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Piyush Prajapati 22 April, 2023

How investors of company Fixed deposits are protected under companies act 2013 ?

Let us start by defining the term deposits under companies act 2013, deposit includes any receipt of money by way of deposit or loan or any other form by a company but does not include such categories of amount as may be prescribed in consultation with the RBI.

The Companies Act 2013 imposes various restrictions on the acceptance of deposits by companies in order to safeguard the interests of depositors. Some of the key restrictions are as follows:

  • Restrictions on acceptance of deposits:Companies are prohibited from accepting deposits from the public unless they meet certain criteria, such as having a minimum net worth of Rs 100 crores or turnover of Rs 500 crores, complying with deposit rules, and obtaining credit ratings.

  • Deposit insurance:The Act requires companies accepting deposits to obtain deposit insurance to ensure that depositors are protected in the event of default by the company.

  • Creation of Deposit Repayment Reserve Account:Companies accepting deposits are required to create a separate bank account in a scheduled bank to be called Deposit Repayment Reserve Account (DRRA) to ensure that depositors are repaid in the event of default. The amount deposited into the DRRA must be at least 20% of the total deposits accepted by the company.

  • Mandatory credit rating:Companies accepting deposits are required to obtain a credit rating from a recognized credit rating agency. The credit rating provides an indication of the company's creditworthiness and ability to repay the deposit on maturity. Higher credit ratings signify a lower risk of default and a greater likelihood of the company meeting its obligations. You can check the credit rating of a company through credit rating agencies such as CRISIL, ICRA, and CARE.

  • Penalties:Companies that violate the deposit rules may be subject to fines and other penalties. The Act also provides for criminal liability in case of non-compliance. A company shall have to pay an interest of 18% per annum. for the overdue period of deposits, matured and claimed but remaining unpaid. Further In addition to the payment of the amount of deposit or part thereof and the interest due, company may be fined minimum Rs. 1 crore or twice the amount of deposit so accepted, whichever is lower, which may extend to Rs. 10 crore.

These provisions are designed to protect the interests of depositors and to ensure that companies accepting deposits meet investment grade standards.

Remember, investing in company fixed deposits carries some level of risk, and it is important to do your research and choose a reliable company with a good track record. It is recommended to consult with a financial advisor before making any investment decisions.

Piyush Prajapati 22 April, 2023

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