Protection of depositors

Governments attention has been drawn to a number of companies defaulting in the payment of the interest and sometimes even the principle. But so far neither finance ministry nor the Reserve Bank has ever published the number of such complaints to indicate whether they are on the increase. It is true that regulations have to be framed as regards the quantum of deposits that can be received by companies. But there regulations are no safeguards against a company defaulting and the public cannot look at the government or the RBI for forcing the companies to pay the interest or repay the deposits when due. Thus, large number of companies mobilize deposits at alluring rates of interest and decived the investors by denying payment of interest and the amount of deposit.

In this context, the following issues deserve consideration.

(i) How far the legislature enacted for regulating and controlling the various aspects of company deposits is adequate and serves the aim of public.

(ii) How long will it take for the government to deal with this problem?

As regards the 1 st issue, it can be stated that the existing legislature has proved to be quite inadequate in dealing with the various problems of company deposits. Even the minister for law, justice and company affairs had to compel a company to pay the deposits to aggrieved parties. The department of company affairs took over the responsibility in this field through the insertion of sec 58A and 58B in the companies ( Amendment act 1974, and the rules framed there Under, namely the companies (Acceptance of deposits) Rules, 1975. These rules have been amended more than 4 times so far. What has been the net result of these legislature measures.

         It is the feeling of the government that advertisement published in the newspaper before any co invite deposits is a good safeguard because in the context of advertisement a good deal of information about the financial position of the concerned company is given so that an intending depositor can form an opinion as to whether or not he should risk his savings in such a company so far this device has hardly provided any real assistance to a prospective depositor in selecting a company. These advertisements an the other hand, are very expensive to the companies and the net result has been to push up the cost of collection of deposits.

                Inspite of the procedural and accounting complexity the companies are collecting deposits from the public because the interest and other incidental cost on loan from the FI and banks are found to be much more costly, nearly 20% cost of collection of deposits from the public in much less. Further the loans advanced by FIs and banks are hedged in the numerous conditions the imposition of convertibility clause, the appointment of their nominees on the board of the assisted companies. Instance of interference by the government and FIs in the day to day affairs or official management of the assisted companies are also not rare. Companies deposits continue to be an important feature of corporate financing. Honest and we'll managed companies which take to such raising of finance must not be punished because of the defaulting of a few companies. There is no need to put a company accepting deposits. On the other hand, suitable measure must be taken to provide effective protection to depositors in case of defaulting companies.

           Protection to investors in fixed deposits can be improved by adopting the following measures.

(i) The statutory advertisement includes on a summarised financial position of the last 2 years. This information is inadequate regarding its coverage, content and period. It is very difficult to judge the capacity of a company to repay a maturity. More material must be included in this summary. Depositors must have access to sufficient into in making a rational investment decision.

(ii) While it is easy to obtain a loan from the bank, against the bank deposits, this facility does not exist in case of corporate deposit.

(iii) The provision of compulsory deduction of 2% in case of repayment before maturity should be deleted with a view to introducing liquidity factor in company deposits.

(iv) Company fixed depositors feel helpless when a company defaults, in making repayment to maturity. There is an effective remedy by way of sec 434 of the companies act 1956. The depositor should send a simple notice to the company by registered post. If the company fails to effects such payment within 3 Weeks, it affords a statutory ground for filling a winding up petition against the company. But deforlting companies usually seek assistance from government. Under relief act putting a restraint on depositors for such action.

     It is worth nothing that the companies (Amendment) Act,1988 has given power to the company law board where a company has failed to repay any deposit in accordance with the terms and conditions of such deposit to direct by order, the company to make repayment of such deposit within such time and object to such conditions as may be specified in the order such an action can be taken by company law board either on its own motion or on the application of depositor.

                But this surely entails great difficulty for persons living in towns other than metropolitan areas where the company law board branch may not exist. Government should set up branches of company law board in all major cities to prompthy redress grievances of depositors.

        The SEBI is keeping to ensure comparable standards of disclosure of info to investors in fixed deposits to companies to provide effective remedies for non- compliance with terms of issues by companies especially non- payment of interest and or principle. The SEBI is non considering to make credit rating of fixed deposit scheme of companies mandatory along with all the instruments other than the equity issues, which invite public money.

           In the recent past, the RBI has directed that fixed deposits programmes of all non banking finance company's with net owned funds above rs 2 crore were to be compulsorily ratest by March the 31,95. The non banking finance companies with net owned funds between rs 50 lakhs and rs 2 crores were also to get their fixed deposit programme rated within March 31,96.