On the face of it, raising money should be a straightforward task. However, the Indian company law dictates that the methods a company employs to raise money are just as significant as the source of the funds. There are numerous instances where companies, in good faith, accept funds and treat deposits as just another mode of raising finance, thereby inadvertently breaching the law. This is a point at which the provisions of Section 73 of the Companies Act, 2013, come into play with utmost significance.
This part defines a very clear distinction between funds deposited by members and those deposited by the public. The main purpose of this provision is to safeguard the investors from the wrong use of their money and to stop companies from behaving as unlicensed banks. In case Section 73 is wrongly interpreted or disregarded, it can lead to a situation in which a company and its directors will have to face heavy fines, legal action, & loss of reputation.
Let’s break it down in a simple, practical, & compliance-friendly way.
What Is Section 73 of the Companies Act, 2013?
Section 73 of the Companies Act, 2013, primarily deals with the prohibition on acceptance of deposits from the public. The law clearly states that no company shall invite, accept, or renew deposits under this Act from the public, except in accordance with the provisions of the Act and the rules made thereunder.
To put it simply, firms cannot take deposits from the public if they are not a certain type of company as per the rules mentioned in Sections 73 to 76. This measure is meant to safeguard laypersons against the risk of money being collected from them without proper regulation and also to maintain the financial discipline of corporates.
Prohibition on Acceptance of Deposits from Public
The core principle of Section 73 is prohibition. The law is direct & unambiguous.
No company shall invite, accept, or renew deposits from the public.
This means:
Companies cannot raise money from outsiders by calling it a “deposit.”
Public fundraising through deposits is barred
Only regulated entities can access public deposits
This restriction is the backbone of investor protection under the Companies Act, 2013.
Also Read: Treatment of Speculation Losses Explained
Can Any Company Accept Deposits at All? Yes—From Members
While public deposits are prohibited, any company can accept deposits from its members, but only if strict conditions are fulfilled.
Section 73(2) of the Companies Act, 2013, provides that after meeting the necessary safeguards, a company can obtain deposits from its members. Thus, the whole process of raising funds internally is kept open, recorded, and financially safe.
Conditions Under Section 73(2) of Companies Act, 2013
To accept deposits from members, a company must:
- Pass a resolution in general meeting
- Issue a detailed circular to members disclosing financial position
- File the circular with the Registrar of Companies
- Create a Deposit Repayment Reserve Account
- Deposit at least 20% of deposits maturing in the next financial year
- Obtain deposit insurance (as applicable)
- Certify no default in repayment of earlier deposits
- These safeguards exist to prevent misuse & protect members’ funds.
Deposit Repayment Reserve Account: A Key Safeguard
One of the most important protections under Section 73 of the Companies Act, 2013, is the Deposit Repayment Reserve Account.
Companies are required to set aside a certain portion of their deposit obligations in a scheduled bank. The amount so set aside is not available to be used for the business operations. It is a kind of cushion that guarantees the payment of depositors in case the company runs into cash flow problems.
This single requirement has stopped countless financial disasters.
Disclosure Through Circular: Transparency Is Mandatory
Before accepting deposits, companies must issue a circular to members. This document must disclose:
Financial position
Credit rating
Purpose of deposits
Risk factors
Previous deposit repayment history
This ensures informed consent & prevents blind trust-based fundraising.
Section 73(1) vs Section 73(2): What’s the Difference?
- Section 73(1) lays down the general prohibition on public deposits
- Section 73(2) provides the exception allowing deposits from members under conditions
Understanding this distinction is essential for compliance.
Sections 73 to 76 of Companies Act, 2013: The Bigger Framework
Sections 73 to 76 of the Companies Act, 2013, collectively regulate deposits.
- Section 73 – General prohibition and member deposits
- Section 74 – Repayment of existing deposits
- Section 75 – Damages for fraud
- Section 76 – Public deposits by eligible companies
Together, these provisions ensure deposit-taking remains regulated and safe.
Exemption to Private Companies Under Section 73
A commonly searched query is Section 73 of the Companies Act, 2013, exemption to private companies.
Certain private companies enjoy conditional exemptions, especially those:
- With limited members
- With no public borrowing
- That meet prescribed thresholds
However, exemptions are not automatic. They depend on notifications and conditions. Blind reliance on exemptions can be risky.
Penalty for Violation of Section 73 of Companies Act, 2013
Non-compliance attracts heavy penalties.
Company: fine up to ₹10 crore
Officers in default: imprisonment up to 7 years, fine, or both
These penalties underline the seriousness of the prohibition on acceptance of deposits from the public.
Connection With Sections 185 and 186
Sections 185 and 186 deal with loans, guarantees, and investments. Companies often try to disguise deposits as loans to bypass Section 73. This is a dangerous mistake.
Regulators look at substance over form. If money functions like a deposit, Section 73 applies.
Why Section 73 Exists: Investor Protection at Its Core
The history of financial frauds in India prompted strict deposit regulation. Section 73 ensures:
- Companies don’t misuse public trust"
- Investors are protected
- Corporate fundraising remains disciplined
It is not anti-business. It is pro-stability.
Practical Compliance Tips for Companies
- Avoid accepting funds casually
- Clearly classify transactions
- Document member deposits properly"
- Monitor exemptions carefully
- Seek professional advice before raising funds"
A small mistake can have long-term legal consequences.
Final Thoughts: Deposits Are Not Easy Money
Section 73 of the Companies Act, 2013, makes one thing clear—deposits are highly regulated instruments, not casual funding options. Companies that respect this boundary stay safe, compliant, and trustworthy.
Those who ignore it often learn the hard way.
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