Inter-Corporate Deposits (ICDs) under the Companies Act, 2013: Meaning, Legal Framework & Compliance

Introduction

In India’s corporate ecosystem, the difference between staying afloat and scaling up often comes down to how efficiently a company manages its cash flow. Businesses frequently face periods of temporary liquidity crunch or hold surplus funds waiting for deployment. In both scenarios, one of the most practical and legally recognized options available is the Inter-Corporate Deposit (ICD).

An ICD is not merely an informal financial adjustment between friendly companies; it is a structured short-term financing tool that allows one company to lend to another within a defined legal framework. While it may resemble a simple commercial loan in its form, it carries specific legal and compliance implications under the Companies Act, 2013and the Companies (Acceptance of Deposits) Rules, 2014.

The law treats ICDs with a mix of flexibility and caution: flexibility because companies can use them to balance liquidity and optimize returns; caution because, if structured incorrectly, they can blur into prohibited “deposits” or breach Section 186 limits.

This article explains in clear terms the meaning of Inter-Corporate Deposits, the statutory provisions that regulate them, the compliance obligations on both lending and borrowing companies, and the critical safeguards that must be observed to remain within the law.

What is an Inter-Corporate Deposit (ICD)?

An Inter-Corporate Deposit (ICD) refers to a short-term financial arrangement where one company lends money to another for a fixed period, typically ranging from seven days to twelve months. These transactions are widely used for short-term liquidity management, particularly in industries with cyclical cash flows or staggered payment cycles.

ICDs are distinct from public deposits. The Companies (Acceptance of Deposits) Rules, 2014—specifically Rule 2(1)(c)(vi)—explicitly exclude any loan or deposit made by one company to another from the definition of “deposits.” This exclusion is crucial: it means such transactions are not subject to the stringent requirements applicable to public deposits under Sections 73 and 76 of the Companies Act, 2013.

The primary controlling provision for ICDs is Section 186 of the Companies Act, 2013, which governs the manner in which companies can make loans, provide guarantees, and invest in securities. Section 186 lays down quantitative limits, procedural safeguards, and disclosure obligations to ensure such financial dealings are transparent, accountable, and within the bounds of good corporate governance.

In essence, ICDs offer companies a legally compliant route to manage short-term funding requirements—provided they are executed with due care, supported by board approvals, and properly disclosed in the financial statements.

Which Legal Provisions Govern ICDs in India?

The framework regulating Inter-Corporate Deposits (ICDs) in India is drawn from a combination of provisions under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014. Together, these laws ensure that financial transactions between companies remain transparent, accountable, and consistent with the broader objectives of corporate governance.

At the core of this framework lies Section 186 of the Companies Act, 2013, which governs loans, guarantees, and investments made by companies. This provision lays down quantitative limits, approval mechanisms, and disclosure requirements that every company must observe before extending financial assistance to another. In simple terms, it ensures that companies do not overextend themselves through inter-corporate lending or investment activities beyond what their capital structure can reasonably support.

Complementing this, Sections 73 and 76 of the Companies Act, 2013 regulate the acceptance of public deposits. These sections were enacted to safeguard investor interests and to prevent companies from misusing deposit mechanisms as a substitute for legitimate financing. Although ICDs might appear similar to deposits, they fall outside this category because they are transactions strictly between corporate entities, not between a company and the general public.

This distinction is formally recognized under Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, which expressly excludes any loan or deposit made by one company to another from the definition of “deposits.” The exclusion is significant because it exempts ICDs from the procedural rigour, filing requirements, and penalties associated with public deposit acceptance.

Read together, these provisions strike a careful balance: they permit companies to extend financial accommodation to one another when done responsibly, while maintaining strong safeguards against misuse. In effect, they make inter-corporate funding both lawful and traceable, ensuring that companies operate within prudent financial and governance boundaries.

What Are the Conditions for Giving an Inter-Corporate Deposit (ICD)?

