Insure public deposits with firms, says panel

JJ Irani panel recommends amendment in companies act

The government is considering to make it mandatory for companies to take insurance cover for their public deposits. To this effect, a panel headed by former Tata Managing Director JJ Irani will be recommending amendments to the Companies Act.

"The depositors in the company fixed deposit scheme are treated as unsecured creditors and even when complaints are lodged with the government, the cases get stuck in legal wrangles and depositors are unable to get back their money. Once the insurance mechanism is in place the depositors will get their money and the litigations will be between the defaulting company and the insurer," an official told Business Standard.

The government has extended the term of the panel to April 30 to give it sufficient time to finalise the recommendations, based on which the government will introduce a Bill to form a new companies Act.

The panel is expected to examine issues relating to investor protection in its coming meetings.

"An internal committee set up by the ministry of company affairs is examining various options to provide a safety net for the depositors. The insurance could be mandatory up to a specific amount of deposit. Companies wanting to accept public deposits should be willing to bear the cost of insurance," the official added.

The existing Companies Act forbids defaulting companies from inviting fresh deposits. The law is expected to be further modified to clearly state that no new deposits can be accepted in case of default and that the disclosure guidelines for acceptance of deposits will be strengthened. The report of the internal committee will be placed before the Irani panel.

The company affairs ministry has recently introduced an online complaint-filing system on its website for depositors, shareholders or anybody who wish to lodge a complaint against the company.

The ministry has already received several complaint about defaults in fixed deposits. Firms like Morepen Laboratories and Rollatainers Ltd have promised the company law board that they will make repayments, but have continued to default.

DCM Finance Services has fixed deposits over dues for last seven years and investors are still writing to the government to recover their dues. Deposit insurance is mandatory in many countries like the US, the UK and Malaysia, and are largely state schemes.

The Irani panel, which is meeting three to four times a months, is seized with corporate governance issues and is extensively revamping the provisions to facilitate an effective and simple legislation.