You are on page 1of 9

INTRODUCTION

The term 'public deposit' implies any


money received by a company through the
deposits or loans collected from the public.
The public includes the general public,
employees and shareholders of the company
but excludes the money received in the form
of shares and debentures.
ADVANTAGES
 It is an easier method of mobilising funds,
especially during periods of credit squeeze.
 The administrative cost of deposits for the
company is lower than that involved in the issue of
shares and debentures.The procedure of inviting
public deposits is also simpler and involve lesser
formalities.
 The rate of interest payable by the company
on public deposits is lower than the interest on loans
from banks and other financial institutions. Such an
interest is a tax deductible expense.
 It helps the company to borrow funds from a
larger segment of public and thus reduces the
dependence of the company upon financial
institutions.
It also enables the company to create contact
with a large number of investors.

It ensures the availability of funds for a longer


duration and provides flexibility to the financial
structure of the company. There is no risk of
over-capitalisation and the deposits can be
repaid when they are not required.

There is no dilution of shareholders' control as


the depositors have no voting rights and cannot
interfere with the internal management of the
company.
LIMITATIONS
As the public deposits are more likely to be affected
by the uncertain conditions in the economy, the
depositors response may vary accordingly. They may
also tend to withdraw their deposits if the company is
not performing well.
Public deposits with the companies may cause a
diversion of resources into non-priority and
undesirable areas.
Professional investors may not like to invest in such
deposits as there is no or less chance for capital
appreciation.
As public deposits are unsecured, the depositors
may have to bear the risk of loss of money in the
event of failure of the company.
Their widespread use restricts the growth of a
healthy capital market.They also tend to distort
the interest rate pattern of the economy and
may result in the dearth of sound industrial
securities.
Regulating Public Deposits
According to Companies Act and the Companies
(Acceptance of Deposit) Rules,1975 , the following
amounts are not included in the expression'deposits':-

Any amount received from the Central Government or a


State Government, local authority, foreign Government,
any foreign citizen or authority or any other source whose
repayment is guaranteed by the Central Government or a
State Government

Any amount received as a loan from any banking


company, State Bank of India or its subsidiaries,a
nationalised bank or co-operative bank

Any amount received as a loan from any of the notified


financial institutions
Any amount received from an employee of the
company by way of security deposit
Any amount received by way of security or as an
advance from any purchasing ,selling or other
agents in the course of or for the purposes of the
business of the company
Any amount received in trust or any amount in
transit
Any amount received from directors of the
company or from its shareholders by a private
company
Any amount of unsecured loans brought in by the
promoters in pursuance of stipulations of financial
institutions or loans provided by the promoters
themselves and/or by their relatives but not by
their friends and business associates
Under
the Companies Act and the rules
framed thereunder, the invitation
and acceptance of deposits by
companies is subjected to the
following conditions:-
Companies are not permitted to raise
unlimited amounts of fund through public
deposits. The aggregate of all outstanding
deposits cannot exceed certain prescribed
percentage of the paid up capital and free
reserves of the company.
Invitations of deposits by a company can be
made only by means of an advertisement
specifying the financial position.A company
which has defaulted in repayment of deposit or
interest thereon is prohibited from inviting
deposits.
The depositors shall fill the application form
supplied by the company. The company in
return issues a deposit receipt which is an
acknowledgement of debt by the company.The
terms and conditions of the deposit are printed
on the back of the receipt.The company shall
maintain a register of deposits containing the
prescribed particulars and file returns of
deposits duly certified by their auditor with a
Registrar on or before 30th June of every year.
The interest to be allowed on such deposits
by the company must be in accordance with
the rate fixed by the Government. The rate of
interest on deposits also varies depending
upon the period of deposit and the reputation
of the company