Class 12 Secretarial Practice Chapter 5: Deposits

Key concepts: Deposits

Deposits

A deposit is a short term loan taken by a company from its members or the public. It is cheaper than other sources and does not dilute control, but default in repayment is risky.

Legal framework

Companies other than banking companies, NBFCs and housing finance companies must follow Sections 73 to 76 of the Act, the Acceptance of Deposits Rules 2014 and RBI directives.

Eligible public company

A public company with net worth of at least Rs 100 crores, or turnover of at least Rs 500 crores with a special resolution for public deposits. Only such companies can take public deposits.

Who can collect from whom

Private companies and non-eligible public companies take deposits from members (and directors). Eligible public companies and Government companies can also take them from the public.

Tenure and type of deposit

Deposits run for 6 to 36 months and cannot be repayable on demand. They may be secured by a charge on tangible assets or unsecured, and this must be stated in the circular.

Circular and advertisement

A circular invites deposits from members, an advertisement invites the public. It is filed with the Registrar and issued only after 30 days of filing.

Deposit trustee and insurance

Trustees protect depositors of secured deposits under a Trust Deed signed 7 days before the issue. Deposit insurance is taken at least 30 days before the circular or advertisement.

Deposit Repayment Reserve Account

An account in a scheduled bank into which the company puts at least 20% of deposits maturing in the year by 30 April. It can be used only to repay deposits.

Quick revision: important points

• Amount limits: private company 100%, non-eligible public 35%, Government company 35% of paid up capital and free reserves.
• Tenure: minimum 6 months, maximum 36 months; premature repayment only after 3 months.
• Charge on tangible assets within 30 days for secured deposits; joint names not more than 3.
• Deposit receipt within 21 days; Register of Deposits within 7 days of the receipt.
• Return of Deposit by 30 June with details as on 31 March.
• Premature repayment: 1% less interest; unpaid matured deposits: penal interest of 18%.

Practice MCQs with answers

1. A deposit accepted by a company is best described as which type of capital?

   1. Owned capital
   2. Long term loan
   3. Short term loan
   4. Share capital
   Show answer

   Answer: C. Short term loan
   A deposit is money borrowed for a short period and repaid on a fixed maturity date, so it is a short term loan.

2. Which company must upload its circular for deposits on the company website, while it is optional for private and other public companies?

   1. Private company
   2. Eligible public company
   3. Non-eligible public company
   4. Every unlisted company
   Show answer

   Answer: B. Eligible public company
   For deposits from members, uploading the circular on the website is compulsory only for an eligible public company.

3. Which is the correct order of the first three steps for accepting deposits from the public?

   1. Board meeting, general meeting, Board meeting to approve draft advertisement
   2. General meeting, credit rating, Board meeting
   3. Appoint banker, Board meeting, general meeting
   4. Board meeting, deposit insurance, general meeting
   Show answer

   Answer: A. Board meeting, general meeting, Board meeting to approve draft advertisement
   The Board first decides the plan, shareholders pass a special resolution in the general meeting, and then the Board approves the draft advertisement.

4. What penal rate of interest must a company pay on deposits that have matured and been claimed but remain unpaid?

   1. 1%
   2. 10%
   3. 12%
   4. 18%
   Show answer

   Answer: D. 18%
   For the overdue period the company has to pay penal interest at 18%.

5. Which company is called an eligible public company?

   1. Net worth of at least Rs 100 crores, or turnover of Rs 500 crores with a special resolution
   2. Any public company listed on a stock exchange
   3. Net worth of Rs 10 crores and turnover of Rs 50 crores
   4. Any Government company
   Show answer

   Answer: B. Any public company listed on a stock exchange
   An eligible public company has net worth of not less than Rs 100 crores or turnover of not less than Rs 500 crores with shareholders' special resolution.

All Class 12 Secretarial Practice chapters

• Chapter 1: Introduction to Corporate Finance
• Chapter 2: Sources of Corporate Finance
• Chapter 3: Issue of Shares
• Chapter 4: Issue of Debentures
• Chapter 5: Deposits
• Chapter 6: Correspondence with Members
• Chapter 7: Correspondence with Debentureholders
• Chapter 8: Correspondence with Depositors
• Chapter 9: Depository System
• Chapter 10: Dividend and Interest
• Chapter 11: Financial Market
• Chapter 12: Stock Exchange

Class 12 Secretarial Practice notes: all chapters