Strategic Management and Corporate Finance · Raising of Funds from Debt and Procedural Aspects

Acceptance of Deposits and Inter-Corporate Loans under Companies Act

Updated 11 October 2026 · Fact-checked

A company cannot invite, accept or renew public deposits. Under section 73 it may take deposits from members, with a resolution, a circular and a 20% deposit repayment reserve. Section 186 limits loans, guarantees, security and investments beyond 60% of paid-up capital, free reserves and securities premium (or 100% of free reserves and premium, if higher); they need a special resolution.

Understand Deposits and Loans: Acceptance and Inter-Corporate Dealings

A deposit is money a company receives and must repay, with or without interest. Section 73(1) bans a company from inviting, accepting or renewing deposits from the public except as the Chapter allows. The proviso exempts a banking company and a non-banking financial company as defined in the Reserve Bank of India Act, 1934, and other companies the Central Government specifies after consultation with the RBI.

The Act gives one route: deposits from members. Under section 73(2), the company must pass a resolution in general meeting and follow the rules prescribed in consultation with the RBI. Those rules are not in the text supplied here, so do not quote details, figures or exemptions from them unless you are sure of them.

Section 186 covers the other side: money the company puts out. It limits loans to any person or body corporate, guarantees and security for such loans, and acquisition of securities of other bodies corporate. Think of it as a ceiling on how much of its funds a company can send outside.

The ceiling is set out in section 186(2). Under section 186(5), a Board resolution passed at a meeting with the consent of all directors present is a precondition for every investment, loan, guarantee or security. Besides this, prior approval of the public financial institution concerned is needed where a term loan from it is subsisting. That approval is not needed if the aggregate of loans, investments, guarantees and security, including the proposed one, stays within the section 186(2) limit and there is no default in repaying that loan or its interest.

Where the aggregate crosses the ceiling, a prior special resolution in general meeting is needed in addition to the Board resolution. Section 186(11) exempts some transactions from the section, except sub-section (1). Examples are loans, guarantees, security and investments by a banking company, insurance company or housing finance company in the ordinary course of business, and investments by an investment company. Check it before applying the limit.

Section 185 deals separately with loans to directors and connected persons. It is not in the text supplied here, so state its rule without a section-text quote.

Key rules to remember

Ban on public deposits: Section 73(1): no invite, accept or renew deposits from the public except under the Chapter; Exempt: a banking company and an NBFC as defined in the RBI Act, 1934, and other companies specified by the Central Government after consultation with the RBI.
Deposits from members: Section 73(2): general meeting resolution + circular to members (financial position, credit rating, total number of depositors, amount due on earlier deposits) + copy of circular filed with Registrar within thirty days before the date of issue + DRA by 30 April + no default + security (if any); Unsecured deposits must be described as 'unsecured deposits' in every circular, form and advertisement.
Deposit repayment reserve: DRA ≥ 20% of deposits maturing in the next financial year, deposited on or before 30 April each year, in a separate account in a scheduled bank; Section 73(2)(c). Under section 73(5) it can be used only to repay deposits.
Default bar on deposits: No default in repaying deposits or interest; if a default occurred, it was made good and five years have passed; Section 73(2)(e), as substituted in 2018.
Depositor's remedy: Failure to repay: depositor applies to the Tribunal; Section 73(4). The Tribunal can order payment and compensation for loss.
Section 186(2) ceiling: Limit = higher of (60% × (paid-up share capital + free reserves + securities premium)) and (100% × (free reserves + securities premium)); Covers loans, guarantees, security and acquisition of securities taken together.
Approval above the ceiling: Section 186(3): prior special resolution in general meeting if aggregate (existing + proposed) exceeds the limit; No special resolution is needed for loans, guarantees, security to a wholly owned subsidiary or joint venture company, or for a holding company's acquisition of securities of its wholly owned subsidiary. Details must still be disclosed.
Board and lender approval: Section 186(5): Board resolution passed at a meeting with the consent of all directors present, in every case + prior approval of the public financial institution where a term loan subsists; The proviso removes the need for PFI approval only where the aggregate, including the proposed amount, is within the section 186(2) limit and there is no default in repaying that loan or its interest.
Interest rate floor: Loan rate ≥ prevailing yield of 1, 3, 5 or 10 year G-Sec closest to the tenor; Section 186(7).
Default bar on lending: A company in default on deposits or interest cannot give loans, guarantees, security or make acquisitions while default subsists; Section 186(8).
Penalty under section 186: Company: ₹25,000 to ₹5,00,000. Officer in default: up to 2 years' imprisonment and fine of ₹25,000 to ₹1,00,000; Section 186(13).

