Rethinking The Blanket Exclusion From The Definition Of Deposits: Inter-Corporate Deposits (ICDs) Benefits And Their Implications

Rethinking the Blanket Exclusion from the Definition of Deposits: Inter-Corporate Deposits (ICDs) Benefits and Their Implications

Synopsis

This article examines the regulatory framework governing the acceptance of deposits under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014. It outlines the avenues available to companies for raising funds through the deposit route and highlights key exclusions within the statutory definition of "deposit". In particular, it examines Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, which excludes amounts received by a company from another company from the definition of deposits, thereby enabling the use of Inter-Corporate Deposits (ICDs) as a legitimate avenue for corporate fund-raising without triggering the compliance framework prescribed under Chapter V of the Act. For C-suite decision-makers, this exclusion may provide practical financing flexibility. However, the article also evaluates the governance implications, compliance considerations, and potential regulatory risks that may arise if reliance on Inter-Corporate Deposits (ICDs) is not accompanied by diligent adherence to applicable legal and compliance requirements.

Background –

Indian corporate houses seeking financing options may explore the deposits route as a source of funding under the regulatory framework of the Companies Act, 2013, especially Chapter V and the Companies (Acceptance of Deposits) Rules, 2014 ("Deposits Rules"). While this avenue can provide access to relatively low-cost capital, it is accompanied by stringent regulatory oversight under Chapter V of the Act. Companies intending to raise funds through deposits are required to comply with several conditions, including obtaining a credit rating, disclosing their financial position and outstanding deposits, maintaining a mandatory deposit repayment reserve with a scheduled bank, certifying that there are no prior defaults, appointing trustees, executing a Trust Deed, adhering to Trust Deed covenants and other contractual obligations including provisioning methodology. In addition, deposit- related filings with the Registrar of Companies (ROC) are mandatory, making this route both difficult and less flexible as a financing opportunity and additionally bringing significant compliance obligations for companies.

Let us now explore the more flexible alternatives available within the compliance framework of the deposits route, with reference to the exclusions provided under Chapter V of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

Unlocking Flexibility: Exclusions under the Definition of "Deposits"

The Companies (Acceptance of Deposits) Rules, 2014 provide a detailed definition of what qualifies as a "Deposit" and also specify certain exclusions under Rule 2(1)(c). As per the Rules, a "deposit" includes any receipt of money by way of deposit, loan, or in any other form by a company, but does not include amounts specified under clauses I to XVIII. These eighteen exclusions provide flexibility for C-suite decision-makers by relieving certain receipts from the definition of deposits and the associated compliance requirements under Chapter V of the Companies Act, 2013. Key exclusions include:

1. Any amount received as a loan from the Government or Government authorities;
2. Any amount from foreign governments, foreign body corporates, or foreign citizens, subject to conditions in the FEMA and rules made thereunder;
3. Any amount received as a loan or facility from a banking company;
4. Any amount received as a loan from public financial institutions;
5. Any amount against the issue of commercial paper;
6. Any amount received by a company from another company (Inter-Corporate Deposits);
7. Share application money or advance towards allotment of securities;
8. Any amount received from a director of a private company or their relative during their directorship;
9. Any amount raised through bonds or debentures secured by a charge;
10. Any amount received from employees, subject to conditions in the Rules;
11. Any non-interest-bearing amount held in trust;
12. Any amount received in the course of, or for the purposes of, the company's business as;
    1. an advance for the supply of goods or provision of services provided that such advance is appropriated against supply within 365 days;
    2. advance in connection with consideration for an immovable property, provided that such advance is adjusted against such property;
    3. security deposit for the performance of the contract for supply of goods or provision of services
    4. advance received under long term projects for supply of capital goods;
13. Any amount brought in by promoters, subject to conditions in the Rules;
14. Any amount accepted by a Nidhi company in accordance with the Act and Rules;
15. Any amount received by way of subscription chit under the Chit Fund Act, 1982;
16. Any amount received under a collective investment scheme in compliance with SEBI regulations;
17. Any amount of ₹25 lakh or more received by a start-up company by way of a convertible note, subject to conditions in the Rules;
18. Any amount received from Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts, Real Estate Investment Trusts, or Mutual Funds registered with SEBI in accordance with applicable regulations.

These carve-outs are critical because they allow companies to raise funds without triggering the extensive compliance obligations under Chapter V. In particular, this article will focus on the exclusion relating to Inter-Corporate Deposits (ICDs), i.e., any amount received by a company from another company, and its practical implications. For C-suite decision-makers, understanding these exclusions is not merely a matter of legal interpretation—it represents an opportunity to identify legitimate, flexible funding sources. Misinterpreting the definition can expose a company to penalties, whereas leveraging the exclusions appropriately can provide low-cost, strategic capital for corporate operations.

