BAN ON UNREGULATED DEPOSIT SCHEMES

1.  BACKGROUND

The Lok Sabha
passed the “Banning of Unregulated Deposit Schemes Bill, 2019” on 13^th
February, 2019. As the said Bill could not be passed by Rajya Sabha before the
Parliament was dissolved, the Hon’ble President has issued an Ordinance called
“The Banning of Unregulated Deposit Schemes Ordinance, 2019”, on 21^st
February, 2019. This has come into force on 21^st February, 2019. The
main objective of the Ordinance is to provide for a comprehensive mechanism to
ban unregulated deposit schemes and to protect the interest of depositors. The
Ordinance contains a substantive banning clause which bans deposit takers from
promoting, operating, issuing advertisements or accepting deposits in any
unregulated deposit scheme. It creates three different types of offences, viz.,
Running Unregulated Deposit Schemes, Fraudulent default in Regulated Deposit Schemes
and Wrongful inducement in relation to Unregulated Deposit Schemes. There are
adequate provisions for disgorgement or repayment of deposits in cases where
such schemes have managed to raise deposits illegally. The Ordinance provides
for attachment of properties/assets of the deposit taker by the Competent
Authority and subsequent realisation of assets for repayment to the depositors.
However, there are some controversial provisions in the Ordinance which have
created some practical issues. In this article an attempt is made to discuss
some of the important provisions of this Ordinance.

2. UNREGULATED
DEPOSIT SCHEMES

(i)     Section 2(17) of the
Ordinance states that an “Unregulated
Deposit Scheme” shall mean a Scheme or an arrangement under which deposits are
accepted or solicited by any deposit taker by way of business. However, this
term does not include a deposit taken under the Regulated Deposit Scheme as
stated in the First Schedule to the Ordinance.

(ii)    Section 3 of the Ordinance
bans any Unregulated Deposit Schemes effective from 21^st February,
2019. In other words, no deposit taker can directly or indirectly promote or
issue any advertisement soliciting participation or enrolment in such a scheme.
Further, the deposit taker cannot accept any deposits in pursuance of an
Unregulated Deposit Scheme.

(iii)    Section 5 of the Ordinance
provides that no person shall knowingly make any statement, promise or forecast
which is false, deceptive or misleading in material facts or deliberately
conceal any material facts to induce another person to invest in, or become a
member or participant of, any Unregulated Deposit Scheme.

(iv)   Further, section 6 of the
Ordinance states that a Prize Chit or Money Circulation Scheme which is banned
under the provisions of the Prize Chits and Money Circulation Scheme (Banning)
Act, 1978, shall be deemed to be an Unregulated Deposit Scheme under this
Ordinance.

3. REGULATED DEPOSIT SCHEMES

(i)     The Ordinance does not apply to Regulated
Deposit Schemes as mentioned in the First Schedule to the Ordinance as under:  

(ii)    Section 4 of the Ordinance
provides that while accepting deposits pursuant to a “Regulated Deposit Scheme”
no deposit taker shall commit any fraudulent default in the repayment or return
of the deposit on maturity or in rendering any specified services promised
against such deposit.

(iii)    From the above provisions
for Unregulated Deposit Schemes it is evident that the terms (a) Deposit and
(b) Deposit Taker are important. It may be noted that merely because a person
is covered by the term “Deposit Taker”, or loan or advance is covered by the
term “Deposit”, it does not mean that such deposit taken by a deposit taker is
prohibited by the Ordinance. These two terms defined in the Ordinance are
explained in the following paragraphs.

4.     DEFINITION OF “DEPOSIT”

The term “Deposit” is defined in section 2(4) of the Ordinance as under:

(i)     Deposit

Deposit means an amount of money received by way of an advance or loan
or in any other form by any Deposit Taker with a promise to return the money
after a specified period or otherwise, either in cash or kind or in the form of
a specified service. This may be with or without any benefit in the form of
interest, bonus, and profit, or in any other form.

(ii)    Exclusions

However, the following transactions are excluded from the definition of deposit.

(a)    Loan from a Scheduled Bank,
Co-operative Bank or any other banking company as defined in the Banking
Regulation Act, 1949.

(b)    Loan or financial assistance
received from a notified Public Financial Institution, Regional Financial
Institution or insurance companies.

(c)    Amount received from a State
or Central Government or from any other source if it is guaranteed by the
government or from a Statutory Authority.

(d)    Amounts received from any
foreign government, foreign bank, multilateral financial institution, foreign
government-owned development financial institutions, foreign export
collaborators, foreign corporate bodies, foreign citizens, foreign authorities
or persons resident outside India (subject to provisions of FEMA, 1999), etc.

(e)    Amounts received as credit
by a buyer from a seller on the sale of any movable or immovable property.

(f) Amounts received by a recognised asset reconstruction company.

(g)    Any deposit made u/s. 34 or
an amount accepted by a political party u/s. 29B of the Representation of
People Act, 1951.

