Companies (Acceptance of Deposits) Amendment Rules, 2020

Ministry of Corporate Affairs (MCA) has further amended the Companies (Acceptance of Deposits) Rules, 2014 in a notification dated 7th September 2020 to be called Companies (Acceptance of Deposits) Amendment Rules, 2020. The notification broadly pertains to two amendments concerning start-up companies with respect to the Acceptance of deposits. This is released in Gazette as per the requirement of the Government of India and this article will provide details on the same.

The Gist of the Companies (Acceptance of Deposits) Amendment Rules, 2020

In the Companies (Acceptance of Deposits) Rules, the amendment is brought under rules 2 and 3 which specifies the conditions for acceptance of deposits (Money or Loan) by a start-up company. This change has been made by amending rule 2, in sub-rule (1), in clause (c), in sub-clause (xvii) and rule 3, in sub-rule (3), in the second proviso, in clause (i) of Companies (Acceptance of Deposits) Rules, 2014. As stated above, the notification broadly pertains to two amendments about start-up companies with respect to the following:

Acceptance of deposit in a form of the convertible note
Acceptance of deposits from members by a start-up company which are private companies

Existing Rule 2(1)(c)(xvii) of Companies (Acceptance of Deposits) Rules, 2014

Earlier, start-up companies were allowed to accept a deposit for an amount of Rs. 25 Lakhs or more by way of in a single tranche from a person. Such convertible notes must be convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue. Note: Start-up Company means a private company incorporated under the Companies Act, 2013 and recognized by the Department for Promotion of Industry and Internal Trade.

Understanding the term Convertible note

A convertible note means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other conditions agreed to and indicated in the instrument. Please click on the official link on Rule 2(1)(c)(xvii) of Companies (Acceptance of Deposits) Rules, 2014 for reference

Amendment made in Companies (Acceptance of Deposits) Amendment Rules, 2020

As mentioned above, the amendment is made in rules 2 and 3 of Companies (Acceptance of Deposits) Rules, 2014 and the startup company needs to satisfy the following conditions. The changes contemplated are as follows::

Acceptance of Deposit in form of convertible note:

As per this new amendment, the limit for repayment of deposit (money/loan) is increased to 10 years which means that start-up companies can now accept a deposit in form of a convertible note which is convertible/repayable up to 10 years from the date of issue. Before this amendment, the period of repayment was fixed at 5 years from the date of issue.

Acceptance of deposits from members by a start-up which is private companies

This amendment now allows start-up which is private companies to accept the deposit from its members without any restrictions for 10 years from the date of its incorporation as against the earlier time frame of 5 years.

Definition for Startup – As per Companies (Acceptance of Deposits) Amendment Rules, 2020

The above amendments are in line with the amendment to the definition of ‘start-up’ notified by the Department of Promotion of Industry and Internal Trade (DPIIT) vides notification dated 19 February 2019. To access tax benefits and easier compliance, companies have to be recognized as Startups by the Department for Promotion of Industry and Internal Trade (DPIIT). Startups recognized by DPIIT can avail of Intellectual property rights (IPR) related benefits. The definition of a startup as per the DPIIT’s notification dated 19.02.2019 is explained here for reference:

Tenure - Entity shall be considered as a start-up up to 10 years from the date of incorporation
Turnover - Turnover for any of the financial years since incorporation has not exceeded Rs.100 Crores
Areas of Operation - It is working towards innovation, development, or improvement of products or processes or services or scalable business model with a high potential of employment generation or wealth creation

Acceptance of Deposits by Startups

As per the rules, deposit includes any receipt of money by way of deposit or loan by a company. The startup can receive money from the following entities/Governments and such amount will be considered as Deposit as per the Companies (Acceptance of Deposits) Amendment Rules, 2020: Any amount from the Central Government or a State Government or any other source whose repayment is guaranteed by the Central Government or a State Government

