CHAPTER 4 - DEBT CAPITAL

Q1. The Board of directors of Wood Ltd. are authorised to borrow money upto `2 crore. The
Board of directors got sanctioned a loan of `30 lakh from a Bank for payment of debt
liabilities of the company. But the Board of directors used this amount towards payment of
their travelling & tour expenses. Will Wood Ltd. be held liable for repayment of the loan ?
Discuss.

ANSWER

FACTS OF THE CASE:

The Board of directors of Wood Ltd. are authorised to borrow money upto `2 crore. The Board of
directors got sanctioned a loan of `30 lakh from a Bank for payment of debt liabilities of the
company. The Board of directors used this amount towards payment of their travelling & tour
expenses.

LANDMARK CASE

 V.K.R.S.T Firm v. Oriental Investment Trust Ltd.

 In a decided case of V.K.R.S.T Firm v. Oriental Investment Trust Ltd. under the authority of

the company, its managing director borrowed large sums of money and misappropriated it.

 The company was held liable stating that where the borrowing is within the powers of the

company, the lender will not be prejudiced simply because its officer have applied the loan
to unauthorized activities provided the lender had no knowledge of the intended misuse.

CONCLUSION :

Applying the principles of the above decided case in the given case Wood Ltd. will be held liable

for repayment of the loan of Rupees 30 lakhs which well within the sanctioned limits of the
company.

Q2. Fun and Frolic Limited has received INR 5,00,000 from its Promoters as an unsecured
loan in pursuance of the stipulation of credit facilities from the Bank. Can the company
accept the unsecured loan? What would be your answer if the company has repaid in full its
amount of credit facility and after such repayment, the company continues this unsecured
loan? Referring to the provisions of the Companies Act, 2013. Advice the company

ANSWER

FACTS OF THE CASE :

Fun and Frolic Limited has received INR 5,00,000 from its promoters as an unsecured loan in
pursuance of the stipulation of credit facilities from the Bank.

PROVISION :

As per Rule 2 of the Companies (Acceptance of Deposits) Rules, 2014, the deposit does not include
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 bank subject to fulfilment of the following
conditions:-

 the loan is brought in pursuance of the stipulation imposed by the lending institutions on
the promoters to contribute such finance; and

 the loan is provided by the promoters themselves or by their relatives or by both andthe
exemption under this sub-clause shall be available only till the loans of financial institution
or bank are repaid and not thereafter.

CONCLUSION :

 As per the facts given in the case, Fun and Frolic Limited has received INR 5,00,000 from its
promoters as an unsecured loan in pursuance of the stipulation of credit facilities from the
Bank. Such unsecured loan will not be treated as a deposit till the loans of financial
institution or bank are repaid and not thereafter.

 However, after repayment of the credit facility if the company continues to keep the
unsecured loan of its promoter, then it will be treated as a deposit.

Q3. Define the term 'deposit' under the provisions of the Companies Act, 2013 and
comment with relevant provisions that the following amount received by a company will be
considered as deposit or not;
a. 5,00,000 raised by Rishi Ltd. through issue of non-convertible debenture not
constituting a charge on the assets of the company and listed on a recognised stock
 exchange as per applicable regulations made by Securities and Exchange Board of
India.
b. 2,00,000 received from Mr. T, an employee of the company who is drawing annual
salary of INR 1,50,000 under a contract of employment with the company in the
nature of non-interest-bearing security deposit.
c. Amount of INR 3,00,000 received by a private company from a relative of a Director,
declared by the depositor as out of gift received from his mother.