It is useful to understand the regulatory contrast between formally accepting deposits under Chapter V and raising funds through Inter-Corporate Deposits (ICDs). The deposit framework under Chapter V is accompanied by structured compliance prerequisites followed by an extensive compliance process. In contrast, amounts received from another company under Rule 2(1)(c)(vi) are excluded from the definition of "deposits", provided they are structured as loans rather than public deposits and therefore many of these procedural requirements do not apply.

To highlight this distinction, the following section presents a practical compliance comparison between the statutory checklist applicable to companies inviting deposits under Sections 73 or 76 and the relative flexibility available when funds are raised through Inter-Corporate Deposits (ICDs). This comparison aims to help C-suite decision-makers understand the procedural burden associated with the deposits route and the operational flexibility available under the ICD exclusion.

Rule 2(1)(c)(vi) Exclusion: Inter-Corporate Deposits Outside 'Deposit' Compliance

Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, provides a significant exclusion: any amount received by a company from another company does not qualify as a "deposit" under the law, provided they are structured as loans rather than public deposits. This exclusion applies regardless of whether the companies are related parties, the size of the transaction, the tenure of the arrangement, or the security provided. As a result, some companies can gain a strategic advantage in managing their operational financing costs by accessing off-balance-sheet resources, such as funds from group companies or wholly-owned subsidiaries, leveraging the C-suite's experience, network, and goodwill to secure favourable financing. Conversely, other companies may continue to face challenges in arranging flexible financing options and optimizing cost of capital.

Let us explore which companies could benefit from a tailwind and derive optimal advantage from this exclusion window, or, conversely, which may face challenges despite it.

Companies Benefiting from Exclusions: Inter-Corporate Funding Outside Deposit Compliance

Group companies can gain a strategic advantage in managing their operational financing costs by accessing off-balance-sheet resources, such as funds from group companies or wholly-owned subsidiaries, leveraging the C-suite's experience, network, and goodwill to secure favourable financing. As a result, they can benefit significantly from inter-corporate loans and advances, which are excluded from the definition of deposits under Rule 2(1)(c)(vi). This exemption allows funds to move within the group without triggering Chapter V compliance, providing a powerful liquidity management tool for C-suite executives. It enables smoother cash flow, faster funding decisions, and reduced reliance on external lenders. From a compliance perspective, these transactions must be properly documented and, where applicable, disclosed as related-party transactions in the financial statements to prevent incorrect mobilization of funds or diversion from the intended borrowing objectives. The opportunity lies in flexibility, while the responsibility lies in maintaining transparency, disciplined repayment schedules, and sound utilization of funds within the governance framework.

Companies Facing Challenges Despite Exclusions: Inter-Corporate Funding Outside Deposit Compliance

Not all companies can benefit from inter-corporate deposits. Standalone businesses, SMEs, and firms outside large conglomerates often face headwinds because they lack access to group funding networks. Without intercompany support, they must rely on banks, NBFCs, equity infusion, etc. depending on the business structure and operations. Such options can be more expensive and restrictive. For C-suite executives of independent firms, this creates a funding bottleneck. The challenge lies in finding creative yet compliant ways to raise capital without breaching deposit rules. To navigate these headwinds, companies must adopt a disciplined and diligent approach, while continually exploring possibilities and seeking regular guidance from legal professionals—particularly regarding exclusions under Rule 2(1)(c)(xviii), which covers amounts received from Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts, and Real Estate Investment Trusts registered with SEBI in accordance with applicable regulations.

Non-Compliance Risk: Weak Governance, absence of Due Diligence and regular compliance health check-

Despite the broad exclusion under Rule 2(1)(c)(vi), whereby the receipt of money by one company from another company does not qualify as acceptance of deposits, certain compliance requirements under the Companies Act and FEMA regulations may still apply. While such transactions may fall outside the purview of Chapter V, other applicable provisions of the Companies Act and FEMA rules and regulations must still be evaluated on a case-to- case basis and require careful attention to detail.

Such compliances may include FEMA and RBI filing if any depositor falls under the Non- Resident status, regular filing of returns with the ROC, obtaining credit ratings where applicable, adhering to all relevant covenants relating to deposits, ensuring adequate reserves with scheduled Bank, monitoring related party transactions, and making adequate disclosures in annual filings or any other compliance requirement under the law. This also includes filing AOC-2 along with the audited financial statements of the company and maintaining the register of deposits in the prescribed manner under the Companies Act.

Takeaways – Not all borrowings fall under the deposit regime — knowing these exclusions can open up legitimate funding avenues however every choice comes with a price. A company must either bear the diligence cost of compliance or risk compromising governance prudence in execution. Wise and responsible utilization of funds is essential, as it directly impacts corporate governance and the sound management of stakeholders' resources.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.