In what ways are investors in corporate fixed deposits safeguarded under the Companies Act of 2013?

To protect the interests of depositors, the Companies Act of 2013 places several limitations on the acceptance of deposits by companies. The Act defines 'deposits' as any receipt of money in the form of a deposit, loan, or other means by a company. However, it excludes specific types of amounts prescribed in consultation with the Reserve Bank of India (RBI).

Here are some of the significant restrictions imposed on companies regarding the acceptance of deposits under the Companies Act of 2013:

  • Under the Companies Act 2013, companies are restricted from accepting deposits from the public unless they meet certain criteria. These criteria include having a minimum net worth of Rs 100 crores or a turnover of Rs 500 crores, complying with deposit regulations, and obtaining credit ratings.
  • Under the Companies Act 2013, companies accepting deposits are required to obtain deposit insurance. This is a measure to safeguard the interests of depositors in case the company defaults on its payment obligations.
  • Under the Companies Act 2013, companies accepting deposits are obligated to create a separate bank account in a scheduled bank named Deposit Repayment Reserve Account (DRRA). This account serves to ensure that depositors are repaid in the event of default by the company. The company must deposit at least 20% of the total deposits they have accepted into the DRRA. This measure is put in place to provide additional protection to depositors in case of any untoward incident.
  • Under the Companies Act 2013, companies accepting deposits must obtain a credit rating from a recognized credit rating agency. This credit rating is an indication of the company's creditworthiness and ability to repay the deposit on maturity. A higher credit rating signifies a lower risk of default and a greater likelihood of the company meeting its obligations. You can verify a company's credit rating through credit rating agencies such as CRISIL, ICRA, and CARE.
  • Penalties for non-compliance with deposit rules can be severe. The Companies Act 2013 stipulates that companies that violate the deposit rules may be subject to fines and other penalties, including criminal liability. In case of non-payment of matured deposits, companies are required to pay an interest of 18% per annum for the overdue period. Additionally, the company may be fined a minimum of Rs. 1 crore or twice the amount of deposit accepted, whichever is lower, and the penalty may extend up to Rs. 10 crore. These penalties are designed to ensure that companies take the safety of their depositors seriously and comply with the rules and regulations laid out by the government.
The aforementioned provisions have been put in place to safeguard the interests of depositors and to ensure that companies accepting deposits adhere to investment-grade standards.

Keep in mind that investing in company fixed deposits involves a certain level of risk, so it is crucial to conduct thorough research and select a reputable company with a strong track record. It is advisable to seek guidance from a financial advisor prior to making any investment choices.

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