Q.What is a Deposit Repayment Reserve Account? Explain the provisions relating to repayment of deposits.

A promise to repay a deposit is only as good as the money genuinely set aside to honour it, which is exactly what this reserve forces every deposit-accepting company to do.

Because a deposit is, in substance, an unsecured or only lightly secured promise by the company to repay money on a fixed future date, the Act and Rules build in safeguards to ensure that promise is genuinely kept.

The central safeguard is the Deposit Repayment Reserve Account, required as a condition under both Section 73(2) (member deposits) and Section 76 (public deposits). Every deposit-accepting company must deposit or invest, on or before the 30th of April each year, a sum not less than twenty per cent of the amount of deposits maturing during the following financial year, and this sum may be used only to repay those maturing deposits, never for any other corporate purpose. This forces the company to set aside real, ring-fenced funds well in advance of a deposit falling due; a company that fails to maintain this reserve is treated, for penalty purposes, exactly as though it had defaulted on the deposit itself.

A second, originally-parallel safeguard, deposit insurance, required a company to insure its deposits so depositors would recover their money even if the company failed. In practice, no general insurance product for company deposits has become available in the Indian market, so this requirement has largely fallen away in application, though it remains referenced in the Rules — an honest gap worth flagging rather than glossing over. …

Students frequently describe the Deposit Repayment Reserve as optional or as a general-purpose reserve, missing that it is a MANDATORY, ring-fenced fund usable ONLY for repaying maturing deposits. Confusing Form D …