Advocacy - Amendment of definition of Deposit under Companies Rules

Availing Security Deposit to cover for non-payment by the buyer is a common practice in case of companies dealing with continuous supply of goods and services i.e. cellular services, electricity utilities, gas utilities, 2-3 years subscription, security deposit in case of medium term lease agreement, companies dealing with continuous contract for supply of goods, etc.

 

Section 2 (31) of the Companies Act, 2013 defines deposits as follows:

“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 Reserve Bank of India;

Rule 2 (1) (c) (xii) of Companies (Acceptance of Deposits) Rules, 2014 clarifies that an amount received in the normal course of business as an advance for the supply of goods and services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance, shall not be treated as Deposit.

The Ministry vide Companies (Acceptance of Deposits) Amendment Rules, 2016, further added that following advances also shall not be considered as Deposits:

·         “as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;

·        as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;

·         as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications;"

This excluded the earnest money deposits, advance allowed by sectoral regulator and 2-3 years subscription to publications. However, it has not excluded security deposit taken by utilities although allowed by the spectral regulator and security deposit taken in continuous contracts.

In such case, a company accepting Security Deposit to secure against non-payment in case of continuous contracts of more than 365 days will have to consider the same as deposit and will have to abide by the provision of section 76 read with section 73 (2) of the Companies Act, 2013.

An accountant in me would immediately come out with a solution that it is better to adjust the security deposit against the account of such buyer on annual or six monthly basis so as to avoid it being considered as Deposit and avoid the additional compliances under the Companies Act. However, at the same time a tax guy in me warns that such a book entry adjustment for repayment of security deposit may lead to non-contravention to section 269T of the Income Tax Act, 1961.

In my humble opinion, considering the industry practice of taking security deposit to avoid non-payment in case of continuous contract, the Ministry may consider proposing an amendment to Companies (Acceptance of Deposits) Rules in following manner:

"(iv) in sub-clause (xii),-

(f) as an advance or security deposit received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;

(g) ….

(h) as an security deposit in case of continuous contracts to be adjusted against non-payment by the buyer of goods or services."

Change in definition of Startups

During last 25 years, India has made its mark globally by providing quality services at optimum cost,. Now time has come when the country needs to further establish itself as a hub for innovation, research and development. While the many startup sprung up over last 5-10 years, the Central Government took steps to nurture Startups by launching Startup India on January 16, 2016, to recognize and provide incentives for these startup to grow further. 

Comparison of earlier and amended definition

On May 23, 2017, the Central Government change the definition of Startups (only for the purpose of Government Schemes). The salient differences in the earlier and amended definition are as follows:

Earlier Definition

Amended definition

An entity shall be considered as a Startup: a) Up to five years from the date of its incorporation/registration, b) If its turnover for any of the financial years has not exceeded Rupees 25 crore, and c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property; Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’; Provided further that in order to obtain tax benefits a startup so identified under the above definition shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of: a) Joint Secretary, Department of Industrial Policy and Promotion, b) Representative of Department of Science and Technology, and c) Representative of Department of Biotechnology.

An entity shall be considered as a Startup: a) if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India; and b) up to seven years from the date of its incorporation/ registration; however, in the case of Startups in the biotechnology sector, the period shall be up to ten years from the date of its incorporation/ registration; and c) if its turnover for any of the financial years since incorporation/ registration has not exceeded Rupees 25 crores; and  d) if it is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation. Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘Startup’.

* entity being a private limited company or registered partnership or limited liability partnership was also covered in earlier definition as a part of explanation.

Prominent changes in definition

The prominent changes in the definition are as follows:

1. Increase in age of Startups: The age of startups is increased to 7 years (10 years in case of biotechnology sector) as against earlier age of 5 years, considering the long gestation period for Startups. 
2. On certificate required: In in order to obtain tax benefits a Startup no longer requires to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of: a) Joint Secretary, Department of Industrial Policy and Promotion, b) Representative of Department of Science and Technology, andvc) Representative of Department of Biotechnology.           
3. High potential of employment generation or wealth creation: Apart from age and turnover conditions, earlier Startup was eligible under Government schemes if it was working towards innovation, development or improvement of products or processes or service. This criteria has been further expanded to include Startups having scalable business model with high potential of employment generation or wealth creation.

It is expected that the new definition would provide Government Schemes benefits for extended period for projects with longer gestation period. Further the amendment with respect to scalable business model with high potential of employment generation or wealth creation may also lead to many businesses focusing remodeling the ways many businesses with rural setup are run.