Family and Friends Money in Your Startup: When a Loan Becomes a Deposit

An uncle offers ₹20 lakh as a "friendly loan". A mentor wires ₹10 lakh "to be returned with interest". For most founders this is just help. For the Companies Act 2013 it can be a "deposit", and the deposit chapter (ss.73 to 76A) opens with a ban and closes with a heavy penalty. This article explains the questions to ask before the money reaches your company's account.

Legal basis: Companies Act, 2013, ss.2(31), 73, 75, 76 and 76A; Companies (Acceptance of Deposits) Rules, 2014, rules 2, 3, 16 and 16A as amended.

What to do now

• Before accepting any outside money as a loan: ask whether it is a "deposit" at all. The Act defines deposit to include "any receipt of money by way of deposit or loan or in any other form by a company", but "does not include such categories of amount as may be prescribed" (s.2(31)). Those categories sit in the Acceptance of Deposits Rules, 2014 (rule 2(1)(c)). We do not reproduce that list here; read the current rule, with your CA, and classify the receipt against it before you take the money.
• If it is a deposit: the lender must be a member, the members must pass a resolution in general meeting, and the s.73(2) steps below must be done before the money comes in.
• Return: Form DPT-3 is the prescribed return of deposits (rules 16 and 16A), and a company using the rule 3(3) provisos must file details of the monies accepted in Form DPT-3. Confirm the current due date on the MCA portal.
• Consequence of getting it wrong: a fine on the company of not less than "one crore rupees or twice the amount of deposit accepted by the company, whichever is lower", up to ten crore rupees, and for every officer in default imprisonment up to seven years and a fine of ₹25 lakh to ₹2 crore (s.76A).

Have a CA review your facts before you act or file.

Start with the definition, not the label

Founders say "loan", "advance", "bridge" or "friendly money". The Act does not care about the label. A deposit "includes any receipt of money by way of deposit or loan or in any other form" (s.2(31)), minus the categories the Rules exclude. So the useful question is not "what did we call it?" but "is this receipt excluded under the Rules, and if not, who is lending?"

The ban follows: "no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter" (s.73(1)). Banks and non-banking financial companies, and companies the Central Government specifies, are outside it. A startup is not.

Note the three verbs, invite, accept and renew. Rolling over last year's advance without fresh paperwork can be "renewing" a deposit.

Who can lend: members only, for a private company

Chapter V opens two doors. Door one is s.73(2): a company may, "subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members". Door two is s.76(1), which begins "a public company, having such net worth or turnover as may be prescribed" and permits deposits from persons other than members. A private startup has only the first door.

For founders, that has a plain meaning. Your own shareholders (including you and your co-founders) are members. A cousin, a mentor or an uncle who holds no shares is not. Whether their money can come in as a deposit is not decided by the family relationship. Whether such a receipt is excluded from "deposit" altogether depends on the rule 2(1)(c) list noted above, which you must read before deciding.

The s.73(2) steps for a member deposit

Each of these must be satisfied (s.73(2)):

• (a) Circular to members. A circular "including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed".
• (b) Filing with the Registrar. "filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular". The filing comes before the circular is issued, not after the cheque clears.
• (c) Deposit repayment reserve. "depositing, on or before the thirtieth day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account" (as substituted with effect from 15 August 2018).
• (e) No-default certification. "certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company made good the default and a period of five years had lapsed since the date of making good the default".
• (f) Security and labelling. The company provides "security, if any". Where it "does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as 'unsecured deposits' and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits".

There is no clause (d); the 2018 amendment omitted it, so the list runs (a), (b), (c), (e), (f).

How much can a startup take from members

The numbers are in rule 3(3). Member deposits, together with other deposits outstanding, are capped at 35 per cent of the aggregate of paid-up share capital, free reserves and securities premium account. Two relaxations matter to founders:

• A private company may accept from its members "monies not exceeding one hundred per cent. of aggregate of the paid up share capital, free reserves and securities premium account", and must file the details of the monies so accepted with the Registrar in Form DPT-3 (rule 3(3), first proviso, as substituted in 2017).
• The maximum limit "shall not apply" to a private company that is a start-up, "for ten years from the date of its incorporation", or to a private company that is not an associate or subsidiary of another company, whose borrowings from banks, financial institutions or bodies corporate are less than twice its paid-up share capital or fifty crore rupees, whichever is less, and that has not defaulted in repaying those borrowings (rule 3(3), second proviso, as amended in 2020).

