Government has tweaked the rules governing acceptance of deposits by companies, a move that provides more flexibility for startups in garnering funds.

Besides, entities have been given more time to have deposit insurance in place.

The latest amendments to certain rules under the Companies Act is expected to further improve the ease of doing business by way of lesser procedural requirements and increased flexibility.

In this regard, the Corporate Affairs Ministry has made changes to the Companies (Acceptance of Deposits) Rules.

Corporates have been allowed to accept deposits without deposit insurance contract till March 31, 2017 or till the availability of such a deposit insurance product, whichever is earlier.

Under the companies law, there should be insurance contract for deposits taken.

Now, money up to Rs 25 lakh received by startups by way of convertible note in a single tranche from a person would not be considered as deposit under the companies law.

This would be applicable on convertible notes that can be converted into equity shares or repayable within five years.

This comes amid larger government efforts to encourage more startups in the country.

According to the Ministry, all companies would have to disclose in their financial statements — by way of notes — money received from a director.

This would not be applicable for private companies or those having a minimum paid-up share capital of Rs 1 lakh.

A senior official said the norms are being rationalised and in some areas it is being eased.

Advisory firm Corporate Professionals said the amendments provide a “much needed respite to the industry which is facing huge liquidity related issues”.

The exemption of amount received by startups from the category of deposits would bring down the procedural requirement as well as facilitate the ease of raising funds, it added.

Further, any amount received as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement has been exempted from the category of deposits.

This would be subject to the condition that the period for providing such services does not exceed five years from the date of accepting such services whichever is less, as per the revised rules.

Source: The Economic Times