How to solve Deposits and Loans: Acceptance and Inter-Corporate Dealings questions

Use this order for any case question on deposits, loans or investments.

1Classify the transaction: money received (deposit or loan taken) or money given or invested (loan, guarantee, security, acquisition).
2If money is received, check whether it is from the public or from members, and whether any exemption under the rules applies. Then apply section 73.
3For deposits from members, tick each condition: resolution; circular with financial position, credit rating, number of depositors and amount due on earlier deposits; filing the circular with the Registrar within thirty days before the date of issue; 20% DRA by 30 April; no default; security.
4If money is given out, compute the section 186(2) limit using both tests and take the higher.
5Add existing loans, guarantees, security and investments to the proposed one, and compare with the limit.
6Check exemptions: wholly owned subsidiary, joint venture, and section 186(11) companies such as banking and insurance.
7Check approvals and compliance: Board resolution with consent of all directors present in every case; prior approval of the public financial institution if a term loan subsists, unless the proviso to section 186(5) applies; special resolution if over the limit; interest floor, default bar, register and disclosure.
8Conclude with the consequence: valid, needs a special resolution and other approvals, or contravention with penalty.

Quickest way: Limit test in 60 seconds

When to use it: Numerical or case questions asking whether a loan or investment is allowed under section 186.

Write A = 60% × (paid-up capital + free reserves + securities premium).
Write B = 100% × (free reserves + securities premium).
Limit = the larger of A and B.
Total = existing exposure + proposed.
If Total ≤ Limit, no special resolution is needed. The Board resolution with consent of all directors present is still required, and PFI approval is not needed if there is no default on the term loan.
If Total > Limit, a special resolution is needed first, besides the Board resolution. Prior PFI approval is also needed where a term loan subsists.
Check for a wholly owned subsidiary exemption and the section 186(11) exemptions before concluding.

Common mistakes in Deposits and Loans: Acceptance and Inter-Corporate Dealings

Using only the 60% test and ignoring the 100% of free reserves test.
The 60% figure is remembered more easily.
Fix: Always compute both and take the higher, as section 186(2) says.
Saying a company can never accept deposits.
Students read section 73(1) and stop.
Fix: The ban is on the public. Deposits from members are allowed under section 73(2) on conditions.
Treating a special resolution as always needed for any loan.
Confusing the Board approval with the above-limit approval.
Fix: A special resolution is needed only above the limit. Within the limit you still need the Board resolution with consent of all directors present, and PFI approval if a term loan subsists and the proviso to section 186(5) does not apply.
Ignoring the wholly owned subsidiary exemption.
The provisos to section 186(3) are overlooked.
Fix: Loans, guarantees or security to a wholly owned subsidiary or joint venture are outside the special resolution requirement, but still need disclosure.
Forgetting the deposit default bar when a company wants to lend.
Deposits and lending are studied as separate topics.
Fix: Section 186(8) stops a company in default on deposits or interest from lending, guaranteeing or acquiring.
Treating the deposit repayment reserve as general funds.
It sits in the company's own bank account.
Fix: Under section 73(5) it can be used only to repay deposits.