While the Companies Act, 2013 gives companies the flexibility to extend short-term financial accommodation to one another, it does not do so without guardrails. Section 186 of the Act sets out the legal framework for granting loans, including Inter-Corporate Deposits (ICDs), and ensures that such transactions remain transparent, financially prudent, and within the company’s capacity.

The first condition relates to the overall ceiling on loans and investments. A company may lend, give guarantees, or make investments up to 60% of its paid-up share capital, free reserves, and securities premium, or 100% of its free reserves and securities premium, whichever is higher. This dual threshold acts as a prudential limit — protecting companies from overexposure and ensuring that they maintain a balance between lending and liquidity. If a company intends to exceed this statutory cap, it must first obtain shareholder approval through a special resolution. This additional layer of consent ensures that such decisions are made with wider oversight and accountability.

Next, the law requires prior approval of the Board of Directors before any ICD can be advanced. A formal Board Resolution under Section 186(5) must be passed, authorising the transaction and recording the rationale, amount, tenure, and terms of the deposit. This procedural safeguard embeds corporate governance into the very act of lending, making the decision both deliberate and documented.

The interest rate applicable to an ICD cannot be arbitrary. Section 186 stipulates that the lending company must not charge an interest rate lower than the prevailing yield on Government Securities (G-Secs) of comparable maturity. This requirement ensures that inter-corporate loans are priced fairly and not used as instruments of undue favour or related-party accommodation.

Further, the purpose of the ICD must be legitimate and aligned with the borrowing company’s principal business activities. The lending company bears a duty of reasonable assurance that the funds are not being diverted for speculative, unrelated, or prohibited purposes.

The Act also prohibits any company from granting ICDs if it has defaulted on repayment of existing loans or deposits. This “no default” condition serves as a credibility test — companies with unresolved obligations cannot extend financial assistance to others.

Finally, transparency is mandated through disclosure in the financial statements. Under Section 186(4), every company that grants ICDs must disclose full particulars of such loans in the notes to accounts, including the amount, purpose, and terms. These disclosures not only ensure auditability but also allow regulators, shareholders, and lenders to assess whether the company’s financial decisions are sound and compliant.

In essence, the law expects companies to exercise the same discipline in lending as they would in borrowing. When properly structured — with approvals, interest parity, and full disclosure — ICDs become a legitimate and efficient corporate finance tool rather than a compliance risk.

What Are the Conditions for the Borrower Company?

The responsibility for compliance in an Inter-Corporate Deposit (ICD) transaction is not limited to the lending company alone. The company receiving the deposit—often seeking short-term liquidity—must also observe specific legal and accounting obligations to ensure that the transaction remains within the framework of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

To begin with, only a company can accept an ICD. The law draws a clear line: inter-corporate deposits are permitted strictly between corporate entities, not between a company and individuals, directors, or shareholders. This distinction keeps ICDs outside the realm of public deposits and shields them from the compliance-heavy provisions of Section 73, which governs deposits accepted from the public.

From an accounting and governance perspective, the borrowing company must treat the amount received through an ICD as a loan liability, not as income or capital contribution. It should be appropriately classified under liabilities in the balance sheet, following the format prescribed in Schedule III of the Act. Proper classification is not merely a formality—it ensures that the company’s financial position is accurately represented to regulators, auditors, and potential investors.

Equally important is the intended use of funds. The borrowing company must deploy the ICD strictly for its principal business activities. Diverting the funds to unrelated ventures, speculative investments, or intra-group adjustments can raise serious compliance concerns and attract scrutiny from statutory auditors or the Registrar of Companies.

Transparency is further reinforced through disclosure requirements. The existence and particulars of the ICD—amount, source, tenure, and purpose—should be disclosed clearly in the company’s financial statements and in the Board’s Report under Section 134. Failure to make accurate disclosures or to classify such transactions correctly can lead to non-compliance under Section 129, exposing the company and its officers to penalties for misstatement of financial information.

In short, for a borrower, accepting an ICD is not just a matter of receiving funds—it is a matter of maintaining discipline, transparency, and legal integrity. A well-documented ICD, recorded with clarity and used for the right purpose, reflects sound governance and strengthens the company’s credibility before its stakeholders.

