repay the amount, the
depositor can dispose off that asset against the recovery of his sum.

Unsecured deposit: As the name portrays, a deposit that does not create
any charge over the company’s assets is called an ‘unsecured deposit’. The
depositor is not provided with security over his deposited amount. A
depositor usually hesitates to invest in unsecured deposits. However,
companies usually allow high rates of interest on such deposits to lure the
public.

List of exempted deposits

Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 sets out
a list of transactions which may be termed an ‘exempted deposits’:
Amount received from government
– Funds received from the central
government or state government, as
well as amounts received from
sources backed by guarantees from
these governments, or funds received
from local authorities, or statutory
bodies established under
parliamentary, or state legislative
cannot be called deposits.
Amount received from foreign parties under Foreign Exchange
Management Act, 1999 (FEMA) – Funds received from foreign sources,
including foreign governments, international banks, multilateral financial
institutions, foreign corporations, foreign citizens, and entities residing
outside India, are not classified as deposits under Company Law. These
transactions are governed by the FEMA and its accompanying rules and
regulations.

Amount received as loan or facility – Companies often secure financial

assistance through loans or credit facilities. Funds obtained from banking
companies, including subsidiaries of SBI, institutions notified by the Central
Government under the Banking Regulation Act, 1949, corresponding new
banks, or co-operative banks as defined by the Reserve Bank of India Act,
1934, do not fall under the deposit category.

Amount received as loan or financial assistance – Loans and financial

assistance received from public financial institutions, regional financial
institutions, insurance companies, or scheduled banks defined by the RBI Act
1934, are not considered deposits under Company Law.

Amount received against issue of commercial paper – Companies can

raise funds by issuing commercial paper or similar instruments following RBI
guidelines or notifications. These funds received in exchange for such
instruments are not classified as deposits.
Inter-corporate deposits – When one company receives funds from
another company, it often falls under inter-corporate deposits. Such
transactions are exempted from being categorised as deposits.

Advance securities application money – Companies often receive

advance payments or application fees for securities like shares. These funds,
which are held in anticipation of allocating the securities, are not categorised
as deposits unless the company fails to allocate the securities within 60 days
from receiving the application money and does not issue refunds within 15
days after that period.

Loans from directors & relatives of directors – Amounts received from a

company’s director or a relative of a director are excluded from the deposit
category. However, the director or relative must provide a written declaration
confirming that the funds were not acquired through borrowing or accepting
loans or deposits from others.

Acceptance of deposits from members (private companies) – Private

companies are subject to specific rules governing deposits. These rules do
not apply to private companies that meet certain conditions, such as
restricting the acceptance of monies from members to specific limits based
on share capital, reserves, and premium accounts.

Secured debentures or compulsorily convertible bonds – Companies

may issue bonds or debentures secured by assets or bonds that are
compulsorily convertible into shares within a specified period (not exceeding
10 years). These transactions do not qualify as deposits.

Unsecured non-convertible debentures listed on stock exchanges –

Issuance of non-convertible debentures that do not constitute a charge on
the company’s assets and are listed on recognized stock exchanges as per
SEBI regulations are exempted from being classified as deposits.

Amount received from employees and non-interest bearing

amounts – Funds received from employees as non-interest-bearing security
deposits and non-interest-bearing amounts held in trust are not considered
deposits.

Receipt of advance for supply of goods or services – Advances received

for the supply of goods or provision of services, provided that these advances
are accounted for and appropriated against the supply or provision within
365 days from acceptance, are not categorised as deposits. However, in
cases involving legal proceedings, the 365-day limit may not apply.

Trade advances or business advances – Advances received in connection

with immovable property, security deposits for contract performance,
advances under long-term projects for capital goods, and advances for future
services such as warranties or maintenance contracts (provided the service
period doesn’t exceed common business practice or 5 years) are not
considered deposits.

Promoter’s co-pay – Amounts brought in by promoters of a company as

unsecured loans in compliance with financial institutions or bank stipulations
are excluded from the deposit category. This exemption is available only until
the loans from financial institutions or banks are repaid.

