Public deposits are an important source
of financing the medium-term and long-term requirements of a company.
The term 'public deposit' implies any money received by a company through
the deposits or loans collected from the public. The public includes the
general public, employees and shareholders of the company but excludes
the money received in the form of shares and debentures. In India, this
method of raising finance has gained a lot of importance because of the
several advantages relating to public deposits:-
- It is an easier method of mobilising funds, especially
during periods of credit squeeze.
- The administrative cost of deposits for the company is
lower than that involved in the issue of shares and debentures. The procedure
of inviting public deposits is also simpler and involve lesser formalities.
- The rate of interest payable by the company on public
deposits is lower than the interest on loans from banks and other financial
institutions. Such an interest is a tax deductible expense.
- It helps the company to borrow funds from a larger segment
of public and thus reduces the dependence of the company upon financial
- It also enables the company to create contact with a
large number of investors.
- It ensures the availability of funds for a longer duration
and provides flexibility to the financial structure of the company.
There is no risk of over-capitalisation and the deposits can be repaid
when they are not required.
- There is no dilution of shareholders' control as the
depositors have no voting rights and cannot interfere with the internal
management of the company.
But this mode of financing through public deposits has
its own limitations:-
- As the public deposits are more likely to be affected
by the uncertain conditions in the economy, the depositors response
may vary accordingly. They may also tend to withdraw their deposits
if the company is not performing well.
- Public deposits with the companies may cause a diversion
of resources into non-priority and undesirable areas.
- Professional investors may not like to invest in such
deposits as there is no or less chance for capital appreciation.
- As public deposits are unsecured, the depositors may
have to bear the risk of loss of money in the event of failure of the
- Their widespread use restricts the growth of a healthy
capital market. They also tend to distort the interest rate pattern of
the economy and may result in the dearth of sound industrial securities.
Regulating Public Deposits
The public deposits are regulated by
the provisions of the Companies
Act and the Companies (Acceptance of Deposit) Rules,1975.
According to them, the following amounts are not included in the expression
- Any amount received from the Central
Government or a State Government, local authority, foreign Government,
any foreign citizen or authority or any other source whose repayment
is guaranteed by the Central Government or a State Government
- Any amount received as a loan from
any banking company, State Bank of India or its subsidiaries, a nationalised
bank or co-operative bank
- Any amount received as a loan from
any of the notified financial institutions
- Any amount received by a company
from any other company
- Any amount received from an employee
of the company by way of security deposit
- Any amount received by way of security
or as an advance from any purchasing, selling or other agents in the
course of or for the purposes of the business of the company
- Any amount received by way of subscriptions
to any shares, stock, bonds or debenture pending the allotment of such
shares, etc., and calls in advance on shares
- Any amount received in trust or any
amount in transit
- Any amount received from directors
of the company or from its shareholders by a private company
- Any amount of unsecured loans brought
in by the promoters in pursuance of stipulations of financial institutions
or loans provided by the promoters themselves and/or by their relatives
but not by their friends and business associates.
Companies Act and the rules framed thereunder, the invitation
and acceptance of deposits by companies is subjected to the following
- Companies are not permitted to raise
unlimited amounts of fund through public deposits. The aggregate of
all outstanding deposits cannot exceed certain prescribed percentage
of the paid up capital and free reserves of the company.
- Invitations of deposits by a company
can be made only by means of an advertisement specifying the financial
position, management structure and other particulars relating to a company.
A company which has defaulted in repayment of deposit or interest thereon
is prohibited from inviting deposits.
- The depositors shall fill the application
form supplied by the company. The company in return issues a deposit
receipt which is an acknowledgement of debt by the company. The terms
and conditions of the deposit are printed on the back of the receipt. The
company shall maintain a register of deposits containing the prescribed
particulars and file returns of deposits duly certified by their auditor
with a Registrar on or before 30th June of every year.
- The interest to be allowed on such
deposits by the company must be in accordance with the rate fixed by
the Government. The rate of interest on deposits also varies depending
upon the period of deposit and the reputation of the company.
(Amendment) Act,2000 has inserted certain new sections, in
order to protect the interests of small depositors. The expression 'small
depositor' means ''a depositor who has deposited (in a financial year)
a sum not exceeding twenty thousand rupees in a company and includes his
successors, nominees and legal representatives". In case of any default
by the company in paying back to them, it shall inform the Company
Law Board within sixty days from the date of default. The
Company Law Board will then direct the company to repay to small depositors
within a period of thirty days from the date of receipt of intimation
of default. On failure to comply with the orders of the Board, the company
and its directors shall be punishable with imprisonment and payment of
daily fine during the period in which such non-compliance continues. However, if
such a defaulting company wants to invite deposits from small depositors, it
shall state the complete nature of default in all its future advertisements
and application form.
the Reserve Bank of India issues directives from
time to time for regulating public deposits. These are aimed at safeguarding
the interest of the public and to give them a feeling of security in investing
in the public deposits. These regulations pertain to:-
- The ratio of
deposits to the paid-up capital and free reserves of the company
- The maximum duration of the deposits
- Obligation to invest a specified
percentage of the deposit in a current or other account with a scheduled
bank free from any charge or lien, or in approved securities which shall
be used only for the repayment of deposits
- The filing of periodical
returns with the RBI, giving the required information about public deposits/loans
as well as furnishing of certain specified information on its financial
position and working.