What Is the Typical Tenure and Documentation for Inter-Corporate Deposits (ICDs)?

Inter-Corporate Deposits (ICDs) are designed to meet short-term financial needs. In practice, their tenure generally ranges from six months to one year, though some companies opt for even shorter durations depending on liquidity cycles, repayment capacity, or the specific nature of the business relationship. The short tenure keeps ICDs flexible, cost-effective, and manageable within a single financial year—reducing long-term credit exposure and ensuring quick settlement.

While the concept of an ICD may appear straightforward, the documentation and formal approvals are what give it legal enforceability. Every ICD should be backed by a written Inter-Corporate Deposit Agreement (or Loan Agreement) executed between the lending and borrowing companies. This agreement serves as the contractual backbone of the transaction, detailing the commercial and legal terms that govern the arrangement.

A well-drafted ICD Agreement should clearly set out:

• the amount, tenure, and purpose of the deposit,
• the rate of interest and repayment schedule, and
• the provisions for default, penal interest, and early repayment if applicable.

Clarity at this stage minimizes disputes later and provides a documentary trail for auditors and regulators to verify the legitimacy of the transaction.

In addition, both the lending and borrowing companies must pass Board Resolutions authorizing the transaction. These resolutions—typically passed in duly convened Board meetings—record the company’s intent, compliance under Section 186, and confirmation that the ICD aligns with its business and financial policy. They also serve as internal evidence that the decision was made with full knowledge and approval of the company’s directors.

These layers of documentation—agreements, resolutions, and supporting disclosures—are not procedural burdens; they are compliance safeguards. They ensure that the ICD can withstand audit scrutiny, meet the expectations of statutory authorities, and be enforced in a court of law if required. In a well-governed company, every rupee lent or borrowed through an ICD should be traceable to a resolution, an agreement, and a disclosure note.

Are There Additional Rules for Related Party ICDs?

Yes. When an Inter-Corporate Deposit (ICD) takes place between related companies, it triggers an additional layer of regulatory scrutiny. The rationale is simple — transactions within a corporate group, or between entities that share directors or significant ownership, carry a higher risk of conflict of interest and potential misuse. To maintain transparency, such dealings are governed not just by Section 186, but also by Section 188 of the Companies Act, 2013, which specifically regulates Related Party Transactions (RPTs).

Section 188 requires that any financial transaction between related parties—whether it involves the sale of goods, provision of services, or lending and borrowing of money—must be conducted on an arm’s length basis and in the ordinary course of business. This means that even if two companies are part of the same group or share common management, the ICD must be justified commercially, priced fairly, and supported by documentary evidence that the terms mirror those offered to an unrelated entity.

In certain cases, depending on the nature and value of the ICD, the transaction may also require prior approval of the shareholders through a special resolution. The thresholds for such approval are set out in the Companies (Meetings of Board and its Powers) Rules, 2014, and must be carefully reviewed before finalizing the transaction. Non-compliance can render the ICD voidable at the option of the company and expose directors to penalties.

From an accounting perspective, every related-party ICD must comply with Accounting Standard (AS) 18 or Ind AS 24, which govern Related Party Disclosures. These standards require companies to disclose, in their financial statements, the nature of the relationship, the amount of the ICD, the terms and conditions, and any outstanding balances as of the reporting date. These disclosures are not mere formalities—they provide investors, auditors, and regulators with a transparent view of intra-group financial dealings.

In practice, it is good governance to evaluate related-party ICDs with a heightened level of diligence. Independent director review, legal vetting, and documentation of commercial rationale all help demonstrate that the transaction was undertaken responsibly. Because such deposits can easily be perceived as preferential or opaque, substance and process become equally important.

In essence, while related-party ICDs are not prohibited, they must be carefully structured, transparently disclosed, and defensibly justified. The closer the relationship between the entities, the higher the expectation of governance discipline.