Amounts received by Nidhi companies, chit fund companies, CIS –

Specific categories of companies, including Nidhi companies, those dealing
with chit funds, and those involved in Collective Investment Schemes (CIS)
under SEBI regulations, may receive amounts that are not considered
deposits.

Amount received as convertible note – Start-up companies recognized by

the Department for Promotion of Industry and Internal Trade (DPIIT) can
receive convertible notes, provided they meet certain conditions. These notes
are not classified as deposits.

Amount received from AIF, DVCF, etc.– Companies may receive funds
from Alternate Investment Funds (AIFs), Domestic Venture Capital Funds
(DVCFs), Infrastructure Investment Trusts, Real Estate Investment Trusts, and
Mutual Funds registered with SEBI under SEBI regulations. These transactions
do not qualify as deposits.

Who is a depositor
According to Rule 2(1)(d) of the Companies (Acceptance of Deposits) Rules,
2014, a depositor is a person who has deposited a sum in the company. The
depositor could be:

 An individual,
 a company,
 a trust/firm,
 any companies entity, or
 any member of a private or public company.
In other words, it includes any people or organisations that give money or
any other kind of financial benefit to a company in exchange for interest,
repayment, conversion into shares or debentures, etc., as long as the
company seems viable. Besides, depositors are considered creditors of the
company and are recorded on the liability side of its financial statements.
According to the deposit agreement, depositors are entitled to repayment of
the principal amount and the agreed-upon interest.
Who is an eligible company
There are two different kinds of companies, i.e.: public and private. However,
only publicly traded companies have the right to request deposits. Private
companies are not eligible for this provision. The Companies Act 2013,
specifies some requirements for a public company to be eligible to raise
deposits. In accordance with the limitations outlined in Section 180(1)(c) of
the Companies Act 2013, an eligible company may request public deposits.

 It should be a public company.

 It should have at least Rs. 500 crore in revenue or a net worth of Rs.
100 crore.
 The company management must adopt a special resolution. The
registrar must receive this resolution.

Section 73: Prohibition on acceptance of

deposits from the public
Sections 73 to 76 of the Companies Act, 2013 mention the provisions related
to the restrictions and prohibitions for the company while accepting deposits.
However, according to Section 73(1) of the Companies Act, 2013, companies
are generally not allowed to accept public deposits. This rule safeguards the
interests of the public and prevents fraudulent proposals by companies that
might dupe depositors. Any violation of these provisions required for
accepting deposits might result in severe penalties. However, in Section 73,
there are certain rules provided for deposits. Besides, only eligible companies
can accept deposits and abide by these rules. However, Section 73(1) does
not apply to:

 A banking company;
 A non-banking financial company (NBFC); or
 Any other company as RBI or Central Government specifies.
Furthermore, Section 73(2) of the Companies Act, 2013, deals with the
prohibition of accepting deposits from the public. The deposits cannot be
raised by overlooking the following conditions:

 There must be a submission of a detailed circular of the company

within its members stating the financial statements, credit rating,
number of depositors, and the amount due to previous depositors.
 A copy of the circular and such statement must be submitted to the
registrar of companies within a thirty-day period.
 There must be a 20 percent submission of the deposited amount
accrued in the upcoming financial year before April 30. However,
these deposits must be held within a separate bank account.
  There must be an insurance policy linked with those deposits.
 The company has to make sure that there are no outstanding
interests or repayments of deposits to the public. Besides, such a
default can put a stay on the company for demanding deposits for
the next five years.
 There must be a separate account of charge over the company’s
assets (against deposits). Such deposits are known as ‘secured
deposits’. This provision also acts as a security against the deposited
amount.

Status of deposits accepted before the

commencement of the Act
Section 74(1) states that if a company had accepted any deposits, any
outstanding interest payments, repayment of deposits in the future before
the commencement of the act shall be deemed similar as if that were done
after the act. All those transactions are meant to be paid in the future.

Section 74(1)(a) states that such a company has to submit a statement to the
Registrar of Companies after the commencement of the act. The statement
must include a detailed report of the company’s deposits including balance,
accrued interests, and repayments.

Section 74(2) mentioned that the Tribunal has the power to extend the three-
month period for repayments after considering the financial conditions of the
company.

