## Creation of Charge on Secured Deposits

When a company issues secured deposits, the security must be backed by a charge on the company's tangible assets, executed in favour of a trustee for the depositors.

### Requirements

The charge must be created on tangible assets of the company.
The market value of the security (assets charged) must be not less than the amount of deposits secured.
A trust deed must be executed in favour of the Deposit Trustee at least 7 days before issue of the deposit circular or advertisement inviting deposits.
The deposit trustee holds the security in trust for the benefit of depositors.

## Disqualifications of a Deposit/Debenture Trustee

A person shall NOT be appointed as deposit trustee if he:

1. Is a director, KMP, or any other officer or an employee of the company or its holding, subsidiary or associate company.

2. Is indebted to the company or its subsidiary / holding / associate company.

3. Has any material pecuniary relationship amounting to not less than 2% of gross turnover with the company.

4. Has given any guarantee in respect of the principal debt secured by the deposit / debenture or interest thereon.

5. Is a relative of any promoter or director.

Worked example

### Example 1

Example: XYZ Ltd. wants to accept secured deposits of ₹2 crore from its members. The company proposes to charge its plant and machinery (market value ₹1.5 crore) as security and appoint Mr. P, brother of the Managing Director, as Deposit Trustee. Comment.

Answer: Two violations:

(i) The market value of security (₹1.5 cr) is less than deposits secured (₹2 cr) — the charge value must be at least equal to the secured amount.

(ii) Mr. P, being a relative of the MD (promoter/director), is disqualified from being appointed Deposit Trustee.

The company must charge additional tangible assets worth at least ₹50 lakh more and appoint an independent person as trustee.

⚠️ Common exam mistakes

Creating a charge on intangible assets (goodwill, trademarks) — only tangible assets qualify as security for deposits.
Executing the trust deed after issue of the deposit circular instead of at least 7 days before.
Appointing a related person or employee of the company as Deposit Trustee, ignoring the disqualifications.
Treating market value as written-down book value while testing the 'value of security ≥ deposits' rule.

Bare-Act text Rule 6 · Companies (Acceptance of Deposits) Rules, 2014 · click to expand

For the purposes of providing security, every company referred to in sub-section (2) of section 73 shall create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit trustee... within thirty days of acceptance of deposits.

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Creation of Charge for Secured Deposits and Debenture/Deposit Trustees

Worked example

⚠️ Common exam mistakes