The Hindu Business Line : Unsecured director loans to companies not `deposits'

IN a reversal of stance, the Department of Company Affairs (DCA) has now held that unsecured loans received by a public company from its director would not qualify as "deposit" under the rules prescribed by it for acceptance of deposits. This would help closely held public companies to tide over temporary financial difficulties by raising resources from directors.

Such borrowings generally are in the nature of interest-free loans, an industry observer pointed out. Besides, it would also give relief to directors in such companies since they would not be debarred from being appointed as directors in other companies' in case of any defaults in repayment of such loans.

Prior to the latest change, any amount (not being a secured loan) received by a public company from its directors was considered to be a "deposit" for the purposes of the Companies (Acceptance of Deposits) Rules. The Department has, however, retained the existing position for private companies — amount received from a director, relative of a director or its member by a private company would not be considered as "deposit."

"Based on the representations made by the directors of public companies, the Department has taken this decision," official sources told Business Line. Elaborating further, the sources said, "In fact, we are just trying to address the problems faced by the directors in the wake of the amendment made to the rules in 2001."

Prior to September 2001, any amount given by a director to a company did not qualify as "deposit."

However, in September 2001, the Department withdrew the exemption and held that any amount (unsecured loans) from a director to a public company would be considered as a deposit. Any sum paid by a director of a private company to the same company, however, continued to be exempted from being categorised as "deposits."

The DCA has now amended the deposit rules to specify that "any amount received from a person who, at the time of the receipt of the amount, was a director of the company or any amount received from a relative of a director or its member by a private company" would not be considered as deposits.

This would be the case only if the director, relative of a director or member, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others.

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