Section 74(3) is a punitive provision that states that if the company fails to
repay the deposited amounts or interests linked to it in the specified time by
the Tribunal, it may amount to a fine of ten crore rupees and a 7-year
sentence.

From whom can a company accept deposits

In addition to the members of the company, only ‘eligible companies’ can
receive deposits from the public. Therefore, not all companies can demand
deposits from the public, although they can receive deposits from their
members. Section 76 of the Companies Act 2013, and the Companies
(Acceptance of Deposits) Rules, 2014 are held together while dealing with the
cases of acceptance of deposits. The list of those entities are:

Members/Shareholders: Companies can demand deposits from their

current members or shareholders. In contrast, the amount cannot be more
than 25% of the paid-up share capital and free reserves of the company.
Directors: Depositors can also be directors of that company. To qualify the
director as a depositor, the deposited sum must not exceed the annual salary
held for the following two years.

Relatives of directors: Deposits are also permitted by the companies and

relatives of the directors. The deposited sum cannot be larger than the
amount of the loan or guarantee obtained by the director from the company.

Employees: Employees can also make deposits to the company. Their

deposited amount cannot be greater than their annual salary.

Exemptions: The Central Government or the Reserve Bank of India (RBI)

may give exemptions to certain individuals or legal entities.

Punishment for Contravention

If any company referred to section 73(2) or any eligible company inviting
deposits or any other person contravenes any provision of these rules for
which no punishment is provided in the Act – The Company and every officer
of the company who is in default shall be punishable with fine which may
extend to Rs. 5,000/- and where the contravention is a continuing one, with a
further fine which may extend to Rs. 500/- for every day after the first day
during which the contravention continues.

In contrast, Section 73(3) of the Companies Act, 2013 provides that any
deposit accepted by the company under Section 73(2) must be repaid with
interest according to the provisions of Section 73(4) of the Companies Act,
2013. This provides that if the company does not repay the deposit or the
interest, a complaint can be filed with the National Company Law Tribunal
(NCLT) mentioned in Section 408 of the Companies Act, 2013.

Repayment of deposits
Section 74: Under this section, companies are required to submit a
declaration of receipt of the deposits to the Registrar. This provision also acts
as a safeguard against deposit repayments. The condition linked to these
deposits is that deposits must be made within a period of three months. To
return the deposited sum to the public, usually, the time period allotted is
one year to three years. Besides, if the matter is raised before the Tribunal, it
can further extend this duration depending upon the financial condition of the
company. Even if the company fails to return the money within the specified
time period, members of that company can be imprisoned for seven years or
be liable for Rs. 1 crore fine.

Damages for fraud

Section 75: This is also a justice-seeking provision under the Companies Act,
2013, as it can make the company liable for any financial damage incurred to
the depositors by any act or omission on the company’s end. Nevertheless,
the company can only be made liable if the mens rea is proven, i.e., the
intention of the company was to dupe the depositors. This provision also
attracts vicarious liability, as the employees of the company who have taken
part in such deceiving can be personally made liable for the same. In other
words, they would be facing legal consequences in his/her personal
capacities according to the degree of offence.

Furthermore, the section mentions that in such a case a victim could initiate
legal action against the company and its employees or any other group or
individuals can plead on behalf of the victim. This provision encourages class
action (a collective lawsuit on behalf of numerous plaintiffs against a single
defendant) as individuals or groups can act on behalf of other victims.

Other protective measures provided under

Companies Act, 2013
Pursuant to Section 245(1)(g), if a depositor believes that the management or
actions of an enterprise are causing harm to the company, its directors or the
depositors, can submit an application before Tribunal. This provision also
comprises class action lawsuits. Various measures may be requested with
this submission and declaration of damages or request for appropriate
measures against:

 The Company or its directors for any dishonest, illegal or wrongful

conduct or any possible misconduct on their part.
 The Company’s auditors, which include the accounting firm, for
providing inaccurate or misleading information in their audit report
or for engaging in dishonest, illegal or illegal activities.
 Any expert, consultant, adviser or individual who has provided false
or misleading information to the Company or has engaged in any
dishonest, unlawful or unlawful activity or has been implicated in
any possible wrongdoing on its part.
 One may also seek any other remedy the court deems appropriate.
Section 245(2) states that if depositors seek compensation, damages, or any
other appropriate action from an audit firm, both the firm and every partner
who played a role in providing inaccurate or misleading information in the
audit report or engaged in fraudulent, unlawful, or wrongful behaviour will be
held vicariously liable.