ANSWER:

AS PER SECTION 2 (31) OF COMPANIES ACT 2013

Deposit includes any receipt of money by way of deposit or loan or in any other form by a
company, but does not include such categories of amount as may be prescribed in consultation
with RBI.

a. In the first case, where INR 5,00,000 raised by the Rishi Ltd. through issue of non-
convertible debenture not constituting a charge on the assets of the company and listed on
recognised stock exchange as per the applicable regulations made by the SEBI, will not be
considered as deposit in terms of sub-clause (ixa) of the said rule.

b. In the second case, INR 2,00,000 was received from Mr. T, an employee of the company
drawing annual salary of INR 1,50,000 under a contract of employment with the company in
the nature of non-interest- bearing security deposit. This amount received by company
from employee, Mr. T will be considered as deposit in terms of sub-clause (x) of the said
rule, as amount received is more than his annual salary under a contract of employment
with the company in the nature of noninterest- bearing security deposit.

c. In the third case, amount of INR 3,00,000 received by a private company from a relative of a
Director, declaring details of the amounts so deposited as out of gift received from his
mother. This amount received by the private Company will not be considered as deposit in
terms of sub-clause (viii) of the said rule. Here as per the requirement, the relative of the
director of the private company, from whom money is received, furnished the declaration in
writing to the effect that the amount is given out of gift received from his mother and not
being given out of funds acquired by him by borrowing or accepting loans or deposits from
others.

Q4. Prism Limited has accepted rupees INR 10 lakh as an advance towards the supply of
goods to certain parties. As per the agreement, the company will supply the goods after two
years from the date of deposit. Letter on, internal auditors qualified their report on the
ground that the company has violated the provisions of the Companies Act, 2013. Directors
explained that this is required to complete the order. Examining the relevant provisions of
the Companies Act, 2013, state whether the explanation given by the directors is justified.

FACTS OF THE CASE :

Prism Ltd. has accepted INR 10 lakh as an advance towards the supply of goods to certain parties.
As per the agreement, the company will supply the goods after two years from the date of deposit.

PROVISION :

 According to Section 2(31) of the Companies Act, 2013, ‘Deposit’ includes any receipt of
money by way of deposit or loan or in any other form by a company but does not include
such categories of amount as may be prescribed in consultation with the RBI.

 As per Rule 2 of the Companies (Acceptance of Deposit) Rules, 2014, the deposit does not
include any amount received in the course of or for the purpose of the Business of the
company as an advance for the supply of goods or provision of services provided that such
advance is appropriated against supply of goods or provision of services within a period of
365 days from acceptance of such advance.

CONCLUSION :

The company has accepted advance for more than 365 days for the supply of goods, and hence it
is ‘Deposit’ as per Section 2(31) read with Rule 2 of the Companies (Acceptance of Deposit) Rules,
2014. The Company has defaulted in accepting deposit without complying with the provision and
hence remark passed by the internal auditor is correct and explanation given by the director is not
sufficient.

Q5. Ashish Ltd. having a net-worth of INR 80 crores and turnover of INR 30 crores wants to
accept deposits from public other than its members. Referring to the provisions of the
Companies Act, 2013, state the conditions and the procedures to be followed by Ashish Ltd.
for accepting deposits from public other than its members.

ANSWER :

FACTS OF THE CASE :

Ashish Ltd. having a net-worth of INR 80 crores and turnover of INR 30 crores wants to accept
deposits from public other than its members

PROVISION :
Acceptance of deposit from public:

 According to section 76 of the Companies Act, 2013, a public company, having net worth of
not less than 100 crore rupees or turnover of not less than 500 crore rupees, can accept
deposits from persons other than its members subject to compliance with the requirements
provided in sub-section (2) of section 73 and subject to such rules as the Central
Government may, in consultation with the Reserve Bank of India, prescribe.

 Provided that such a company shall be required to obtain the rating (including its networth,
liquidity and ability to pay its deposits on due date) from a recognised credit rating agency
for informing the public the rating given to the company at the time of invitation of
deposits from the public which ensures adequate safety and the rating shall be obtained for
every year during the tenure of deposits.

 Provided further that every company accepting secured deposits from the public shall
within thirty days of such acceptance, create a charge on its assets of an amount not less
than the amount of deposits accepted in favour of the deposit holders in accordance with
such rules as may be prescribed.

