Companies Act Section 73

Companies Act Section 73: Prohibition on Acceptance of Deposits from the Public

Introduction to Section 73

Section 73 of the Companies Act addresses the critical regulatory framework surrounding the acceptance of deposits by companies from the public. 

The provisions established in this section are designed to protect the interests of depositors while ensuring that companies adhere to strict guidelines when soliciting deposits. 

This section aims to prevent potential misuse of public funds and enhances transparency and accountability in corporate financial dealings. 

Key Provisions of Section 73

1. General Prohibition on Public Deposits

Restriction on Invitations: 

Following the commencement of the Companies Act, it is strictly prohibited for any company to invite, accept, or renew deposits from the public unless such actions are conducted in accordance with the stipulations outlined in this Chapter. 

This measure is aimed at safeguarding public interest and ensuring that companies operate within a defined legal framework when dealing with public deposits.

Exemptions: 

Notably, this prohibition does not apply to banking companies and non-banking financial companies as defined in the Reserve Bank of India Act, 1934. 

Furthermore, the Central Government may designate other companies as exempt from this prohibition, provided such decisions are made after consultation with the Reserve Bank of India. 

This creates a level of flexibility for regulated financial institutions while maintaining stringent controls for other types of companies.

2. Acceptance of Deposits from Members

Resolution Requirement: 

A company may accept deposits from its members, but this requires the passing of a resolution in a general meeting. 

Additionally, the acceptance of such deposits is contingent upon compliance with prescribed rules, which must be formulated in consultation with the Reserve Bank of India.

Terms and Conditions: 

The company and its members must mutually agree upon the terms and conditions under which deposits are accepted. 

This may include the provision of security for the repayment of deposits, as well as the interest to be paid. 

3. Disclosure and Compliance Requirements

To ensure transparency and protect the interests of depositors, companies must adhere to specific conditions when accepting deposits:

Issuance of Circular: 

A company is required to issue a circular to its members that includes vital information about the company's financial position, credit rating, total number of depositors, and the amounts due from previous deposits. 

This circular must be presented in a prescribed format, providing clarity and enabling members to make informed decisions regarding their investments.

Filing with the Registrar: 

A copy of the circular, along with the accompanying financial statement, must be filed with the Registrar of Companies within thirty days before the issuance of the circular. 

This ensures regulatory oversight and facilitates monitoring by the authorities.

Deposit Repayment Reserve Account: 

Companies are mandated to deposit a minimum of twenty percent of the total amount of their deposits maturing in the upcoming financial year into a separate bank account designated as the Deposit Repayment Reserve Account. 

This account is to be maintained in a scheduled bank and is exclusively for the purpose of repaying deposits.

Certification of Defaults: 

Companies must certify that they have not defaulted on the repayment of any deposits, including interest, either before or after the enactment of this Act. 

If there has been a default, it must be rectified, and a period of five years must have passed since the default was corrected for the company to be eligible to accept new deposits.

Provision of Security: 

Companies may also be required to provide security for the repayment of deposits. If a company fails to fully secure the deposits, these will be classified as "unsecured deposits," and this designation must be explicitly stated in all circulars and related documents.

4. Obligations for Repayment of Deposits

Repayment Terms: 

Every deposit accepted under the provisions of this section must be repaid along with interest, strictly following the terms outlined in the agreement made with the depositors. 

This provision ensures that depositors have a legal recourse should the company fail to meet its repayment obligations.

Tribunal Recourse: 

In the event that a company fails to repay a deposit or any interest due, the affected depositor has the right to apply to the Tribunal. 

The Tribunal is empowered to issue an order directing the company to pay the outstanding amount or to address any losses incurred by the depositor as a result of non-payment. 

This provision provides a mechanism for depositors to seek justice and financial redress.

5. Use of the Deposit Repayment Reserve Account

Restrictions on Use: 

The funds maintained in the Deposit Repayment Reserve Account must be utilized solely for the repayment of deposits. This stipulation is crucial in ensuring that the company's financial resources are allocated appropriately and that depositor interests are prioritized.