Amount from a local authority or a statutory authority constituted under an Act of Parliament or a State Legislature
Any amount received from foreign Governments, international banks, multilateral financial institutions, foreign Governments owned development financial institutions, foreign export credit agency, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities, or persons resident outside India
Any amount received as a loan or facility from any banking company or the State Bank of India and Public Financial Institutions
Any amount received against the issue of commercial paper or any other instruments issued under the guidelines of the Reserve Bank of India
Any amount received by a company from any other company
Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company
Any amount raised by the issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognized stock exchange as per applicable regulations made by the Securities and Exchange Board of India.
Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company like non-interest bearing security deposit
Any non-interest bearing amount received and held in trust
Any amount received for the business of the company
Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a ban
Any amount accepted by a Nidhi company
Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982
Any amount received by the company under any collective investment scheme in compliance with regulations
of the Securities and Exchange Board of India
An amount of twenty-five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding ten years] from the date of issue) in a single tranche, from a person. (As per Companies (Acceptance of Deposits) Amendment Rules, 2020)

The notification pertaining to the Companies (Acceptance of Deposits) Amendment Rules, 2020 is as follows:

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Frequently Asked Questions

Common questions about Companies (Acceptance of Deposits) Amendment Rules, 2020.

The main purpose of the Companies (Acceptance of Deposits) Amendment Rules, 2020 is to amend the existing rules to provide more flexibility for start-up companies in accepting deposits or loans. The amendment primarily focuses on two changes: allowing start-ups to accept convertible notes repayable within 10 years instead of the earlier limit of 5 years, and permitting private start-up companies to accept deposits from members without restrictions for up to 10 years from incorporation.

A convertible note is an instrument that allows a start-up company to receive money initially as a debt, which can be repaid or converted into equity shares of the company upon the occurrence of specified events and as per agreed-upon conditions mentioned in the instrument.

The new amendment benefits start-up companies by extending the time period for repayment or conversion of convertible notes from 5 years to 10 years from the date of issue. Additionally, it allows private start-up companies to accept deposits from members without any restrictions for 10 years from the date of incorporation, instead of the earlier 5-year limit.

The changes made to the definition of a 'start-up' by the DPIIT are significant because the Companies (Acceptance of Deposits) Amendment Rules, 2020 are aligned with this updated definition. The new definition extends the tenure for considering a company as a start-up from 5 years to 10 years from the date of incorporation, making more companies eligible for the benefits under these rules.

According to the Companies (Acceptance of Deposits) Amendment Rules, 2020, a start-up company can accept deposits or loans from various sources, including government entities, local authorities, foreign governments and institutions, banking companies, other companies, directors or their relatives (in case of private companies), non-convertible debentures, employees, promoters, and convertible notes, among others.

The Companies (Acceptance of Deposits) Rules, 2014 were introduced to regulate the acceptance of deposits by companies from their members and the public. The Companies (Acceptance of Deposits) Amendment Rules, 2020 amend specific rules within the 2014 rules, specifically Rules 2 and 3, to provide more flexibility for start-up companies in accepting deposits.

Companies recognized as start-ups by the DPIIT can avail various benefits, such as tax benefits, easier compliance, and Intellectual Property Rights (IPR) related benefits. This recognition is essential for companies to be eligible for the relaxations provided under the Companies (Acceptance of Deposits) Amendment Rules, 2020.

The amendment specifically mentions that private start-up companies can accept deposits from their members without any restrictions for 10 years from the date of incorporation. However, the rules for accepting deposits or convertible notes from other sources remain the same for all types of start-up companies.

The 10-year period mentioned in the amendment is significant because it aligns with the updated definition of a 'start-up' by the DPIIT, which extends the tenure for considering a company as a start-up from 5 years to 10 years from the date of incorporation. This allows more companies to benefit from the relaxations provided under the amended rules for a longer duration.

By allowing start-up companies to accept deposits or convertible notes for a longer period (up to 10 years), the amendment provides them with more flexibility in raising funds and managing their financial resources. This can be beneficial for start-ups, as they often require substantial capital for growth and innovation during their initial years of operation. It also gives them more time to convert the debt into equity or repay the loans, aligning better with their long-term growth plans.