Friends and Family Loans Under the Deposit Rules

I. Introduction

Before a private company raises its first institutional round, it is commonly sustained by informal capital. A founder advances personal savings to meet payroll, a parent or sibling transfers a sum to cover a quarter's rent, a former colleague lends against a promise of repayment with interest, and an early supporter remits money on the understanding that it will become equity once the paperwork is done. The parties usually call these loans, advances or bridge funding, and seldom document them with care. The Companies Act, 2013 attaches no significance to that description. It asks of every receipt of money whether it is a deposit, and it answers by reference to statutory categories rather than the understanding of the parties.

The answer carries weight because Chapter V of the Act, comprising Sections 73 to 76A, read with the Companies (Acceptance of Deposits) Rules, 2014 (the “Deposit Rules”), treats the acceptance of deposits otherwise than in accordance with its conditions as an offence carrying a minimum fine for the company and imprisonment for officers in default. For a private company the position is narrower still. Section 73(1) prohibits the acceptance of deposits from the public except in the manner provided in Chapter V, and the route under Section 76 for accepting deposits from the public is confined to eligible public companies. A private company may therefore accept deposits only from its members, and a receipt that is a deposit and comes from a non-member is unlawful from the day it is received. This article examines which forms of early capital fall within that rule and which escape it. The law is stated as it stands in October 2026.

II. The Definition of Deposit

Section 2(31) defines a deposit to include any receipt of money by way of deposit or loan or in any other form by a company, and to exclude such categories of amount as may be prescribed in consultation with the Reserve Bank of India. Rule 2(1)(c) of the Deposit Rules repeats the inclusive formulation and then sets out the prescribed exclusions in eighteen sub-clauses. The architecture is exclusionary. A receipt of money is a deposit unless it falls within one of the enumerated exclusions, and in practice the company that relies on an exclusion must be able to show that each of its conditions was met.

The structure has three consequences for informal funding. a) The description adopted by the parties is irrelevant. An interest-free advance from a well-wisher is as much a receipt of money by way of loan as an interest-bearing one, and neither the absence of interest nor the informality of the arrangement takes it outside the definition. b) Most exclusions are conditional, and a receipt that fails a condition falls back into the general definition, so that a director's loan unaccompanied by the prescribed declaration is a deposit in the same way as a loan from a stranger. c) Characterisation is not always fixed at the moment of receipt. Money received towards subscription to securities is excluded under Rule 2(1)(c)(vii) only so long as it is appropriated against allotment, and if the securities are not allotted within sixty days of receipt and the money is not refunded within fifteen days thereafter, the amount is treated as a deposit. Equity that an early supporter believes has been subscribed may thus become an unlawful deposit through nothing more than delay in completing the allotment.

III. Directors and Their Relatives

Rule 2(1)(c)(viii) excludes any amount received from a person who, at the time of receipt, was a director of the company or, in the case of a private company, a relative of a director. The exclusion is subject to a proviso. The director or relative must furnish to the company, at the time of giving the money, a declaration in writing that the amount is not being given out of funds acquired by borrowing or accepting loans or deposits from others, and the company must disclose the details of the money so accepted in the Board's report.

The relationship is tested at the time of receipt, so a lender who is appointed to the board afterwards does not bring an earlier advance within the exclusion. The declaration is contemporaneous by the terms of the proviso, and a declaration assembled when the annual return falls due does not satisfy a requirement framed by reference to the time of giving the money. The declaration must also be true. A founder who draws on a personal loan, an overdraft or a credit line and passes the money to the company cannot properly give it, and the receipt is then a deposit even though it came from a director. Disclosure in the Board's report is a further condition, and small companies that prepare a minimal Board's report frequently omit it.

The most consequential limitation lies in the meaning of relative. Section 2(77) defines the term by reference to membership of a Hindu Undivided Family, the relationship of husband and wife, and such other relationships as are prescribed, and Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014 prescribes father, mother, son, son's wife, daughter, daughter's husband, brother and sister, together with step-parents, step-sons and step-siblings. Uncles, aunts, cousins, nephews, nieces, grandparents and parents-in-law fall outside the definition, as do friends and former colleagues however close. The relationship must also be with a director. A co-founder who holds shares but does not sit on the board does not qualify, and money from that co-founder's parent receives no protection from the exclusion.

IV. Deposits From Members

Section 73(2) permits a company, subject to the passing of a resolution in general meeting and to the Deposit Rules, to accept deposits from its members on fulfilment of the conditions set out in its clauses. These include the issue of a circular to members stating the financial position of the company and its credit rating, the filing of that circular with the Registrar, the maintenance of a deposit repayment reserve, and a certification that the company has not defaulted in repaying earlier deposits. These conditions rarely suit a company in its first years.

