1.3 Deposits, Debentures & Borrowings

1.3 Deposits, Debentures & Borrowings

Quick Answer: Independent directors must understand how companies fund themselves with deposits, debentures, and other borrowings; when the Board needs shareholder approval to borrow; how charges secure creditors; and why sections 185/186 style restrictions on loans, guarantees, and investments protect against related-party leakage of corporate funds.

Leverage decisions can create enterprise value—or destroy it. Many corporate failures that end in MCA inspection, NCLT proceedings, or SEBI action show a pattern: aggressive borrowing, opaque guarantees, deposit defaults, and boards that did not interrogate the liability side of the balance sheet.

Why Funding Structure Is an ID Topic

You will not draft charge documents, but you will vote on:

• Annual borrowing limits and bank facility renewals
• Debenture issuances and security creation
• Corporate guarantees for subsidiaries and group companies
• Inter-corporate loans and investments
• Regularisation of deposits or “advance” arrangements that may be deposits in substance

Schedule IV expects independent directors to safeguard stakeholder interests and to satisfy themselves on integrity of financial information and risk management. Debt is risk.

Public Deposits — Rules Overview

Chapter V of the Companies Act regulates acceptance of deposits from members and the public. Key exam-and-practice ideas:

• Not every receipt of money is a “deposit”; the Act and Deposit Rules define deposits and carve-outs (for example certain amounts received from governments, banks, or against commercial paper/appropriate instruments as specified).
• Eligible companies, limits, credit rating, deposit insurance/security (as applicable under the evolving rules), liquid asset maintenance, and trustee/disclosure requirements apply when public deposits are accepted.
• Private companies face a different, generally more restricted perimeter for public deposits than public companies; accepting money from the public without authority is a classic violation.
• Default in repayment of deposits or interest attracts stringent consequences, including restrictions on raising further deposits and potential disqualification/liability themes for officers.

ID scenario: Finance proposes “customer advances” and “supplier security deposits” growing far beyond operational norms while the company markets fixed returns to individuals. Ask legal whether these are deposits in substance. Demand an age analysis, utilisation of funds, and compliance certificate under Deposit Rules—not only a management assurance slide.

Red flags in deposit programmes

Debentures and Creation of Charge

Debentures

A debenture includes debenture stock, bonds, and other instruments of a company evidencing a debt, whether constituting a charge on company assets or not (see section 2(30) definitional contours). Debentures may be:

• Secured or unsecured
• Convertible or non-convertible
• Issued via private placement or public issue routes subject to the Act and SEBI debt regulations where applicable

Boards approving debenture issues should review coupon, tenure, conversion terms, security cover, financial covenants, and events of default. Convertible debentures reintroduce dilution analysis from the previous section.

Charges

A charge is an interest or lien created on company property or assets as security (section 2(16)). Creation, modification, and satisfaction of charges must be registered with the Registrar within prescribed timelines (section 77 framework). Unregistered charges risk being incomplete against liquidators and creditors in insolvency—disastrous for both the secured creditor and the company’s reputation.

Independent directors should periodically review the register of charges and MCA charge index:

• Is aggregate secured debt consistent with what the Board authorised?
• Are assets already fully encumbered before a new facility is approved?
• Are personal guarantees of promoters being substituted with corporate guarantees without pricing the contingent liability?

Debenture trustees (where required) protect debenture holders; Board engagement with trustee observations is a governance positive, not a nuisance.

Board Power to Borrow vs Shareholder Limits

Directors’ powers to borrow are subject to the Act and AoA. A critical shareholder-control point is the section 180(1)(c) theme: the Board shall not borrow money, where money already borrowed together with further borrowing would exceed the aggregate of paid-up share capital, free reserves, and securities premium, except with the consent of the company by a special resolution (with exclusions/definitions as in the section—temporary loans from bankers in ordinary course often receive special treatment in the statutory text).

