R. Anand

R. Anand on the Irani Committee recommendations on public deposits

THE much-awaited Irani Committee constituted to provide the required approach to the new company law has been released and already debate has started on its various recommendations.

The agenda, as set out, envisages that the Committee's recommendations would form part of the new Companies Bill which will see the light of the day before the end of 2005. The corporate sector is eagerly awaiting this major development in regulation, which, alongside value added tax (VAT), constitutes the two significant reforms in the agenda of this Government.

Any regulation has to take into account the necessary safeguards and controls and at the same time ensure free and fair functioning of the players. Dr Irani in his covering letter to the Minister for Company Affairs states that "... our effort has also been aimed at making India globally competitive in attracting investments from abroad, by suggesting systems in the Indian corporate environment which are transparent, simple and globally acceptable."

One will have to look at the provisions as set out in the Companies Bill before arriving at the conclusion whether the new Companies Act will really make Corporate India globally competitive as far as the regulatory measures are concerned. One of the chapters in the report deals with access to public deposits.

Access to public deposits

On the subject of deposits, the report states thus: "It was brought to the notice of the Committee that a number of complaints by depositors in respect of deposits made by them with corporate entities are being received by the Ministry of Company Affairs (MCA) and the Reserve Bank of India (RBI).

There was, therefore, a view in the Committee that the provisions relating to allowing non-banking, non-finance companies to accept deposits from public should be reviewed and that such companies be prohibited completely from accepting deposits. However, another view was that since acceptance of deposits is one of the ways through which companies (including non-banking, non-finance companies) raise finances, there should not be complete ban for accepting deposits. Instead, the norms for accepting deposits by such companies should be made stricter."

Strangely, there is no reference in the report on how and why some of the NBFCs failed to honour repayment of deposits and NBFCs engaged in asset financing have not failed in their obligations to various constituents. The question of applying stricter norms for accepting deposits has been put in place by the nodal regulator — the RBI.

The process

The report suggests a two-pronged process to regulate the acceptance and monitoring of public deposits. The ex-ante process covers:

Disclosure requirement: The company accepting deposits should be mandated to make appropriate disclosures through issue of advertisement (text of which should be detailed and prescribed by way of rules) in the newspapers, one English and one vernacular.

The application forms soliciting deposits should also indicate all such disclosures. Besides, there should be certain documents (such as balance-sheets/annual reports) of the company which should be open for inspection by potential deposit-holders. On demand/payment of requisite fees, these should also be made available to potential deposit-holders.

Compulsory credit rating: No company should be allowed to raise deposits unless it obtains a credit rating from SEBI registered credit rating agencies. There should be a minimum credit rating prescribed in the Act/Rules for enabling any company to go for inviting deposits. Further, the rating should also be reviewable/renewable after every two years.

Creation of reserves: Besides maintaining certain percentage of deposits invited/accepted in liquid funds, every company inviting/accepting deposits should also be required to transfer certain amounts (out of profits) every year in a separate cash reserve created/earmarked only for the purpose of utilisation for payment to deposit holders.

The ex post process suggests that the regulation should include "setting up of a dispute resolution mechanism and penalties that deter irresponsible/fraudulent behaviour by corporates."

Focus under such measures should be on bolstering confidence through an effective dispute resolution mechanism as well as penalising of irresponsible/fraudulent behaviour by companies. A provision similar to Section 68 of the Act, at present covering punishment for fraudulent inducement for investment in shares, should be made in respect of deposits also.

RBI regulations

As far as non-banking finance companies (NBFCs) are concerned, stringent regulations in the RBI Act and directions post-1998 have more or less ensured that the deposit taking activity is well controlled and adequately monitored. Even recently, the RBI had advised various NBFCs to voluntarily phase out deposits to ensure that the liability side is well protected and administered. Therefore, it would be well advised if the regulation of deposits relating to NBFCs is confined to the rigours of RBI Regulations, with the Companies Act staying away from this sector. Duplication of regulation and the conflicting signals could hamper the growth and development of this industry which is now back on track after the shakeout of the 1990s. The existing players are now actively engaged in the business of asset creation and retail asset financing. The RBI regulations require hire purchase and equipment financing companies accessing public deposits to comply with prudential norms and also ensure minimum credit rating before accepting or renewing public deposit and limits have also been prescribed as 1½ times of net owned funds or four times of net owned funds respectively.

Section 45IA of the RBI Act requires creation of 20 per cent reserve fund before declaring dividend by all NBFCs. This adequately ensures creation of reserves for unforeseen liabilities and contingencies and also takes care of depositor protection.

Therefore, requiring further disclosures and creation of additional reserve under the Companies Act would be redundant in the context of the existing provisions of the RBI Act and the regulations.

(The author is a Chennai-based chartered accountant.)

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