Section 245(3)(ii) states that there must be either one hundred depositors or
a percentage fixed under regulations, whichever of the two is lesser.
Therefore, the company owes a percentage of total deposits as mentioned by
the regulations to the depositors.
Other rules related to deposits mentioned
under Companies (Acceptance of Deposits)
Rules, 2014
In the Companies Act, 2013, Chapter V is dedicated to rules and regulations
surrounding the acceptance of deposits by companies.

Rule 3: Rule 3 is a pivotal part of this chapter, and lays out essential terms
and conditions regarding deposit acceptance. In essence, Rule 3 and its
associated provisions are designed to ensure transparency, security, and
fairness in the process of accepting deposits by companies. These regulations
aim to safeguard the interests of both the company and its depositors,
promoting trust and accountability. The provisions of Rule 3 are:

 Deposit duration: Rule 3 strictly prohibits companies, both under

sub-section (2) of section 73 and eligible companies, from accepting
or renewing any deposit, secured or unsecured, with a repayment
period less than six months or exceeding thirty-six months from the
date of acceptance or renewal. There are conditions where
companies can accept or renew deposits for repayment earlier than
six months. The deposits must not exceed ten percent of the
aggregate of the company’s paid-up share capital and free reserves.
These deposits should not become due for repayment earlier than
three months from the date of deposit or renewal.
 Joint names: Rule 3 allows deposits to be accepted in joint names,
not exceeding three individuals, with various clauses such as
“jointly,” “either or survivor,” “first named or survivor,” or “anyone
or survivor” to accommodate the depositors’ preferences.
 Limit on deposits: Companies referred to in sub-section (2) of
section 73 are subject to a limit on the acceptance of deposits. The
total deposits, when combined with other outstanding deposits,
cannot exceed 25 percent of the aggregate of the company’s paid-
up share capital and free reserves.
 Deposit limits: Eligible companies must adhere to deposit limits.
Deposits from members should not exceed ten percent of the
aggregate of the paid-up share capital and free reserves. For other
deposits, excluding those from members, the limit is twenty-five
percent of the aggregate of the paid-up share capital and free
reserves.
 Government companies: Government companies that are eligible
to accept deposits under section 76, have their own ceiling. The
total deposits, along with other outstanding deposits, should not
exceed thirty-five percent of the aggregate of their paid-up share
capital and free reserves.
  Rate of interest and brokerage: Rule 3 establishes restrictions
on the rate of interest and brokerage. Companies cannot invite or
accept deposits carrying an interest rate or pay brokerage
exceeding the maximum rate set by the Reserve Bank of India for
non-banking financial companies. Only individuals who have
received written authorization from the company to solicit deposits
on its behalf are entitled to receive brokerage. Any payment of
brokerage to unauthorised individuals is strictly prohibited.
 Unalterable terms: To protect the interests of depositors, Rule 3
mandates that companies cannot reserve the right to alter any
terms and conditions of the deposit, deposit trust deed, or deposit
insurance contract in a way that prejudices or disadvantages the
depositors after the issuance of circulars or advertisements.
Rule 4: Form and particulars of advertisements/circulars: In
continuation of Chapter V’s regulations, Rule 4 focuses on how companies
should communicate their intent to accept deposits to their members and the
wider public. This rule aims to ensure that information about deposit schemes
is effectively and transparently communicated to members and the public.
The key elements of this rule are as follows:

