Alerts:

Regulatory Alert: Amendment to the Companies (Acceptance of Deposits) Rules, 2014

08 September 2020

The Ministry of Corporate Affairs (MCA) on 7 September 2020 has notified the Companies (Acceptance of Deposits) Amendment Rules, 2020 (the amended rules) by amending Companies (Acceptance of Deposits) Rules, 2014 (the existing rules). The notification broadly pertains to two amendments in relation to start-up companies with respect to:

  • Acceptance of deposit in a form of convertible note; and
  • Acceptance of deposits from members by a start-up which are private companies.

The key highlights of the notification are summarised below:

  • Acceptance of Deposit in form of convertible note:
    • Earlier, start-up companies were allowed to accept deposit for an amount of INR 25 Lacs or more by way of a convertible note (convertible into equity shares or repayable within 5 years from the date of issue). Post this amendment, the limit is increased to 10 years which means that start-up companies can now accept a deposit in form of convertible note which is convertible / repayable up to 10 years from the date of issue.
  • Acceptance of deposits from members by a start-up which are private companies:
    • This amendment now allows start-up which are private companies to accept the deposit from its members without any restrictions for the period of 10 years from the date of its incorporation as against the earlier time frame of 5 years. 
    • The above amendments are in line with the amendment to the definition of ‘start-up’ notified by Department of Promotion of Industry and Internal Trade (DPIIT) vide notification dated 19 February 2019 (2019 circular). The amended rules have also now inserted reference to the 2019 circular.
    • A comparative analysis of the definition of start-up given in 2019 circular as against erstwhile circular is mentioned below for your reference:

Particulars

As per notification dated 17 February 2016 (Erstwhile)

As per notification dated 19 February 2019 (Current)

Tenure

Entity shall be considered as a start-up upto 5 years from the date of incorporation

Entity shall be considered as a start-up upto 10 years from the date of incorporation

Turnover

Turnover for any of the financial years since incorporation has not exceeded INR 25 crores

Turnover for any of the financial years since incorporation has not exceeded INR 100 crores

Areas of Operation

It is working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property

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

 

BDO Comments:

The amendment was long overdue considering the changes in the definition of start-up brought about by the DPIIT. The disconnect between DPIIT and the MCA led to chaos for the start-ups which has now been ironed out with this notification. As has been the trend, 5 years may not be sufficient for a start-up to turn-around and start meeting in financial obligations. Hence the extended period of 10 years should ensure that the start-ups have at least matured enough to manage its finances efficiently.