Issuing Unsecured Unlisted NCDs to Group Companies? Why Deposit Rules Might Not Apply—But Watch This Exception

Why Unlisted Companies Opt for Unsecured NCDs Within Groups

Unlisted Indian companies frequently raise funds by issuing unsecured, unlisted non-convertible debentures (NCDs) to other companies within the corporate group. The key attraction: NCDs provide flexibility in structuring inter-company funding—possibly at attractive terms and without pledging assets—but a lingering question is whether such NCD receipts are treated as "deposits" under Chapter V of the Companies Act, 2013. Getting this classification wrong has sharp compliance and penalty risks.

The Core Legal Principle: Source-Based Exclusion Trumps Instrument Type

The Companies (Acceptance of Deposits) Rules, 2014, strictly regulate what counts as a "deposit"—triggering significant caps, disclosure, formalities and penal consequences for company directors. But Rule 2(1)(c)(vi) carves out a broad source-based exclusion: Any money received by a company from any other company (regardless of the instrument or form) is not treated as a deposit. This applies whether the funding arrives via a simple loan, a secured debenture, or—crucially for group structures—an unsecured, unlisted NCD. The rationale is regulatory: transactions entirely among registered companies are considered subject to existing corporate governance and oversight, reducing the need for deposit controls.

Instrument-Based Exclusions Are Independent

Certain debentures are also excluded from the definition of deposit based on their features:

• Rule 2(1)(c)(ix): Secured debentures (whether convertible or not)
• Rule 2(1)(c)(ixa): Unsecured, unlisted NCDs if they are listed

If you issue secured debentures or listed NCDs to any party (company, LLP, individual), these exclusions apply even if the recipient is not a company. But the source-based exclusion for companies under Rule 2(1)(c)(vi) applies regardless of the instrument’s security or listing status.

The Practical Rule for Unsecured, Unlisted NCDs

If an Indian company issues unsecured, unlisted NCDs and the entire subscription is taken by companies (as defined under Section 2(20) of the Companies Act), then the amount received is not a deposit. This dramatically simplifies compliance for unlisted companies seeking internal funding:

• There’s no limit on the quantum (unless other sections, like Section 180(1)(c)/186, apply)
• Deposit-specific procedural burdens do not arise
• Raised funds retain the flexibility of a debenture instrument

However, debenture-related compliances remain applicable:

• Approvals per Sections 42 (private placement), 71 (debentures), and relevant rules
• Board and possibly shareholder approval
• Offers to be made strictly to eligible companies
• Form PAS-3 (return of allotment) and PAS-4 (offer letter), where applicable

DPT-3 Reporting: Still Mandatory

Even though inter-corporate NCD subscriptions are not deposits, all money received via NCDs (secured or unsecured, listed or unlisted) must still be reported annually in Form DPT-3 under the 'money not considered as deposit' section.

Why the “Company-to-Company” Condition Matters—and When It Breaks

The exemption under Rule 2(1)(c)(vi) works only while the subscriber remains a company. If the NCDs are transferred by the original company-subscriber to a non-company entity (such as an individual, LLP, or partnership), the exemption may cease to apply—making the original issue potentially count as a deposit and triggering compliance breaches. For safety, it is strongly recommended to restrict—by contract or debenture terms—transfers only to companies.

Who qualifies as a company? This means only those meeting Section 2(20) of the Companies Act: Indian companies (private/public/Section 8) or foreign companies with registered Indian presence. LLPs, partnerships, HUFs, and individuals do not count.

Conditions, Approvals and Other Company Law Provisions

While ignoring the deposit tag reduces risk, these steps remain mandatory for compliant issuance:

1. Board Resolution: Every NCD issuance requires board approval. Section 179(3)(c) covers this.
2. Shareholder Resolution: If borrowing limits under Section 180(1)(c) are breached, approval by special resolution of shareholders is a must.
3. Section 186 (Loan and Investment Limits): Group-level cross-holdings are subject to these ceilings.
4. Section 42 and PAS Rules: Applies to private placements—including NCDs issued only to identified companies; ensures paper trail and regulatory vetting.
5. Section 71 and Debenture Rules: Debenture trust deed, appointment of debenture trustee (if >500 holders), and maintenance of debenture redemption reserve may arise.
6. Form PAS-3 and PAS-4: Reporting and offer documentation for NCDs.
7. DPT-3: Record all such receipts as 'amount not considered as deposit.'

Comparison Table: When Is an NCD Receipt a Deposit?

Penalties and Consequences if Misapplied

If a company wrongfully treats deposit receipts as exempt, the penal provisions under Section 76A kick in—exposing the company and officers to heavy fines and possible imprisonment.

Action Points for Companies Raising Intra-Group Funds via NCDs

• Ensure all investors are companies under the Act—restrict onward transfer.
• Complete all board/shareholder and private placement steps; maintain documentation.
• File Form DPT-3 every year, even for exempted (inter-corporate) NCD funding.
• Monitor legal definitions and transaction chains: a break in "company" status can retrospectively reclassify your funds as deposits and trigger penalties.

Uncertain Areas: Transfer to Non-Companies

While best practice is to restrict transfer of these NCDs to other companies, the law is not overtly explicit if a later transfer always invalidates the original exemption. There’s regulatory ambiguity, but to pre-empt future scrutiny or compliance risk, lock in transfer restrictions at the outset.

Key Bluman Takeaway

If you’re structuring intra-group funding via unsecured, unlisted NCDs, source-based exemptions offer valuable freedom—but only while all holders are companies. Failing to track this or report as required can dramatically increase your regulatory exposure.