Can foreign funds be treated as Inter-corporate deposits (ICD) ?

As per the Companies (Acceptance of Deposits) Rules, 1975, The amounts which do not
fall within the ambit of the definition of deposits under the 2013 Act and Deposits Rules are
inter alia:
1. Loans taken by a company from another company;
2. Loans from directors or a relative of a director subject to the directors/relative
furnishing a declaration that such amounts are not being funded by borrowing or
accepting loans or deposits from others and the company disclosing the same in the
Board's' report;
3. Any non-interest bearing amount received and held in trust;
4. Any amount received from an employee of the company not exceeding his annual
salary in the nature of non-interest bearing security deposit; and
5. Such other items mentioned in Rule 2 (c) of the Deposits Rules.

One of the exclusions that necessitate discussion is set out in Rule 2(c) (ii) of the Deposits
Rules which excludes from the ambit of deposits any amount received from foreign
institutions, foreign governments or foreign banks, foreign corporate bodies, foreign
citizens ("Foreign Bodies") subject to the provisions of Foreign Exchange Management Act,
1999 and the rules and regulations made there under ("FEMA").

FEMA prescribes that capital instruments should be issued by the company within a period of
180 (one hundred and eighty) days from receipt of inward remittance by the company, failing
which the inward remittance should be refunded immediately. Failure to follow these
timelines may attract penalties. In exceptional cases, refund of the amount of consideration
outstanding beyond a period of 180 (one hundred and eighty) days from the date of receipt
may be considered by the RBI, on the merits of the case. This is where the dichotomy lies.
The Deposits Rules stipulate that an amount received towards share application money will
not be considered a deposit as long as allotment against the amount is made within 60 (sixty)
days of receipt of such money or the money is refunded within 15 (fifteen) days from the
completion of 60 (sixty) days. The question that arises is whether the allotment should be
made within the 60 (sixty) day's period prescribed under the Deposits Rules or within the 180
(one hundred and eighty) day's period prescribed under FEMA.

This anomaly has given rise to two interpretations. The 2013 Act has been enacted to govern
and encompass within its domain companies incorporated in India and all matters relating
thereto. FEMA provides a framework and lays down guidelines with respect to foreign
investment. Hence it may be argued that the 2013 Act is a specific legislation which governs
the subject of companies as opposed to FEMA which governs foreign investment and
contains a general provision with respect to the issuance of securities to foreign investors.
Therefore, following the principle of generalia specialibus non derogant, the provisions
under FEMA which are general in nature, should yield to 2013 Act which is a specific
legislation with respect to the issuance procedure. Therefore share application money will not
be treated as a deposit for a period of 60 (sixty) days. Hence, securities should be issued
within 60 (sixty) days from the receipt of money as opposed to 180 (one hundred and eighty)
days prescribed under FEMA failing which the share application money will be treated as a
deposit.
An alternative interpretation is that considering FEMA governs the framework with respect to
foreign investment, foreign investors should be able to enjoy the leniency afforded under
FEMA. However this interpretation seems to provide a foreign investor a superior position
vis-a-vis a domestic investor. Considering the conundrum, in order to avoid having to comply
with the procedure prescribed under Deposits Rules with respect to accepting deposits and
therefore potentially having to comply with regulations on external commercial borrowings,
allotment of shares should be made within 60 (sixty) days of receipt of the application
money.

The other exclusion which prompts a discussion is set out in Rule 2(c) (ix) which excludes
from the definition of Deposits the amounts raised by the issue of bonds or debentures
secured by a first charge or a charge ranking pari passu with the first charge on any assets
referred to in Schedule III of the 2013 Act excluding intangible assets of the company or
bonds or debentures compulsorily convertible into shares of the company within 10 (ten)
years1. This exclusion essentially signifies that a secured debenture, regardless of its tenure or
convertibility, shall be exempt from the purview of deposits. However, an unsecured
debenture shall only be exempt from the purview of deposits as long as it is compulsorily
convertible within 10 (ten) years. This would mean that non-convertible unsecured
debentures would be considered as deposits. However, any amount raised by issue of non-
convertible and unsecured debentures listed on a stock exchange as per regulations framed by
SEBI shall not be considered as deposits2. It needs to be noted here that FEMA does not
prescribe any timeline for conversion of debentures. When the exclusions stated in Rule 2(c)
(ii) and Rule 2(c)(ix) are read together, one needs to determine whether an unsecured
debenture issued by a company to a Foreign Body which is convertible in more than 10 (ten)
years, where such issuance is in conformity with FEMA, will amount to a deposit.

Further, it may be noted that Rule 2 (c) (vi) exempts from the definition of deposits any
amount received by a company from another company.

Based on a bare reading of the aforementioned provisions, one may argue that since amounts
received from a Foreign Body are exempt from the purview of deposits debentures issued to
such Foreign Body, regardless of its secured, unsecured, convertible or unconvertible nature
and regardless of the tenure shall not attract the provisions pertaining to Deposits.