Worked examples

Example 1

Sundaram Textiles Ltd has paid-up share capital of ₹40 crore, free reserves of ₹30 crore and securities premium of ₹10 crore. It has existing loans and investments of ₹45 crore in other bodies corporate and wants to lend ₹10 crore to an unrelated company, Kaveri Mills Ltd. Can the Board do this alone?

Show the solution

Test A: 60% × (40 + 30 + 10) = 60% × 80 = ₹48 crore.
Test B: 100% × (30 + 10) = ₹40 crore.
Limit is the higher: ₹48 crore.
Total after the proposed loan = 45 + 10 = ₹55 crore.
₹55 crore exceeds ₹48 crore, so section 186(3) applies.
Kaveri Mills is not a wholly owned subsidiary or joint venture, so no exemption applies.
Because the limit is exceeded, the proviso to section 186(5) cannot help. If a term loan from a public financial institution subsists, its prior approval is also needed.

Answer: The Board cannot proceed alone. A special resolution must be passed in general meeting before the loan is given. The Board must also pass its own resolution with consent of all directors present. If a term loan from a public financial institution subsists, that institution's prior approval is also needed. The loan must carry interest at or above the relevant G-Sec yield.

Example 2

Himalaya Foods Ltd is unlisted. Its Board wants to invite fixed deposits from the general public and also from its members. It has never defaulted on deposits. Advise on the position under section 73.

Show the solution

Section 73(1) bars inviting, accepting or renewing deposits from the public except as the Chapter provides. Himalaya Foods is not a banking company or an NBFC and is not a company specified by the Central Government, so the ban applies to the public.
Section 73(2) permits deposits from members, subject to conditions.
Conditions: general meeting resolution; circular to members with financial position, credit rating, number of depositors and amount due on earlier deposits; filing the circular with the Registrar within thirty days before the date of issue.
Deposit ₹ equal to at least 20% of deposits maturing in the next financial year by 30 April in a separate scheduled bank account (the DRA).
Certify no default in repayment or interest, or if there was one, it was made good and five years have lapsed.
If the deposits are unsecured, say so in every circular, form and advertisement.

Answer: The company cannot invite deposits from the public. It can accept deposits from members after meeting all section 73(2) conditions. If it fails to repay, a depositor may apply to the Tribunal under section 73(4).

Exam tips

Write the provision, apply the facts, then conclude. Examiners reward this order.
In numerical questions, show both limit tests and state which is higher.
Always check for the wholly owned subsidiary exemption before concluding a special resolution is needed.
Quote the exact conditions of section 73(2) as a list. It is easy marks.
State the section 186(5) approvals fully: Board resolution with all directors present consenting in every case, plus prior PFI approval where a term loan subsists and the proviso does not apply.
When a question mentions a loan to a director, flag section 185 and state its rule in plain words, without inventing figures.

Practice questions from Raising of Funds from Debt and Procedural Aspects

Deposits and Loans: Acceptance and Inter-Corporate Dealings: frequently asked questions

Can a company accept deposits from the public?

No. Section 73(1) bars a company from inviting, accepting or renewing deposits from the public except in the manner provided in the Chapter. The restriction does not apply to a banking company and an NBFC as defined in the RBI Act, 1934, or to other companies the Central Government specifies after consultation with the RBI.

What is the deposit repayment reserve account?

It is a separate account in a scheduled bank. The company must deposit in it, by 30 April each year, at least 20% of the deposits maturing in the following financial year. Under section 73(5) it can only be used to repay deposits.

What is the limit for loans and investments under section 186?

The limit is the higher of 60% of paid-up share capital, free reserves and securities premium, or 100% of free reserves and securities premium. Crossing it needs a prior special resolution in general meeting under section 186(3).

What is the penalty for breaching section 186?

The company faces a fine of ₹25,000 to ₹5,00,000. Each officer in default faces up to two years' imprisonment and a fine of ₹25,000 to ₹1,00,000, as per section 186(13).