Cos can treat public deposits as capital: Panel

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Sep 8 2010, 02:21am hrs
The parliamentary standing committee on finance headed by former finance minister Yashwant Singh has endorsed public deposits as a potential source of capital for companies but wants to ensure that such deposits should be attached to the companys assets so that they become secure in nature.

The committee has recommended that in case of failure on the part of the company to pay back the promised sum, penal interest be imposed to act as a deterrent for the defaulting companies.

The recommendations are in line with the committees attempts to bring transparency in an area which is largely unregulated.

Clause 68 of the Companies Act deals with damages for fraud states that if its proven that deposits from public had been accepted with intent to defraud the depositors, every officer who was responsible for acceptance of deposits shall be personally responsible, without any limitation of liability for losses or damages incurred by the depositors.

Managing partner of Delhi-based corporate law firm Patnaik & Associates Sangram Patnaik said such a step was required to create more accountability among corporate houses especially with the intention of safeguarding investor interests. Borrowing unsecured loans from public is a very common practice. As much as 70% of companies adopt this route to meet cash requirements. There are times when such companies default on payments and there really is no efficient mechanism to bring them to justice, Patnaik said.

Apart from this the committee has also suggested that the process it takes for bringing the defaulting companies to task by moving the tribunal should also be quickened. According to Delhi-based corporate lawyer Tamali Sengupta the committees suggestion could benefit companies as well. She said, Many a times large chunks of black money finds its way into companies which are never claimed by the public. Once the government brings in regulation such a practice would stop.

The Companies Bill 2009 had earlier suggested inclusion of a new clause 68A under section 68 which created a threshold limit for companies that could accept deposits from the public. As per the Bill compiled by the corporate affairs ministry only those public companies which have a net worth of atleast Rs 500 crore and a turnover of Rs 1,000 crore could use this route to raise funds. The idea behind setting these standards was to allow only relatively larger companies that have a sound track record could raise money, a corporate affairs source said.

Though the committee has largely accepted the suggestions of the ministry on the damages for fraud it has pointed out that a condition imposed by the bill that states the company should obtain the highest rating from a recognised credit rating agency should not prohibit otherwise sound companies from inviting deposits. The committee said that the public deposits should be a potential source of capital for companies while remaining an avenue of investment with safety and assured return.