Before You Borrow: What Every Private Company Should Know About Deposits Under Company Law

Private companies often raise funds from directors, shareholders, or group entities to manage operations or expansion. But under the Companies Act, 2013, not every inflow of money is allowed freely. If money received by a company doesn’t fall under the list of exemptions, it becomes a 'deposit' triggering strict compliance obligations.

What Is a Deposit?

Any money a company receives, by way of loan or otherwise, is treated as a deposit unless it qualifies as an exempt category under the Companies (Acceptance of Deposits) Rules, 2014.

Private limited companies cannot accept public deposits and can take money only from limited sources such as directors, shareholders, relatives of directors, or other companies subject to specific conditions.

Why It Matters

Deposits are a sensitive area under company law. Accepting money incorrectly classified as a 'loan' or 'advance' may be treated as an unauthorised deposit, leading to:

• A penalty of at least the lower of ₹1 crore or twice the amount of deposits accepted, which may extend up to ₹10 crore.
• Possible prosecution under Section 76A.
• Investors receive an offer-cum-application letter.
• Funds are accepted only through banking channels — no cash.
• Shares are allotted within 60 days from the date of receipt of application money, followed by filing of Form PAS-3 with the Registrar of Companies (ROC) within 15 days of allotment.
• Funds can be utilized only after filing of allotment (Form PAS-3).

Even genuine business transactions can attract penalties if the source or documentation is unclear.

Funds a Private Company Can Accept Without Being Treated as Deposits:

• Directors: Permitted, only if accompanied by a written declaration that funds are from personal resources and not borrowed.
• Relatives of Directors: A private company can accept money from its directors or their relatives, as long as they give a written declaration confirming the money isn’t borrowed from someone else. The company must also disclose these details in its Board’s Report for transparency.
• Other Companies: Inter-corporate loans or deposits between companies are not treated as deposits.
• Banks/FIs/NBFCs: Permitted under separate lending laws.

Private companies are not permitted to accept funds from outsiders, friends, or any individuals who are not their members, directors, or relatives of directors.

Further, a private company that is not linked to a public company may accept funds from its shareholders up to 100% of its paid-up share capital, free reserves, and securities premium account as deposits.

This limit, however, does not apply to private companies that are neither subsidiaries nor associates of any other company, have borrowings less than twice their paid-up capital or ₹50 crores, whichever is lower, and have not defaulted in the repayment of such borrowings.

Receipts Not Treated as Deposits

Certain inflows are exempt if conditions are met:

• Share application money (shares allotted within 60 days)
• Advance for supply of goods or services (adjusted within 365 days)
• Security deposits or employee advances
• Loans from banks or other companies
• Promoter funds required by lenders

If these timelines or conditions are breached, the money automatically becomes a deposit.

Key Compliances

If a company legally accepts permissible deposits:

• Obtain declarations from directors/relatives.
• Maintain a deposit register and disclose details in financials.
• Create a deposit repayment reserve (20% of deposits maturing next year).
• File Form DPT-3 annually (even if no deposits exist).

The DPT-3 Filing Rule

Every company must file Form DPT-3 every year by 30th June, declaring both deposits and other outstanding non-deposit receipts such as director loans, inter-corporate loans, or advances.

Missing or misreporting even exempted loans can invite unnecessary MCA queries.

Practical Takeaways

• Document every inflow with source declaration and board approval.
• Avoid accepting money from outsiders.
• Track 60-day and 365-day limits for share money and advances.
• File DPT-3 every year without fail.
• Consult your Chartered Accountant or Company Secretary before raising or repaying significant amounts.

In Summary

For private limited companies, not all funding is straightforward. What looks like a simple loan may be treated as a deposit under law. Understanding these distinctions helps avoid penalties and preserves your company’s credibility. Treat deposits as the 'red zone' of corporate funding safe only when backed by the right paperwork and compliance.

Disclaimer:

The information contained in this document is for information purposes only. In no way, this document should be treated as advice. Please reach out to us or your consultants for undertaking detailed analysis.

This author will not be liable for any loss or damage caused by the reader's reliance on information obtained through this report. The contents are provided for your reference only.

About Asksolique.ai

Asksolique.ai is a context-centric AI tool built for Indian tax professionals. Click here to access.

Try it for free and see how much time you win back to focus on what truly matters.