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S. Murlidharan

S. Murlidharan on the small mercies for small depositors

THE special dispensation for small depositors, Section 58AA of the Companies Act, 1956, as ushered in by the Companies (Amendment) Act, 2000, is indeed full of good intentions. It, among other things, defines a small depositor as the one who has not deposited more than Rs 20,000 with a company during a financial year.

In a milieu of falling interest rates in government securities, one may be driven into investing in company deposits allured by the higher rate of interest vis-à-vis the one offered by government securities for identical maturity.

To qualify for the protection afforded by the dispensation, an investor must ensure that he does not go beyond the prescribed threshold lest he is dislodged from the comfortable perch of the small depositor.

All that he has to do to ensure this is to deposit not more than Rs 20,000 during a financial year in a company. He must, in other words, spread his deposits among 10 companies if what he wants to invest is Rs 2 lakh.

If he has tremendous faith in a particular company and thus wants to deposit more, he will do well to stagger his deposits in such a way that not more than Rs 20,000 is deposited in a given financial year.

The special remedy reserved for a small depositor, which is not available to other depositors, is that in case of default in repayment of the deposit or interest thereon, the company itself will have to offer its head on the chopping block by reporting its delinquency to the Company Law Board. In fact, it is this self-flagellation, as it were, on the part of the company that makes the lot of small depositors better vis-à-vis other depositors.

But there are quite a few misgivings in the dispensation. How do joint deposits figure in the scheme of things? Suppose a husband deposits Rs 20,000 in his own name, another Rs 20,000 in his wife's name and yet another Rs 20,000 in their joint names all in one go, will he pass muster as a small depositor?

Section 58AA(6) requires disclosure of waiver of interest if any. What exactly is contemplated? Who waives the interest? There is no machinery in place in the Act to call a meeting of depositors to consider a proposal to waive interest.

In the event, the requirement begs the question: What exactly is sought to be disclosed? Similarly, sub-section (8) requires disclosure of every past default by the company in the repayment of deposit or interest and the fact of waiver of interest in the application form issued to small depositors.

To be sure, there is no separate form for small depositors. Moreover, is a company required to chronicle faithfully all its defaults till date or is it that only the defaults to small depositors are required to be chronicled?

And, finally, will a depositor make the grade as small depositor despite breaching the ceiling if he subsequently ensures that in a year he does not deposit more than Rs 20,000? Because if one reads the following definition of small depositor as given by the Explanation to Section 58AA, the unmistakable impression one gets is that even if the norms are met for one financial year that is enough to vest him with the robes of a small depositor even though he might have deposited in crores in earlier years:

"For the purposes of this section, a small depositor means a depositor who has deposited in a financial year a sum not exceeding twenty thousand rupees in a company... ."

This then lends the entire scheme to abuse. A man who has deposited huge sums running into crores can beget the special treatment reserved for small depositors by investing the minimum possible, say, Rs 1,000, during a financial year.

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