The exemption notification issued under Section 462 on 5 June 2015 (G.S.R. 464(E)), as substituted on 13 June 2017 (G.S.R. 583(E)), disapplies clauses (a) to (e) of Section 73(2) for a private company that a) accepts from its members not more than one hundred per cent of the aggregate of its paid-up share capital, free reserves and securities premium account, b) is a start-up, for five years from incorporation, or c) is not an associate or subsidiary of another company, has borrowings from banks, financial institutions or bodies corporate of less than twice its paid-up share capital or fifty crore rupees, whichever is lower, and has not defaulted in repaying those borrowings. In each case the company must file the details of the money accepted with the Registrar. Rule 3(3) separately caps deposits from members at thirty-five per cent of the same aggregate, raises the ceiling to one hundred per cent for private companies, and removes it altogether for a start-up for ten years from incorporation and for a private company meeting the three conditions in c).

Two points follow from this structure. The first concerns timing. The ten-year period in Rule 3(3) was introduced by amendment in September 2020, but the exemption notification has not been conformed and continues to relieve start-ups from the procedural conditions for five years only. Between the fifth and tenth years, a start-up that relies on its start-up status alone is free of the quantitative cap but not of clauses (a) to (e), and must bring itself within the one-hundred-per-cent limb or the borrowing-based limb to avoid them. The second is that the exemption reaches only clauses (a) to (e). The resolution in general meeting required by the opening words of Section 73(2) lies outside it, a member deposit remains a deposit for every other purpose, and the depositor's right to repayment is enforceable before the Tribunal under Section 73(4).

The practical consequence is that a friend who holds even a single share stands in a different legal position from one who holds none. Bringing a lender into membership, however, requires an allotment that itself complies with Section 42 or Section 62 and the applicable valuation requirements, and the subsequent loan must still be reported as a deposit rather than as an excluded receipt.

V. Convertible Notes and Other Excluded Receipts

Rule 2(1)(c)(xvii) excludes an amount of twenty-five lakh rupees or more received by a start-up company by way of a convertible note, in a single tranche, from a person, where the note is convertible into equity shares or repayable within ten years from the date of issue. The ten-year period replaced the original five years by amendment in September 2020. A convertible note is defined as an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder or convertible into equity shares upon the occurrence of specified events.

The threshold operates per person and per tranche. A friends-and-family round assembled from several cheques of five or ten lakh rupees does not qualify, because the amounts cannot be aggregated across lenders, and a commitment of twenty-five lakh rupees remitted in instalments fails the single-tranche condition. There is also a textual difficulty. The Explanation to the sub-clause defines a start-up company by reference to recognition under notification G.S.R. 180(E) of 17 February 2016, which has since been superseded twice, most recently by notification G.S.R. 108(E) of 4 February 2026. The Deposit Rules have not been conformed. A Press Information Bureau document of February 2026 setting out Companies Act measures for start-ups continues to describe the exclusion as available, which supports reading the reference as one to recognition under the notification currently in force, but that reading rests on purpose rather than text. Where the noteholder is resident outside India, the instrument must also satisfy the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

Several other exclusions bear on informal funding. Rule 2(1)(c)(vi) excludes any amount received from another company, so that a loan routed through a founder's own company is not a deposit, although the lending company must satisfy its own obligations under Section 186. Rule 2(1)(c)(ix) excludes bonds or debentures compulsorily convertible into shares within ten years, which takes a properly issued compulsorily convertible debenture outside the definition. Rule 2(1)(c)(xiii) excludes unsecured loans brought in by promoters, or by their relatives, in pursuance of a stipulation imposed by a lending bank or financial institution, but only until that institutional loan is repaid. None of these covers a casual loan from a friend.

VI. Consequences of Contravention

Section 76A applies where a company accepts or invites a deposit in contravention of the manner or conditions prescribed under Section 73 or Section 76 or the rules made under them, or fails to repay a deposit or interest within the time allowed. The company is liable, in addition to repaying the deposit with interest, to a fine of not less than one crore rupees or twice the amount of the deposit accepted, whichever is lower, which may extend to ten crore rupees. Every officer in default is liable to imprisonment for a term which may extend to seven years and to a fine of not less than twenty-five lakh rupees, which may extend to two crore rupees. Where the officer acted knowingly or wilfully with intent to deceive the company, its shareholders, depositors or creditors, or the tax authorities, liability for fraud under Section 447 arises.

