Can I take a loan from my relatives or friends into my company? The deposit rules
Money from a director or a director's relatives, friends, members and start-up investors: when it counts as a deposit under the Companies Act 2013, and what to file.
CA Harun Raaj
makeitlegit.in
You have set up a private company. The bank will not lend yet, so your parents, a sibling or a friend offer to put in money. You plan to book it as a loan.
Stop. The Companies Act 2013 treats some money a company takes in as a "deposit", and deposits are tightly controlled. Most family money is fine, but only if it falls in the right bucket.
The starting point: what counts as a deposit
The Act says a "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company. It then says some categories of money are not deposits, and the Central Government prescribes those categories in consultation with the Reserve Bank of India (s.2(31), Companies Act 2013).
So the default is wide: a loan is a deposit unless a rule says otherwise.
The rule that lists the exceptions is rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules 2014. The list is long. For a founder, a handful of items matter. The wording quoted below comes from the list as printed in Form DPT-3, the return that companies file on deposits.
Why this matters
No company may invite, accept or renew deposits from the public except in the manner set out in the deposit chapter of the Act (s.73(1), Companies Act 2013). A company may take deposits from its members, but only after a resolution in general meeting and following a list of steps. Those steps include a circular to members, filing a copy of it with the Registrar, and keeping a deposit repayment reserve in a separate bank account (s.73(2), Companies Act 2013).
If a company accepts a deposit in contravention of the manner or conditions in the deposit chapter or the rules, it must still repay the deposit and interest, and in addition it is liable to a fine of not less than one crore rupees or twice the amount of deposit accepted, whichever is lower, which can go up to ten crore rupees. Every officer in default faces imprisonment of up to seven years and a fine of ₹25 lakh to ₹2 crore (s.76A, Companies Act 2013).
Ask the question before the money lands in the bank, not after.
Bucket 1: money from a director, or a director's relative (private company)
This is the one most founders are looking for.
The list of "not a deposit" items includes: "Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or the relative of the director of a private company" (rule 2(1)(c), Companies (Acceptance of Deposits) Rules 2014, as printed in Form DPT-3 notified by G.S.R. 42(E), 22 January 2019).
Reading that text:
- Money from you or your co-founder, as a director of the company, is covered.
- Money from a relative of a director is covered where the company is a private company. The wording does not extend the relative limb to a public company.
The Companies Act defines "relative". Two people are relatives if they are members of the same Hindu Undivided Family, or are husband and wife, or are related in a manner the rules prescribe (s.2(77), Companies Act 2013). The prescribed list is: father, mother, son, son's wife, daughter, daughter's husband, brother and sister. Step-father, step-mother, step-son, step-brother and step-sister are included (rule 4, Companies (Specification of Definitions Details) Rules 2014).
A friend is not a relative. Nor is a cousin, uncle, aunt or nephew, unless in the same Hindu Undivided Family as the director.
Do not skip the checks
Read the current text of rule 2(1)(c) on the MCA website with your CA before the money arrives, and keep a written record of who is lending, in what capacity (director or relative, and which relation), and the date and bank reference of the transfer.
ICSI guidance notes that a private company should disclose money received from directors or their relatives in the notes to its financial statements and in the board's report (citing rule 8(5)(v), Companies (Accounts) Rules 2014 and rule 2(1)(c) of the Deposits Rules).
Bucket 2: money from members, within limits
Say a friend has taken shares in your company, or you want existing shareholders to lend as well. A shareholder is a member. Members can lend, but this counts as a deposit from members, and it has a ceiling.
The general rule for companies covered by s.73(2) is that deposits from members, together with other deposits outstanding, must not exceed thirty-five per cent of the aggregate of the paid-up share capital, free reserves and securities premium account (rule 3(3), Companies (Acceptance of Deposits) Rules 2014).
A private company has more room. It may accept from its members monies not exceeding one hundred per cent of the aggregate of its paid-up share capital, free reserves and securities premium account. It must file the details of the money accepted with the Registrar in Form DPT-3 (proviso to rule 3(3), as substituted by the Second Amendment Rules 2017, G.S.R. 1172(E), 19 September 2017).
There are two classes of private company for which the maximum limit does not apply at all (second proviso to rule 3(3)):
- A private company that is a start-up, for ten years from the date of its incorporation. The period was five years in the 2017 amendment and became ten years by the Companies (Acceptance of Deposits) Amendment Rules 2020 (G.S.R. 548(E), 7 September 2020).
- A private company that meets all three tests. It is not an associate or subsidiary of another company. Its borrowings from banks, financial institutions or any body corporate are less than twice its paid-up share capital or fifty crore rupees, whichever is less. And it has not defaulted in repaying such borrowings that are subsisting when it accepts the deposits.
"All the companies accepting deposits" must file the details in Form DPT-3 (last proviso to rule 3(3)).
Even where the cap does not bite, the money is still a deposit. A company covered by s.73(2) must not accept deposits repayable in less than six months or more than thirty-six months from acceptance, with a limited carve-out for short-term needs: up to ten per cent of paid-up capital, free reserves and securities premium, repayable not earlier than three months (rule 3(1)(a), Companies (Acceptance of Deposits) Rules 2014). The rate of interest or brokerage must not exceed the maximum prescribed by the Reserve Bank of India for non-banking financial companies (rule 3(6)).