 Circular to members: Companies intending to invite deposits from

their members are required to issue a circular in Form DPT-1. This
circular should be sent to all members using a registered post with
acknowledgment, speed post, or electronic means.
 Newspaper advertisement: In addition to the circular, companies
must publish their intent in English and a vernacular language
newspaper, both with a wide readership in the state where the
company’s registered office is located.
 Website upload: To ensure transparency, companies accepting
deposits from the public must upload a copy of the circular on their
website if they have one.
 Authority and registration: Circulars or advertisements must
bear the authority of the company’s board of directors and must be
registered with the Registrar at least thirty days before they are
issued.
 Validity: Circulars or advertisements remain in effect until one of
the following occurs: the expiration of six months from the close of
the financial year, the date of the financial statement presentation
at the annual general meeting, or the date on which the annual
general meeting should have been held.
Rule 5: Deposit Insurance: Rule 5 underscores the significance of deposit
insurance in safeguarding the interests of depositors. Provisions mentioned in
Rule 5 are put in place to secure the interests of depositors and ensure that
companies have adequate insurance to cover potential defaults, fostering
depositor confidence. The key elements of this rule include:

 Contract for deposit insurance: Companies intending to accept

deposits, whether under Section 73(2) or as eligible companies,
 must enter into a contract for providing deposit insurance at least
thirty days before issuing a circular or advertisement.
 Coverage: The deposit insurance contract should explicitly outline
that, in the event of a default in repayment, depositors are entitled
to receive the principal amount of deposits and interest up to the
limit specified in the contract.
 Premium payment: Importantly, the amount paid as insurance
premium must be covered by the company itself and should not be
deducted from the principal or interest payable to depositors.
 Default resolution: If a company defaults in complying with the
terms and conditions of the deposit insurance contract, making the
insurance cover ineffective, the company must rectify the default
promptly or enter into a fresh contract within thirty days. Failure to
do so may result in penalties, and the company will be treated as
having defaulted.
Rule 6: Creation of security: Rule 6 specifically addresses the creation of
security for deposits, particularly for secured deposits. This rule ensures that
assets securing deposits are of sufficient value to cover potential
repayments, further enhancing the security of depositors’ funds. The key
points are as follows:

 Asset charge: Companies accepting secured deposits must provide

security through a charge on their assets, excluding intangible
assets. This charge is established to ensure the repayment of the
deposit principal and interest. Importantly, the security amount
must not be less than the amount not secured by deposit insurance.
 Valuation: The valuation of assets securing deposits is critical. It is
mandated that the market value of these assets must not be less
than the value of deposits accepted and the interest payable. This
valuation should be conducted by a registered valuer.
 Valuation clarification: In cases where the qualifications and
experience of valuers are pending finalisation, an independent
merchant banker registered with SEBI or an independent chartered
accountant with a minimum of ten years of experience can perform
the valuation.
Rule 7: Appointment of deposit trustees: Rule 7 introduces the necessity
of deposit trustees for securing deposits. Rule 7 establishes a structured
framework for the appointment and regulation of deposit trustees, further
safeguarding depositors’ interests. Key provisions include:

 Consent requirement: A company must obtain written consent

from deposit trustees before their appointment. This consent must
be prominently mentioned in the circular or advertisement issued by
the company.
 Trust deed execution: The company must execute a deposit trust
deed at least seven days before issuing the circular or
advertisement, outlining the terms and conditions of the trust.
  Ineligible appointments: Certain individuals or entities are
ineligible for appointment as deposit trustees. This includes
company officers, individuals indebted to the company, those with
material pecuniary relationships with the company, and those who
have entered into guarantee arrangements related to the deposits
or interest.
 Removal procedures: Deposit trustees cannot be removed after
the issuance of the circular or advertisement and before the expiry
of their term unless all directors, including independent directors,
consent to their removal.
 Duties of trustees: Deposit trustees have various responsibilities,
including ensuring adequate security, compliance with deposit
terms, and taking steps to protect depositors’ interests. They also
play a role in calling meetings of depositors when necessary.
Rule 16: Return of Deposits to be filed with the Registrar

 Annual Return Submission: Companies falling under these rules

must submit, before the 30th of June each year, an annual return
using e-Form DPT-3 to the Registrar of Companies. They should also
include the necessary fee as specified in the Companies
(Registration Offices and Fees) Rules, 2014. This return should
contain information as of the 31st of March of that year, and it must
be audited by the company’s auditor. The auditor must provide a
declaration to confirm the accuracy of the information in Form DPT-
3.
 Clarification: It’s important to note that Form DPT-3 is exclusively
utilised for submitting returns related to deposits or details of
transactions not categorised as deposits. This requirement applies to
all companies except those owned by the government.
In addition, Rule 16A addresses the need for financial statement disclosures:

