New rule puts firms taking public deposits in a fix

A proposal to make insurance cover mandatory for public deposits garnered by manufacturing companies has left the corporates in a fix.

Manufacturing companies, it is feared, may lose an important source of funding as a consequence of the new norm.

Companies Act, 2013 - second of tranche of sections was notified March 26 to be operational from April 1.

Section 73(2) (d) of the new Act provides for insurance coverage for deposits in such manner and to such extent as may be prescribed. The Corporate Affairs Ministry has indicated that action will be initiated against companies that fail to comply with the new ruling.

According to the specific norms, every company under sub-section (2) of section 73 and every other eligible company inviting deposits shall enter into a contract providing for deposit insurance at least thirty days before the issue of circular or advertisement, as the case may be, as specified in clause (d) of sub-section (2) of section 73 of the Act.

The deposit insurance contract shall specifically provide that in case the company defaults in repayment of principal amount and interest thereon, the depositor shall be entitled to the repayment of principal amount of deposits and the interest thereon by the insurer up to the aggregate monetary ceiling as specified in the contract;

Provided that in the case of any deposit not exceeding Rs. 20,000, the deposit insurance contract shall provide for payment of the full amount of the deposit, and in the case of any deposit in excess of Rs. 20,000, the deposit insurance contract shall provide for payment of an amount not less than Rs. 20,000 for each depositor.

Hitch

There is a hitch, however. At the moment, no general insurance company offers cover for such public deposit schemes. “We don’t have any insurance products that guarantee coverage for deposits of companies or banks. Since it is a financial product, it requires a lot of study. We will take call after studying the regulation,” said a top official of a public sector insurance company.

Hence, manufacturing companies may be forced not to renew deposits or accept fresh deposits as they may not be able to comply with this company law requirement, it is argued.