CONCLUSION :

Since, Ashish Ltd. has a net worth of Rs. 80 crores and turnover of Rs. 30 crores, which is less than
the prescribed limits, hence, it cannot accept deposit from public other than its members. If the
company wants to accept deposits from public other than its members, it has to fulfill the eligibility
criteria of net worth or Turnover or both and then the other conditions as stated above.

Q6. State, with reasons, whether the following statements are True or False?

a. ABC Private Limited may accept the deposits from its members to the extent of INR 50.00
Lakh, if the aggregate of its paid-up capital; free reserves and security premium account is
INR 50.00 Lakh.

b. A Government Company, which is eligible to accept deposits under Section 76 of the

Companies Act, 2013 cannot accept deposits from public exceeding 25% of the aggregate of
its paid- up capital, free reserves and security premium account.

ANSWER :

a. As per the provisions of Section 73(2) of the Companies Act, 2013 read with Rule 3 of the
Companies (Acceptance of Deposits) Rules, 2014, as amended by the Companies (Acceptance of
Deposits) Amendment Rules, 2016, a company shall accept any deposit from its members,
together with the amount of other deposits outstanding as on the date of acceptance of such
deposits not exceeding thirty five per cent of the aggregate of the Paid-up share capital, free
Reserves and securities premium account of the company. Provided that a private company may
accept from its members monies not exceeding one hundred per cent of aggregate of the paid
up share capital, free reserves and securities premium account and such company shall file the
details of monies so accepted to the Registrar in such manner as may be specified.

Therefore, the given statement of eligibility of XYZ Private Ltd. to accept deposits from its
members to the extent of ₹ 50.00 lakh is True.

b. A Government company is not eligible to accept or renew deposits under section 76, if the
amount of such deposits together with the amount of other deposits outstanding as on the
date of acceptance or renewal exceeds thirty five per cent of the aggregate of its Paid-up share
capital, free Reserves and securities premium account of the company.

Therefore, the given statement prescribing the limit of 25% to accept deposits is False.

Q7. Hi-Fi Ltd. has defaulted in repaying security deposits received from its dealers. Such
security deposits were accepted from the dealers for proper and timely performance of
the contracts by them. Hi-Fi Ltd. wants to invest ` 5 crore in equity shares of Wi-Fi Ltd. Is
there any restriction under Section 186 of the Companies Act, 2013 when a company is in
default with respect to the repayment of security deposits ?

ANSWER :

FACTS OF THE CASE :

Hi-Fi Ltd. has defaulted in repaying security deposits received from its dealers. Such security
deposits were accepted from the dealers for proper and timely performance of the contracts by
them. Hi-Fi Ltd. wants to invest ` 5 crore in equity shares of Wi-Fi Ltd.

PROVISION :

As per section 186(8) of the Companies Act, 2013, a company which is in default in repayment
of public deposits and/or interest thereon is not permitted to make or give any loan or
investment or to provide any guarantee or security till the default is subsisting.

Security deposits accepted for performance of contracts for supply of goods or provision of
services are not considered as deposits within meaning of Rule 2(1)(c) of the Companies
(Acceptance of Deposits) Rules,2014.

CONCLUSION :

It is to be noted that in the given question, company has defaulted in repaying security deposit
received from its dealers which were received for performance of contract of supply of goods or
provisions of services.
Therefore, the provisions of section 186(8) are not attracted.

Hi-Fi Ltd. can make investment into equity shares of Wi-Fi Ltd. subject to fulfillment of other
provisions of the Companies Act, 2013.

Q8. With reference to the provisions of the Companies Act, 2013 and the rules framed
thereunder, state the disqualifications for a Debenture Trustee. Explain whether the
following persons can be appointed as Debenture Trustee?
 A relative of the whole-time director of the company.
 A shareholder who has no beneficial interest.