 For non-private companies: Publicly traded companies, excluding

private ones, must include information in their financial statements,
specifically in the form of notes, regarding funds received from
directors.
 For private companies: Private companies are required to
disclose, via notes in their financial statements, any funds they’ve
received from directors or the relatives of directors.
Deposit v Loan

Deposits

 Acceptance of Deposits: Section 73 of the Companies Act, 2013,

deals with the acceptance of deposits by companies. A deposit, in
this context, refers to any amount of money received by a company
from its members, including individuals and other companies, either
as a loan or as an advance payment for goods or services to be
provided in the future.
  Regulation: Accepting deposits from members is subject to strict
regulatory requirements, including the need to comply with the
Companies (Acceptance of Deposits) Rules, 2014. Companies must
also submit periodic returns and disclosures about deposits
accepted from members.
 Interest: Deposits may or may not carry interest, depending on the
terms agreed upon between the company and the depositor. If
interest is promised, it should be specified in the contract.
 Repayment: Companies must repay deposits to the depositors as
per the terms of the deposit, which may include periodic repayments
or repayment upon maturity.
 Use of Funds: Companies can use the funds raised through
deposits for their operational or business purposes.
Loans

 Borrowing of Loans: The borrowing of loans is governed

by Section 180 of the Companies Act, 2013. Companies can borrow
money by taking loans from banks, financial institutions, or other
lenders. These loans are typically in the form of debt instruments
like term loans, debentures, or bonds.
 Regulation: While there are regulatory requirements for borrowing
loans, they are generally less stringent compared to the rules
governing the acceptance of deposits. Companies must follow their
borrowing limits as specified in their Memorandum of Association
and Articles of Association.
 Interest: Loans almost always carry interest, and the terms,
including the interest rate and repayment schedule, are negotiated
between the borrower (the company) and the lender.
 Repayment: Loans are typically repaid as per the agreed-upon
terms, which may include regular instalments or a lump-sum
repayment at maturity.
 Use of Funds: Companies borrow loans for various purposes,
including capital investments, working capital, and other financial
needs.
Challenge to the constitutionality of Section 73

In the case of M/s. Nidhi Land Infrastructure Developers Pvt. Ltd. v. Union of
India (2017), the plaintiff, Nidhi Land Infrastructure Developers Pvt. Ltd.,
raised an objection regarding the constitutionality of Section 73 within the
framework of the Companies Act of 2013. This section explicitly prohibits
companies from accepting deposits from the general public unless they
adhere to specific formalities.

The plaintiff contended that this provision imposed disproportionate

limitations on their capacity to conduct lawful businesses. This provision is
encroaching upon their right to engage in legitimate commercial
transactions.

Nonetheless, the Supreme Court affirmed the legality of Section 73 through

its verdict. The Supreme Court said that the provision had been formulated
with the primary intent of safeguarding the rights and benefits of depositors.
Therefore, it cannot be said that this provision violates the right of free
conduct of business.

Role of judiciary

Sahara India Real Estate Corporation

Ltd. v. Securities and Exchange Board
of India (SEBI) 2012
In the case of Sahara India Real Estate Corporation, the Sahara Group’s
unlisted companies raised funds through Optionally Fully Convertible
Debentures (OFCDs) without complying with Section 73 of the Companies Act
and other regulations. SEBI alleged that Sahara raised large deposits without
complying with regulatory norms. Sahara contended that OFCD is a focused
issue and does not fall under SEBI’s regulatory jurisdiction. The Supreme
Court of India ruled in favour of SEBI, stating that OFCDs are true “securities”
under the Securities and Exchange Board of India Act, 1992. Sahara was
ordered by the Supreme Court of India to return the collected amount to
investors along with interest to protect their interests. This case set a
precedent for SEBI’s mandate to regulate financial instruments and ensure
investor protection.