Bucket 3: a start-up taking a convertible note
If you are a start-up company and a person puts in a larger cheque as a convertible note, the DPT-3 list carries a separate item: "Any amount of twenty five lakh rupees or more received by a start up company, by way of convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person" (rule 2(1)(c), Companies (Acceptance of Deposits) Rules 2014, as printed in Form DPT-3 substituted by G.S.R. 663(E), 29 August 2022).
Note the limits. The amount must be ₹25 lakh or more, in a single tranche, from one person. Two smaller transfers do not fit the wording. The note must convert into equity shares or be repayable within five years. Check that the company holds its DPIIT recognition as a start-up before relying on this item; the 2020 amendment to rule 2(1)(c)(xvii) refers to the Department for Promotion of Industry and Internal Trade notification G.S.R. 127(E), 19 February 2019 for the meaning of start-up.
Other items on the list
The same list says loans from banking companies and scheduled banks, money received from another company, share application money held pending allotment, compulsorily convertible debentures (within ten years) and amounts received under a collective investment scheme in compliance with SEBI regulations are not deposits (rule 2(1)(c), as printed in Form DPT-3). The 2020 amendment also changed a period in rule 2(1)(c)(xvii) from five to ten years (G.S.R. 548(E), 7 September 2020); check the current text of that sub-clause with your CA.
The deadline clock
There is no single "days after the money comes in" clock in the Act or rules reproduced here. What there is:
- Before the money arrives. Decide the bucket. For members' money, a general meeting resolution and circular are part of the s.73(2) steps.
- Each year. Form DPT-3 has a section titled "Particulars of receipt of money or loan by a company but not considered as deposits, at the end of financial year" (rule 2(1)(c) and rule 16A, Companies (Acceptance of Deposits) Rules 2014, Form DPT-3). The form also carries an auditor's certificate attachment.
- The due date. Check the current due date and fee for DPT-3 on the MCA portal before you file.
For deposits accepted from members under s.73(2) there is another date. On or before the thirtieth day of April each year, the company must deposit not less than twenty per cent of its deposits maturing during the following financial year in a separate bank account kept in a scheduled bank, called the deposit repayment reserve account (s.73(2)(c), Companies Act 2013).
Step by step
- Write down who is lending. Director, relative as defined, member, or friend.
- Pick the bucket. A friend who is neither director nor member is likely a deposit unless another exemption fits.
- Fix the paperwork. Director or relative: a written record of who lends and in what relation. Member: a general meeting resolution. Convertible note: terms that clearly convert or repay within five years.
- Pay by bank.
- Record it as a loan from a director, relative or member, and disclose it in the notes to the financial statements.
- File Form DPT-3 for the year, with director and relative amounts in the not-a-deposit section.
What not to do
- Do not treat a friend as a relative. The definition is narrow.
- Do not split a convertible note into small tranches.
- Do not skip DPT-3 because "it is only family money".
- Do not assume the relative item covers a public company.
What to do now
- Next step: Classify each person who plans to put money in. Director, relative, member, convertible-note investor or none of these (s.2(31) and s.2(77), Companies Act 2013; rule 2(1)(c) of the Deposits Rules; rule 4 of the Specification of Definitions Details Rules 2014).
- Deadline: Do this before the money reaches the company's bank account. Report the year-end amounts in Form DPT-3, and check the filing due date on the MCA portal (rule 16A, Companies (Acceptance of Deposits) Rules 2014).
- Consequence: A deposit taken in contravention of the deposit rules attracts a company fine of at least one crore rupees or twice the deposit, whichever is lower, and officers in default face up to seven years' imprisonment (s.76A, Companies Act 2013).
Have a CA review your facts before you act or file.
Frequently asked questions
Can my father lend money to my private company without it being a deposit?
A father is a relative under the prescribed list, and the DPT-3 list of items that are not deposits includes money from a director's relative into a private company (rule 2(1)(c), Companies (Acceptance of Deposits) Rules 2014, as printed in Form DPT-3; rule 4, Companies (Specification of Definitions Details) Rules 2014). Have the current rule text checked, and disclose it.
Can a friend lend my company money?
A friend is not in the relative list, so the director-and-relative item does not cover the friend. If the friend is not a member and no other exemption applies, the money is a deposit, and s.73(1) bars accepting deposits from the public except as the chapter allows (s.73(1), Companies Act 2013). Consider issuing shares to the friend instead.
My company is a start-up. Is there a limit on loans from members?
For a private company that is a start-up, the maximum limit on deposits from members does not apply for ten years from incorporation (second proviso to rule 3(3), as amended by G.S.R. 548(E), 7 September 2020). The company must still file the details in Form DPT-3 and follow the remaining rules.
Do I report a director's loan in my accounts?
ICSI guidance notes that a private company should disclose money from directors or their relatives in the notes to its financial statements and in the board's report (citing rule 8(5)(v), Companies (Accounts) Rules 2014 and rule 2(1)(c) of the Deposits Rules).
What if I already took a friend's loan?
Take advice on whether it can be converted to shares or repaid, and whether it must be reported (s.76A, Companies Act 2013).
What is a DPT-3?
It is the return of deposits. It also carries the one-time and yearly disclosure of money received that is not considered a deposit under rule 2(1)(c) (Form DPT-3, Companies (Acceptance of Deposits) Rules 2014).
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