Restrictions and Red Flags for Inter-Corporate Deposits (ICDs)

Despite their usefulness as short-term financing instruments, Inter-Corporate Deposits (ICDs) are not universally available to every company. The law—and sound governance practice—places several restrictions on who can give or accept these deposits. These limits are designed to ensure that companies do not misuse ICDs as a backdoor funding mechanism or expose themselves to financial or regulatory risk.

The first and most critical category of restrictions applies to Non-Banking Financial Companies (NBFCs). Since NBFCs are regulated by the Reserve Bank of India (RBI), any inter-corporate lending or borrowing by such entities must comply with RBI’s prudential norms and exposure limits. In most cases, NBFCs are prohibited from accepting ICDs altogether, as doing so can amount to accepting public deposits in disguise. Any non-compliance here can attract severe regulatory action, including cancellation of registration or monetary penalties.

Secondly, companies that have a negative net worth or have defaulted on repayment of existing loans or depositsshould refrain from giving ICDs. Extending financial assistance in such circumstances not only breaches prudence but may also contravene Section 186(8) of the Companies Act, 2013, which restricts companies in default from making further loans or investments. Even if not explicitly illegal, such conduct can be questioned by auditors and regulators as a violation of fiduciary responsibility.

Another red flag arises when a company is already holding public deposits under Sections 73 or 76 of the Act. In such cases, the company cannot simultaneously participate in ICD transactions unless explicitly permitted by law. This restriction exists to prevent financial layering, where funds raised from the public are re-lent to other companies without adequate oversight.

Beyond these specific prohibitions, prudence demands that companies assess their liquidity position, gearing ratios, and repayment capacity before entering ICD arrangements. An inter-corporate deposit made or accepted in haste—without a realistic assessment of cash flow or compliance impact—can quickly turn into a governance liability.

In short, ICDs are a legitimate financial tool, but they come with boundaries. Companies that ignore these restrictions risk not just regulatory penalties, but also reputational damage. A disciplined approach—backed by legal review, financial assessment, and Board oversight—is the surest way to use ICDs as an instrument of stability rather than exposure.

How Compliance Works in Practice

To understand how the compliance framework operates in an Inter-Corporate Deposit (ICD) transaction, consider a straightforward example involving two companies—A Ltd. and B Ltd.

A Ltd., the lending company, has surplus funds available for short-term investment. Before advancing the money as an ICD, it must ensure compliance with Section 186 of the Companies Act, 2013. This includes passing a Board Resolution authorizing the transaction and confirming that the total exposure on loans, guarantees, and investments remains within the statutory limits. If the proposed ICD pushes the company beyond its permissible threshold—60% of paid-up share capital, free reserves, and securities premium, or 100% of free reserves and securities premium, whichever is higher—shareholder approval by special resolution becomes mandatory.

The interest rate on the ICD must not fall below the prevailing Government Security (G-Sec) yield for a comparable maturity period, ensuring that the transaction is commercially fair and not a form of disguised financial accommodation. Finally, the particulars of the ICD—amount, purpose, and terms—must be disclosed in the notes to accounts of A Ltd.’s financial statements, as required under Section 186(4).

On the other side of the transaction, B Ltd., the borrowing company, must comply with Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014). This rule clarifies that ICDs accepted from another company do not constitute “public deposits.” Nevertheless, B Ltd. is obligated to record the amount as a loan liability in its books, disclose it appropriately in its balance sheet under Schedule III, and ensure that the funds are used strictly for business purposes.

In this example, both companies document the transaction through a formal ICD Agreement, pass the necessary Board Resolutions, and set a mutually agreed tenure—typically between six and twelve months. When executed with this level of discipline, the arrangement remains fully compliant, auditable, and defensible under Indian corporate law.

ICDs Are Useful — But Never Casual

Inter-Corporate Deposits (ICDs) continue to play a vital role in India’s corporate financing landscape. They allow companies to bridge short-term liquidity gaps, deploy surplus funds productively, and strengthen inter-company financial cooperation without the complexities of formal lending institutions. Yet, this flexibility comes with responsibility.