State of West Bengal v. Kesoram

Industries Ltd. (2014)
In the case of Kesoram Industries Ltd., Kesoram Industries Ltd., issued
debentures while also looking for public deposits. There arose a lawsuit
against them after the company ran into financial problems and failed to
repay the deposits and unpaid debts. Initially, the question of whether the
State of West Bengal was legally permitted to file a lawsuit against the
company to recover the unclaimed deposits. Secondly, it is the obligatory
nature of the deposit repayment for companies. However, the Supreme Court
ascertained that the State of West Bengal is vested with the legal standing to
institute legal proceedings against Kesoram company. Furthermore, The
company was held liable for its failure to adhere to the court’s orders. SC
ordered them to repay the deposits and take care of any unpaid debts. The
Supreme Court’s verdict further reaffirmed the importance of abiding by
deposit-related regulations. It emphasised the obligation of companies to
fulfil deposit repayment obligations within the stipulated time periods,
thereby ensuring the protection of the interests of depositors. This judicial
ruling put the significance of upholding deposit regulations in the limelight as
it safeguards the depositors.

Gwalior Rayon Silk Manufacturing

(Weaving) Co. Ltd. v. Assistant
Provident Fund Commissioner (2016)
In the case of Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd., there was
an issue regarding the consideration of the outstanding legal liabilities of
Gwalior Rayon Silk Co. as deposits. The central question was whether these
unpaid liabilities, including contributions to provident funds and state
employee insurance, should be classified as public deposits. In its decision,
the Supreme Court ruled that the company’s outstanding statutory
obligations should indeed be considered as “public deposits.” In fact, this
judgement set a precedent by extending the legal requirements of public
deposits to the unpaid legal obligations of the company in question.

Nitin Rekhan v. Union Of India (2022)

In the case of Nitin Rekhan, the petitioner had filed a writ petition before the
Delhi High Court under Article 226 of the Indian Constitution, along
with Section 482 of the Code of Criminal Procedure, 1973. The petitioner’s
primary request was for the court to compel the Registrar of Companies to
take legal action against respondents under Sections 73 and 76A of the
Companies Act, 2013. The background of the case involved the petitioner
paying Rs. 40,00,000 to the directors of the respondent company for share
issuance, with this amount later being refunded. However, the petitioner
alleged that the interest on this sum, as per the Companies (Acceptance of
Deposits) Rules, 2014, was not repaid. The petitioner had filed a complaint
with the Registrar of Companies, but no action was taken.

The petitioner argued that the inaction of the Registrar amounted to a

violation of the Companies Act, 2013, and sought penalties against the
respondent Company and its auditors, (which are also respondents in this
case). However, the court ruled that the sum in question could not be
classified as a “deposit” under the Companies Act, 2013, or the Companies
(Acceptance of Deposits) Rules, 2014. The court based this decision on the
fact that the money had been given for share allotment in 2010 and was
returned in 2018, making the 2013 Act and Rules inapplicable. The court also
referred to a circular that clarified this position. Furthermore, the court stated
that the dispute stemmed from a private contract and was beyond the scope
of its jurisdiction. The petitioner was advised to pursue alternative legal
remedies for recovering interest or dues from the respondent company.
Therefore, the writ petition was dismissed as the court found no valid
grounds for its consideration. The court emphasised that the issue was
contractual and not within the purview of writ jurisdiction. The court also
clarified that its observations would not impact any future proceedings
related to the case.

Conclusion
Winding up, Section 73 of the Company’s Act 2013, and the Companies
(Acceptance of Deposits) Rules, 2014 are vital in controlling how deposits are
acknowledged by companies. As there is a hike of the corporate sector in the
markets, special measures and provisions are made for depositors’
inclination. On the other hand, Section 73 of the Companies Act sets various
standards regarding the acceptance of deposits and adherence to the rules
by characterising the eligibility, accepted deposits, and permitted depositor
entities.

To avoid legal repercussions and safeguard the funds of the depositors,

compliance with the law is of significant importance. To acquire the trust and
validity of their partners, companies should be mindful and use a reasonable
level of raising funds while accepting deposits, keeping precise records, and
guaranteeing convenient reimbursement. The legitimate arrangements of the
Companies Act, 2013, cultivate an environment of monetary increment by
finding some kind of harmony between security provisions and the company
help section. This increases financial backer trust in the corporate area and
advances a feasible and responsible company scene in India.