Acceptance of Deposits from Members – Explained in Simple Terms

When businesses grow, so does their need for funds. While many companies turn to banks, private equity, or venture capital, there is one often-overlooked source of finance available under Indian company law: accepting deposits from members (shareholders). It sounds simple — shareholders giving money to their own company — but in reality, the law lays down a fairly structured framework. This framework sits in Chapter V of the Companies Act, 2013 (Sections 73 to 76), read with the Companies (Acceptance of Deposits) Rules, 2014. Let’s break it down in practical terms. What counts as a “deposit”? Not all money received by a company is treated as a “deposit.” The law makes a distinction. Money received as loans from banks, inter-corporate borrowings, or from directors (in case of private companies) is not considered a deposit. Advances against goods or share application money (pending allotment within the permitted time) are also outside the net. A deposit essentially means money taken by the company from members or public, which carries an obligation to repay, unless it falls under the specific exclusions given in the Rules. The baseline rule Section 73 starts with a prohibition — companies cannot accept deposits from the public. This is to prevent abuse and protect investors. However, companies can accept deposits from their own members (shareholders), provided they comply with certain safeguards. Private companies – the more flexible option Private companies, given their closely held nature, have always enjoyed greater flexibility. They can accept deposits from members up to 100% of the aggregate of their paid-up share capital, free reserves, and securities premium. The only mandatory filing is Form DPT-3, which reports the details of money accepted. The stricter conditions applicable to public companies — such as issuing a circular (DPT-1), maintaining a deposit reserve, or obtaining a credit rating — do not apply in most cases. Here’s a corrected and polished version of that section, reflecting the current law (10 years for start-ups and no limit for qualifying private companies): Special Relaxations for Private Companies This is where things get interesting. (a) Start-ups A start-up private company is given almost a free hand for its first ten years from incorporation. During this period, it can accept deposits from members without going through the heavier compliance steps under Section 73(2). This relief is more than just a legal convenience — it is a genuine lifeline. In the first decade, start-ups often face recurring liquidity crunches. Promoters may need to dip into their own savings or raise bridge funds from close networks. This exemption allows them to do so quickly, without the risk of technical defaults. 👉 Example: A technology start-up incorporated in April 2024 can, till March 2034, freely raise deposits from its members without issuing deposit circulars, obtaining credit ratings, or creating a 20% repayment reserve. (b) Certain Independent Private Companies with Low Borrowings Even if a private company is not a start-up, it may still qualify for exemptions if it ticks three boxes: It is not a subsidiary or associate of another company (ensuring only independent companies benefit). Its borrowings from banks, financial institutions, or any body corporate are less than twice the paid-up share capital or ₹50 crore, whichever is lower. It has not defaulted on repayment of such borrowings at the time of accepting deposits. If these conditions are satisfied, the company can accept deposits from members without any upper limit. In other words, the usual 100% cap (of net worth) does not apply to them. They only need to file details of money so accepted in Form DPT-3, but can skip the heavier obligations such as issuing a deposit circular or maintaining a deposit repayment reserve. This carve-out is designed for small and mid-sized businesses — the local manufacturer, the family-run trading company, the boutique consulting firm — who rely heavily on shareholder support but should not be weighed down by regulatory overkill. Public companies – stricter framework For public companies, the story is different. They can accept deposits from members only up to 35% of paid-up share capital, free reserves, and securities premium. And they must comply with the detailed safeguards under Section 73(2): In short, the law allows public companies to raise money from members, but with enough disclosure and reserves to protect depositors. Why this difference? The rationale is straightforward: Private companies usually raise deposits from people who are already insiders — promoters, family, or close associates. The risk of loss to the general public is minimal, hence lighter compliance. Public companies, on the other hand, may have thousands of shareholders. Raising deposits from them is almost like taking money from the public, which calls for higher transparency and safeguards. Practical points directors should remember Always file DPT-3 – whether you are a private company or public, reporting of deposits is non-negotiable. Respect the limits – 100% of net worth for private companies; 35% for public companies. Defaults have long shadows – even a past default disqualifies you for five years. Unsecured deposits must be named as such – no sugar-coating in circulars or communications. Depositors can go to NCLT – if the company fails to repay, members can approach the Tribunal for orders of repayment. Acceptance of deposits from members can be a useful, low-cost source of funding, especially for private companies and start-ups. It gives promoters breathing room without running to banks or outside investors. At the same time, the restrictions for public companies remind us that depositors’ money is sacrosanct. Safeguards like reserves and disclosures exist not to burden companies, but to protect stakeholders. For company directors and Company secretaries, the message is simple: deposits from members are allowed — but only if you stay within the guardrails. Misuse or ignorance can quickly turn this tool into a liability.