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Monday, Nov 29, 2004

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Stricter norms for cos raising public deposits on cards

Richa Mishra

New Delhi , Nov. 28

COMPANIES may soon have to disclose the purpose and utilisation of funds raised by way of public deposits in their balance sheet.

Such a requirement is likely to be proposed by the Ministry for Company Affairs, which is working out a strategy paper on protecting the depositors' interest and making public deposits a much safer avenue for investments.

Concerned over the number of complaints received on defaults in repayment of deposits raised by the companies, the Ministry had set up a high-level committee to prepare a strategy paper.

Though the existing Companies Act provides for enough safeguards, the defaulting companies have been found taking shelter under higher legal authorities, sources said.

The Minister of Company Affairs (Independent Charge), Mr Prem Chand Gupta, told Business Line, "The Government is committed to protecting the depositor's interest."

Regarding the question whether complaints against non-banking financial companies (NBFCs) can be taken up with the Ministry, sources said, "Agreed that deposit guidelines have been laid down by the Reserve Bank of India, but the Ministry can look into the aspect of depositors' interest."

According to sources, the paper is likely to suggest formation of an ombudsman with nominees of Company Affairs, the Securities & Exchange Board of India, RBI, and recognised investor associations to monitor such companies. This body could be on the lines of banking ombudsman, sources said.

Further, there is a proposal that such companies should be debarred from accepting or inviting any deposits. Currently, the Act only restricts them from inviting deposits and not the acceptance of deposits.

This, in effect, implies that once having invited the deposits through newspaper-advertisements, the company concerned can continue to accept deposits during the entire validity-period of its advertisement even if it is in default of the repayment of any deposit or any interest thereon.

Besides, disclosing the purpose and utilisation of funds the companies may also be required to disclose the quantum of fixed deposits matured but not paid.

The paper is also likely to suggest that companies that have invited deposits without issuing an advertisement as prescribed under law should be prohibited from making any inter-corporate loans, give any guarantee or acquire by way of subscription of the shares of any body corporate.

Further, there is a proposal that such entities should be debarred from floating any new schemes. To ensure that the depositors are able to safely invest their savings in this unsecured mode of public deposits, while avoiding frivolous companies, the paper may suggest that a system of credit rating for such companies be introduced.

"Like in case of NBFCs, which cannot accept deposits unless it has obtained investment grading from any approved credit rating agency, non-banking non-financial companies too be subjected to a similar system," sources said.

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