Your money is not in bad company

For investors who do not want the see-saw ride of the stock-markets or the complexity of multiple mutual funds, the age-old fixed deposit (FD) with companies seemed to be the ideal investment option. The very name had some degree of assurance attached to it, and companies offered interest rates a few notches higher than banks.

All that has, however, changed. A few companies that accepted deposits proved to be fly-by-night operators.

Sahara has been involved in a long tussle with the regulators on the funds it has mopped up under various innovative names — but the basic structure of all these schemes has been an FD.

Recently, the Viswapriya group has been in the news for not being able to service its deposits or repay them due to liquidity issues.

In its old avatar, the Companies Act, 1956, mandated a public advertisement which also contained snapshots of the financials of the company to enable prospective depositors to decipher the financial credentials of the company.

The Companies Bill, 2013, along with the draft rules listed, attempts to ring-fence depositors from the possibility of their deposits vanishing overnight.

Ring-fencing depositors

Clauses 73 to 76 of the Bill attempt this ring-fencing. The advertisement in the erstwhile Section 58A is now called a Circular, which would show the financial position of the company, the credit rating obtained, the total number of depositors and the amount due in respect of any previous deposits accepted by the company.

The first attempt to protect the interest of depositors is the clause that mandates companies to deposit the sum --- which shall not be less than 15 per cent of the amount of its deposits maturing during one financial year and the next --- in a scheduled bank in a separate bank account, to be called as deposit repayment reserve account.

The draft rules also mandate that the deposit insurance should be taken at least a month prior to the issue of the Circular or advertisement.

The Circular should assure a minimum repayable sum of Rs 20,000 (spelt out in the rules), payable to those with deposits of Rs 20,000 or less.

Those with deposits of more than Rs 20,000 are to be repaid at least this sum. The deposit insurance premium cannot be passed on to the depositors.

The rules state that the company shall provide for security by way of a charge on its assets as referred to in Schedule III of the Act, excluding intangible assets of the company, for the due repayment of the amount of deposit and interest.

The amount shall not be less the sum remaining unsecured by the deposit insurance.

The company should ensure that the total value of the security (either by way of deposit insurance and/or by way of charge on company’s assets) shall not be less than the amount of deposits accepted and the interest payable thereon.

The provisions require all companies to appoint one or more deposit trustees for creating a security on the deposits — a sort of a gate-keeper to ensure that the inflow and outflow of deposit traffic is seamless.

The Rules cap the amounts that companies can accept by way of deposits — 25 per cent of the aggregate paid-up capital and reserves for acceptance of deposit and 10 per cent for renewal.

To ensure that companies do not get the opinion that the Ministry of Corporate Affairs and its lieutenants can be managed, the penal provisions are probably the harshest — monetary fines ranging from Rs 1 crore to Rs 10 crore and prison term for seven years.

The provisions as drafted would assure depositors of the safety of their hard-earned money parked with companies. The provisions would certainly dissuade companies that promise high returns over a period of time and a gold coin at inception.

Funder of last resort

It is a fact however, that companies that want to take the deposit route would now pause and think through these provisions.

Credit rating and deposit insurance are going to increase the costs of a deposit campaign.

Parking 15 per cent of the principal and interest due over two years in an escrow account is going to tie up working capital which could have probably been better utilised elsewhere.

The need to appoint an independent trustee is only going to add to the costs, as trustees know that they cannot afford to be lax in the discharge of their duties and would ask their price.

The penal provisions would get companies thinking whether a foray into deposits is worth it.

Right now, the answer would be in the negative, making the depositor the funder of last resort for a company.

(The author is Director, Finance, Ellucian)

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