Rule 3(1) separately restricts deposits repayable on demand or at short notice. Read rule 3 as a whole before fixing the terms of any member deposit.

Repayment and the lender's remedy

"Every deposit accepted by a company under sub-section (2) shall be repaid with interest in accordance with the terms and conditions of the agreement" (s.73(3)). If the company fails, "the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit" (s.73(4)). The reserve account "shall not be used by the company for any purpose other than repayment of deposits" (s.73(5)).

In practice, a relative who lent informally and is not repaid on time does not need to sue in a civil court first; the statute points the depositor to the Tribunal, and the company has already put itself in the penalty zone below.

Why section 76 is not your shortcut

Section 76(1) allows deposits from non-members, but only for "a public company, having such net worth or turnover as may be prescribed", subject to the s.73(2) requirements. It also requires a rating "from a recognised credit rating agency" for every year of the tenure, and for secured deposits a charge on assets "within thirty days of such acceptance" of an amount not less than the deposits accepted (s.76(1) provisos). The Chapter applies "mutatis mutandis" (s.76(2)). A private startup cannot use this door. The prescribed net worth and turnover thresholds are not stated here; check the current rules if you are a public company considering it.

The penalty: section 76A, and where section 75 fits

Where a company "accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder", or fails to repay within the time specified (or such further time as the Tribunal allows), s.76A applies:

• the company, "in addition to the payment of the amount of deposit or part thereof and the interest due", is punishable with fine of not less than "one crore rupees or twice the amount of deposit accepted by the company, whichever is lower" and up to ten crore rupees (s.76A(a)); and
• every officer in default is punishable with imprisonment up to seven years and fine of not less than ₹25 lakh and up to ₹2 crore (s.76A(b)).

If the officer "has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities", action under section 447 follows (proviso to s.76A).

Founders sometimes read s.75 as the penalty for any deposit. It is not. Section 75 concerns deposits referred to in section 74, those accepted before the Act commenced; for a deposit taken today, s.76A is the provision to read.

Three founder scenarios

The outsider cheque. Your father, not a shareholder, transfers ₹15 lakh "for the company, to be repaid with interest". First, test the receipt against the rule 2(1)(c) list. If it is not excluded, he is not a member and the company has no s.73(2) route for him. Fixing it afterwards does not undo what already happened.

The existing shareholder. An investor already on the register wants to lend. If the receipt is a deposit, run the full s.73(2) sequence first: general-meeting resolution, circular, Registrar filing, reserve, no-default certification, "unsecured" labelling where applicable, then the rule 3(3) limit check and DPT-3.

The rollover. A loan matures and everyone agrees to extend it. Since s.73(1) bars "renewing" outside the Chapter, treat an extension as a fresh decision, not an email.

Frequently asked questions

Can a startup accept a loan from a non-member?
Not through the deposit chapter's member route, which allows deposits only "from its members" (s.73(2)). Whether a particular receipt is excluded from "deposit" depends on the Rules under s.2(31); check rule 2(1)(c) before concluding either way.

Can our own shareholders lend to the company?
Yes, as deposits from members, after a general-meeting resolution and the s.73(2) steps, within the rule 3(3) limits.

Is there a cap on how much members can lend?
Rule 3(3) caps it at 35 per cent of paid-up share capital, free reserves and securities premium account, with a 100 per cent allowance for private companies and no maximum for a start-up private company for ten years from incorporation (rule 3(3) provisos).

How much must sit in the repayment reserve?
Not less than twenty per cent of deposits maturing in the following financial year, deposited on or before 30 April in a separate scheduled-bank account (s.73(2)(c)).

What can an unpaid lender do?
Apply to the Tribunal for payment of the sum due or for loss or damage from non-payment (s.73(4)).

What is the penalty for getting it wrong?
Fine on the company and imprisonment and fine on officers in default under s.76A, in addition to repaying the deposit and interest.

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See Also

• Raising Your First Priced Round: The Private Placement Procedure Under Section 42
• Allotting Shares After a Public Offer? Minimum Subscription, Listing Permission and Refunds Under Sections 39–40
• Debentures Under Section 71: Conversion, DRR, Trustees and Holder Remedies