Practical ID habits:

1. Track the approved borrowing limit from the last special resolution
2. Compare outstanding long-term and short-term borrowings plus proposed facilities to that limit
3. Do not let “working capital renewal” rhetoric hide a permanent increase in leverage past the shareholder ceiling
4. Confirm whether subsidiary borrowings or guarantees count toward group risk even if the pure section 180 math is at parent level only

Section 180(1)(a) themes on selling/leasing whole or substantially the whole undertaking similarly require special resolution—relevant when debt restructuring involves asset transfers.

Inter-Corporate Loans, Investments, Guarantees — sections 185 & 186 Themes

Section 185 — loans to directors and related persons

Section 185 restricts loans, guarantees, and securities to directors and to persons in whom directors are interested, subject to exceptions (for example loans to MDs/WTDs as part of conditions of service approved by shareholders, or loans by companies providing loans in ordinary course of business at interest not less than prescribed benchmarks, among statutory exceptions). The policy goal is clear: do not let directors treat the company as a personal lender of first resort.

ID questions:

• Is the borrower a director, relative, or firm/body corporate in which the director is interested?
• Does an exception truly apply, or is the structure designed to skirt 185?
• Is the interest rate arm’s length? Is security adequate? Is disclosure complete?

Section 186 — loans and investments by company

Section 186 governs a company’s power to give loans, provide guarantees/security, and acquire securities of other bodies corporate, including:

• Ceiling based on a percentage of free reserves, paid-up capital, and securities premium (classic exam figure: aggregate beyond 60% of paid-up share capital + free reserves + securities premium or 100% of free reserves + securities premium, whichever is more, requires prior special resolution—confirm exact statutory formula in force for the exam)
• Rate of interest floor concepts for loans
• Layering limits and disclosures; register of loans/guarantees/investments
• Special regimes for investment companies and exemptions as provided

Group guarantee cascades are where sections 185/186 and LODR RPT rules often intersect. An ID on a listed parent board approving a guarantee for a stressed subsidiary must demand recovery analysis, not only “support the group” language.

Red Flags Independent Directors Watch on Leveraged Boards

1. Debt rising faster than EBITDA or cash flow from operations without a credible deleveraging path
2. Short-term deposits or commercial paper funding long-term assets (maturity mismatch)
3. Contingent liabilities (guarantees, letters of comfort) omitted from board risk dashboards
4. Charge saturation — no free assets, yet more secured facilities proposed
5. Related-party loans in substance despite form-based exceptions
6. Repeated rollovers of promoter or group loans without independent credit assessment
7. Breach of deposit or debenture covenants hidden in footnotes
8. Auditor emphasis/modification on going concern linked to debt servicing

Mini case for exam thinking

A mid-sized public unlisted company has paid-up capital and free reserves of ₹100 crore. Outstanding borrowings are ₹95 crore. Management seeks a new term loan of ₹40 crore for capacity expansion and a corporate guarantee of ₹25 crore for a promoter-owned LLP supplier. As ID you should:

• Test section 180 special resolution need for the incremental borrowing
• Classify the guarantee under 185/186 and RPT frameworks
• Ask whether the expansion NPV exceeds the risk of guarantee leakage
• Require CS/CFO matrix of limits, utilisation, and headroom

Interface with Insolvency and Stakeholder Duties

When leverage becomes distress, the Board’s duty landscape shifts toward preserving enterprise value and complying with insolvency triggers under the IBC framework (detailed elsewhere). Early ID intervention—demanding restructuring options, independent cash-flow reviews, and honest disclosure to lenders—is preferable to late-stage blame allocation.

Exam Focus Checklist

• Deposit vs non-deposit receipts; public deposit compliance culture
• Debenture as debt evidence; charge registration importance
• Board borrowing vs special resolution threshold (s.180(1)(c) theme)
• Section 185 director-related lending restrictions and exceptions concept
• Section 186 inter-corporate loan/investment ceilings and approval logic
• Practical leverage red flags for independent directors

If you can narrate how a rupee of new debt is authorised, secured, disclosed, and repaid, you have mastered this section’s contribution to the Companies Act domain of the IICA test.