An ICD is not a casual loan—it is a regulated financial instrument governed by Section 186 of the Companies Act, 2013 and supported by the Companies (Acceptance of Deposits) Rules, 2014. Both the lending and borrowing companies must observe the law’s procedural rigor: Board approvals before disbursal, shareholder approval where limits are crossed, written agreements that clearly define terms, and transparent disclosures in financial statements. These steps are not bureaucratic hurdles—they are the foundation of financial integrity and corporate governance.

When structured correctly, ICDs provide a compliant and efficient alternative to traditional short-term credit. They help businesses maintain liquidity, improve working capital efficiency, and strengthen relationships within corporate groups—all while remaining within the boundaries of the law. However, when handled carelessly, they can expose companies to scrutiny from auditors, regulators, and shareholders, undermining both credibility and compliance.

In short, a well-governed ICD reflects a well-governed company. The key lies in treating every transaction not just as a financial arrangement, but as an act of governance—one that is documented, disclosed, and defensible.

About the Author

Prashant Kumar is a Fellow Member of the Institute of Company Secretaries of India (ICSI) and Partner at CSK & CO., , a full-service firm of Company Secretaries. With over 13 years of experience in corporate law, governance, and regulatory compliance, he has advised a wide spectrum of Indian and international clients on corporate transactions, legal structuring, and statutory compliance under the Companies Act, FEMA, and allied laws.

Prashant is recognized for his deep understanding of inter-corporate funding, private placements, related party transactions, and Board governance frameworks. Over the years, he has handled hundreds of corporate transactions—from strategic investments and group restructurings to complex compliance reviews—helping companies remain both legally sound and operationally agile.

As a practitioner and thought leader, he regularly writes and speaks on corporate, startup, and compliance reforms in India, simplifying complex legal concepts for business leaders, founders, and investors. His writing combines practical insight with professional clarity, reflecting his belief that good compliance is not about ticking boxes—it’s about building trust and credibility.

FAQ – Inter-Corporate Deposits (ICDs) under the Companies Act, 2013

1. Are Inter-Corporate Deposits (ICDs) considered public deposits under Indian law?
No. Under Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, ICDs made between companies are specifically excluded from the definition of public deposits. This means that inter-corporate deposits are not governed by the restrictions of Sections 73 and 76 of the Companies Act, 2013, which apply only to deposits accepted from the public.

2. What is the maximum limit for giving ICDs under Section 186 of the Companies Act, 2013?
A company can provide ICDs up to 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium, whichever is higher.
If the proposed ICD exceeds this ceiling, the company must obtain shareholder approval by special resolution before lending. These limits ensure financial prudence and prevent overexposure.

3. Can a private limited company accept an Inter-Corporate Deposit?
Yes. A private limited company can accept an ICD from another company, provided both entities comply with Rule 2(1)(c)(vi) and maintain proper documentation, Board approvals, and disclosures.
Since ICDs are exempt from the definition of public deposits, Section 73 (which governs public deposit acceptance) does not apply to such inter-company arrangements.

4. What should be the minimum interest rate on Inter-Corporate Deposits?
Under Section 186(7) of the Companies Act, 2013, the rate of interest on any loan, including ICDs, cannot be lower than the prevailing yield of Government Securities (G-Secs) with a similar maturity period. This provision ensures fair market pricing and prevents misuse of ICDs for related-party or preferential financing.

5. Are ICDs between related companies treated differently?
Yes. ICDs between related parties are subject to Section 188 of the Companies Act, 2013 and disclosure standards under AS 18 / Ind AS 24.
These provisions require the transaction to be conducted on an arm’s length basis, supported by Board approval, and in some cases, shareholder approval. The details must also be disclosed in the company’s financial statements and Board’s Report.

6. How should ICDs be disclosed in the company’s financial statements?
The lending company must disclose all ICDs in the notes to accounts under Section 186(4), including the amount, purpose, and terms.
The borrowing company should reflect the ICD as a loan liability in its balance sheet under Schedule III. Proper classification and disclosure are essential to demonstrate compliance and financial transparency.