ANSWER :

Rule 18(2) of Companies (Share Capital and Debentures) Rules, 2014

A person shall not be appointed as a debenture trustee, if he-

 beneficially holds shares in the company;

 is a promoter, director or key managerial personnel or any other officer or an employee of
the company or its holding, subsidiary or associate company;
 is beneficially entitled to moneys which are to be paid by the company otherwise than as
remuneration payable to the debenture trustee;
 is indebted to the company, or its subsidiary or its holding or associate company or a
subsidiary of such holding company;
 has furnished any guarantee in respect of the principal debts secured by the debentures or
interest thereon;
 has any pecuniary relationship with the company amounting to 2% or more of its gross
turnover or total income or 50 Lakhs or whichever is lower, during the 2 immediately
preceding financial years or during the current financial year;
 is relative of any promoter or any person who is in the employment of the company as a
director or key managerial personnel

Thus,

 A relative of the whole-time director of the company cannot become the debenture trustee.
 A shareholder who has no beneficial interest in the company may become the debenture
trustee.
Applicability of Provisions related to Deposits
Q9. Shine Well Limited has accepted deposits from the public under the Companies
(Acceptance of Deposits) Rules, 2014. The company now decided to repay some of its
deposits before maturity. Can the company do so? If yes, what are the conditions attached
there too?

ANSWER :

FACTS OF THE CASE :

Shine Well Limited has accepted deposits from the public under the Companies (Acceptance of
Deposits) Rules, 2014. The company now decided to repay some of its deposits before maturity.

PROVISION :

Provisions regarding premature repayment of deposits [Rule 15]


When a company makes a repayment of deposits, on the request of the depositor, after the
expiry of a period of 6 months from the date of such deposit but before the expiry of the
period for which such deposit was accepted, the rate of interest payable on such deposit
shall be reduced by 1% from the rate which the company would have paid had the deposit
been accepted for the period for which such deposit had actually run and the company shall
not pay interest at any rate higher than the rate so reduced.

CONCLUSION :

 Shine Well Limited may makes a repayment of deposits, on the request of the depositor,
only after the expiry of a period of 6 months from the date of such deposit.
 The rate of interest payable on such pre-matured deposit shall be reduced by 1% from the
rate which the company would have paid had the deposit been accepted.

Q10. IOL, a manufacturing company, issued partly convertible debentures with ` 6 crore few
years back. The convertible option is only for 50% of the issue and debentures are
redeemable in the current financial year.
What is the quantum of Debenture Redemption Reserve (DDR) required to be created by the
company now and how much should be deposited or invested by the company ?

ANSWER :

FACTS OF THE CASE :

IOL, a manufacturing company, issued partly convertible debentures with ` 6 crore few years back.
The convertible option is only for 50% of the issue and debentures are redeemable in the current
financial year.

PROVISION :
  Section 71(4) of Companies Act, 2013, read with Rule 18(7) of the Companies (Share Capital
& Debentures) Rules, 2014 provides for creation of a Debenture Redemption Reserve (DRR)
out of the profits of the company available for payment of dividend.
 The amount credited to such account shall not be utilised by the company except for the
redemption of debentures.
 The provisions for creation of DRR for manufacturing companies are 25% of the value of
outstanding debentures issued through public issue as per present SEBI (Issue and Listing of
Debt Securities) Regulations, 2008 and also 25% DRR is required in the case of privately
placed debentures by listed companies.
 For unlisted companies issuing debentures on private placement basis, the DRR will be 25%
of the value of outstanding debentures.
 Every company required to create Debenture Redemption Reserve shall on or before the
30th day of April in each year, is required to invest or deposit a sum which shall not be less
than 15% of the amount of debentures maturing during the current financial year ending
31st March of next year.
 In case of partly convertible debentures, Debenture Redemption Reserve shall be created in
respect of non-convertible portion of debenture issue in accordance with this rule.

CONCLUSION :

Since, only 50% of the debentures are convertible, for the non-convertible part the DRR is required
to be created.
Hence, only for 3 crore worth of debentures DRR is required. Therefore, 25% of 3 crore is 75 lakhs
to be created as DRR and 45 Lakhs (15%) deposited in the invested bank account or in securities,
etc. during the current financial year.