Deposit Exemptions explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Money that would otherwise be a deposit stops being one for three different reasons — who gave it, on what terms, and whether it stayed too long.
Deposit exemptions: the private company relief
As per the exemption Notification No. GSR 464(E) of the MCA dated 5th June 2015, a Private Company can accept deposits from its members not exceeding 100% of aggregate of its paid up share capital, free reserve and securities premium account without complying with the provisions of Section 73(2)(a), (b), (c), (d) and (e) of the CA, 2013 and such company shall file details of monies so accepted in the manner as may be specified.
The deposit provisions exist to protect people who lend money to a company without the information or bargaining power to protect themselves. Each exemption identifies someone who does not need that protection.
Members of a private company. They are inside the company, few in number, and know its position. Hence the relief from most of section 73(2) — subject to a ceiling of 100% of paid up share capital, free reserve and securities premium account, which prevents the company being funded almost entirely by member money on this basis.
Directors giving their own money. The declaration is precise: the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others.
That condition is the whole point. A director lending personal funds is risking their own money. A director who has borrowed to lend on is a conduit — the real lender is outside the company and unprotected, and the exemption would defeat the section. The declaration must be given at the time of giving the money, not obtained afterwards.
Debentures on their terms. The treatment turns on convertibility and listing. A compulsorily convertible debenture issued to a resident is not a deposit if convertible within 10 years — the holder is a future shareholder, not a lender. A non-convertible or optionally convertible debenture to a resident is a deposit unless listed on stock exchange, because a listed instrument carries its own disclosure regime.
Instruments issued to a company or to a foreign body are outside the deposit rules altogether — institutional lenders can look after themselves.
Deposit exemptions for debentures
| Instrument | Holder | Deposit? |
|---|---|---|
| Compulsorily convertible debenture | Resident | Not a deposit if convertible within 10 years |
| Non-convertible or optionally convertible debenture | Resident | Deposit unless listed on a stock exchange |
| Any debenture | A company | Not a deposit |
| Any debenture | Foreign body | Not a deposit |
| Secured debentures | — | Treated as outside the deposit rules |
Money that becomes a deposit by the passage of time
- Share application money pending allotment for more than 60 days is treated as a deposit.
- Advance towards annual maintenance service for more than 365 days is treated as a deposit.
Both are anti-avoidance rules of the same kind. Money received for a purpose and not applied to that purpose ceases to be what it was called and becomes what it functions as — borrowed money. The sixty-day rule is the one companies most often trip over, because share application money is frequently held while an allotment is arranged.
Practical checks on deposit exemptions
- Obtain the director's written declaration at the time the money is given, not later.
- Test member borrowings in a private company against the 100 per cent ceiling.
- Allot shares within sixty days of receiving application money, or refund it.
- Check the convertibility terms and listing status of every debenture issued to a resident.
- Review long-dated service advances against the 365-day rule.
Common mistakes
- Relying on deposit exemptions for a director who borrowed the money being lent.
- Holding share application money beyond sixty days.
- Treating an optionally convertible debenture as equivalent to a compulsorily convertible one.
- Exceeding the 100 per cent ceiling on member money in a private company.