The exposure is sharper than the headline figures suggest. a) The company's minimum fine scales with the deposit, so that a loan of ten lakh rupees accepted unlawfully carries a minimum fine of twenty lakh rupees, while the officer's minimum fine of twenty-five lakh rupees does not scale at all. b) Since the amendment that took effect on 9 February 2018, the officer's punishment is imprisonment and fine rather than one or the other, and Section 441(6) renders an offence punishable with imprisonment and also with fine non-compoundable. c) In a small company with no managing director, whole-time director or other key managerial personnel, Section 2(60) brings every director within the description of an officer in default unless the Board has specified particular directors, with their consent, for the purpose. The offence is complete on acceptance. Repayment ends the continuing default but does not, on the text of Section 76A, undo a contravention that occurred when the money was taken.

The Banning of Unregulated Deposit Schemes Act, 2019 adopts, in relation to a company, the meaning of deposit under the Companies Act, and is directed at schemes under which deposits are accepted or solicited by way of business outside a regulated framework. An isolated loan from an acquaintance does not ordinarily bear that character. Informal borrowing solicited from a widening circle on a promise of returns moves towards it, and the consequences under that statute are independent of those under Section 76A. The Corporate Laws (Amendment) Bill, 2026, introduced in the Lok Sabha on 23 March 2026 and referred to a Joint Parliamentary Committee, proposes the decriminalisation of a range of procedural defaults. The provisions examined here remain in force in their present form.

VII. The Annual Return in Form DPT-3

Rule 16 of the Deposit Rules requires a company, other than a Government company, to file Form DPT-3 with the Registrar on or before 30 June each year, furnishing information as on 31 March. Rule 16A, inserted in 2019, requires the same form to carry particulars of money received that is not a deposit by reason of Rule 2(1)(c). The return therefore has two components, a return of deposits, which is to be accompanied by the certification of the company's auditor, and particulars of excluded receipts, each attributed to the specific sub-clause relied upon.

The obligation applies to a company that holds only excluded receipts, so that a director's loan supported by a proper declaration must still be reported. The return is also the point at which informal borrowing becomes visible to the Registrar. A member deposit must be reported as a deposit. A loan from a friend cannot be reported under any exclusion without misdescription, and a return that attributes a receipt to an exclusion whose conditions were not met is not merely inaccurate, since Section 448 attaches liability under Section 447 to a statement in a return that is false in a material particular and known to be false. For contraventions of the Deposit Rules for which the Act provides no specific punishment, Rule 21 attaches a liability of up to five thousand rupees to the company and every officer in default, with a further five hundred rupees for each day of continuing contravention, in addition to the additional fees payable on late filing.

VIII. The Choice of Route

The lawful routes differ less in their economics than in what each requires at the moment of receipt. a) A director lending own funds needs only to be a director when the money is given, to give a true written declaration at that time, and to have the loan disclosed in the Board's report, and there is no limit of amount. b) A relative of a director of a private company stands on the same footing, provided the relationship is one the Rules recognise and the relative gives the declaration. c) A member may lend only by way of deposit, within the limits and procedure of Section 73(2), and the loan is reported as a deposit with the auditor's certification. d) A lender to a recognised start-up may subscribe to a convertible note of twenty-five lakh rupees or more in a single tranche, under an instrument that meets the definition. e) A lender willing to hold equity or compulsorily convertible debentures leaves the deposit regime altogether, at the cost of a compliant allotment, a valuation and dilution of the founders.

In each case the protection attaches at the moment of receipt and depends on documents that exist at that moment. The declaration under Rule 2(1)(c)(viii) cannot be supplied afterwards, membership must precede the deposit, and a convertible note must be issued as such when the money is received. A receipt that was a deposit when accepted cannot be turned into an excluded receipt by later paperwork. The remedy for an existing unlawful deposit lies in prompt repayment, and not in a retrospective recharacterisation in the annual return.

Treatment of Common Sources of Informal Capital

IX. Conclusion

For a small private company the position can be stated plainly. Money from a director's own funds, supported by a written declaration given at the time and disclosed in the Board's report, is not a deposit. Money from a director's spouse, parent, child or sibling stands on the same footing, subject to the same declaration. Money from a shareholder who is not a director is a deposit, lawful only within the limits and procedure of Section 73(2) as relaxed for private companies, and reportable as a deposit. A convertible note of twenty-five lakh rupees or more, issued in a single tranche by a recognised start-up, is not a deposit. Money from anyone else, including friends, cousins, in-laws and former colleagues, is a deposit that a private company has no lawful means of accepting.

The consequences of getting this wrong fall on the founders personally. The company's minimum fine is twice the amount wrongly accepted or one crore rupees, whichever is lower, and each officer in default faces a minimum fine of twenty-five lakh rupees and a term of imprisonment that cannot be compounded. Every condition that keeps a receipt outside the definition, whether the relationship, the declaration, the membership or the instrument, must be in place when the money arrives. Whether a particular sum is lawful is therefore settled on the day it is received, and the annual return records that answer rather than altering it.