(h)    Any periodic payment made by
the members of the self-help groups recognised by the State Government.

(i)     Any amount collected for
such purpose as is authorised by the State Government.

(j)     An amount received in the
course of or for the purpose of business and bearing a genuine connection to
such business. This includes the following receipts:

(i)     Payment or advance for
supply or hire of goods or services.

(ii)    Advance received in
connection with consideration of an immovable property.

(iii)    Security or dealership
deposit for contract for supply of goods or services.

(iv)   Advance received under
long-term projects for supply of capital goods.

The above receipts are subject to the following conditions:

•    If the above amounts become refundable,
  such amount shall be deemed to be deposits on the expiry of 15 days, if not
  refunded within 15 days.

•     If the above amount becomes refundable due
  to the Deposit Taker not obtaining necessary permission or approval under the
  law to deal in goods or properties or services for which the money is taken, it
  will be treated as a ‘Deposit’

(k)    Amount received as
contribution towards the capital by partner of any partnership firm or LLP.        

(l)     Amounts received by an
Individual by way of loan from relatives or amounts received by a firm by way
of loan from relatives of any of its partners.

For the above purpose the term “relative” is defined to mean any one who
is related to another if they are members of an HUF, or is husband, wife,
father, mother, son, son’s wife, daughter, daughter’s husband, brother, or
sister of the individual.

It may be noted that this is a very restricted definition as brother’s
wife, sister’s husband, nephew, niece, mother-in-law, father-in-law or near
relatives of spouse are not considered as relatives.  Therefore, any loan or advance received from
such persons will be treated as a deposit.

5.     DEPOSIT TAKER

Section 2(5) of the Ordinance states that a “Deposit Taker” means (i) An
Individual or a Group of Individuals, (ii) A proprietorship Concern, (iii) A
Partnership Firm, (iv) An LLP, (v) A company, (vi) AOP, (vii) A Trust – Private
Trust or Public Trust, (viii) Co-operative Society or a Multi – State
Co-operative Society, (ix) Any other arrangement of whatsoever nature. However,
this term does not include (a) A Corporation incorporated under an Act of Parliament
or a State Legislature or (b) a Banking Company, SBI, a subsidiary bank, a
regional rural bank, a co-operative bank, or a multi- state co-operative bank.

6.     IMPACT OF THE ORDINANCE ON CERTAIN DEPOSITS

Some practical issues arise from the above provisions of the
Ordinance.  As stated above, if any loan,
advance or deposit is taken by a person who falls in the list of Regulated
Deposit Schemes the provisions of the Ordinance will not apply.  Further, merely because a loan, advance or
deposit falls within the definition of ‘Deposit’ given in the Ordinance it does
not mean that it is to be considered as a deposit under the Unregulated Deposit
Scheme.  What is prohibited under the
Ordinance is a loan, advance or deposit taken under the “Unregulated Deposit Scheme”
as defined in section 2(17) of the Ordinance. 
In other words, if the deposit taker is not operating any scheme under
which deposits are accepted by way of business, such deposit will not be
considered as a deposit under Unregulated Deposit Scheme.  Accepting deposit by way of business would
mean that the business of the deposit taker is to accept deposits and give the
money as loans to others (i.e. Money-Lending or Finance business). 

In the light of the above, some of the practical issues are discussed
below:

(i)     If an Individual takes a
loan of Rs. 50 lakh from his friends for construction of his house, such loan
is not prohibited by the Ordinance although such loan is considered as a
deposit u/s. 2(4) of the Ordinance.  This
is because under the definition of the term “Unregulated Deposit Scheme” only
such deposit which the deposit taker takes by way of business is
prohibited.  In other words, if the
deposit taker is taking loans, advances or deposits for his money-lending or
finance business and such business is not covered by the definition of
Regulated Deposit Schemes, it will be considered as a deposit under the
Unregulated Deposit Scheme.

(ii)    If an Individual, Firm or
LLP takes any loan, advance or deposit of Rs. 1 crore from any person (including
a partner of the firm or LLP or a non-relative of such partner) as working
capital for the manufacturing or trading business, it is not prohibited by the
Ordinance.  The reasoning is the same as
stated in (i) above as the person taking such loan, advance or deposit is not
taking the same for the business of taking deposits.  Further, the deposit taker cannot be
considered as having advertised or solicited for taking loans, advances or
deposits.  Such receipt is in the course
of, or for the purpose of, business and bearing a genuine connection to such
business and therefore will not be considered as a ‘Deposit’ u/s. 2(4) of the
Ordinance.

(iii)    If an LLP engaged in
construction of residential flats takes an advance from the prospective
customers against promise to allot residential flats after construction, the
said advance cannot be considered as a deposit taken under the Unregulated
Deposit Scheme. This is because the advance is not taken for the purpose of
business of taking deposits as stated in (i) above.

(iv)   If an individual carrying on
business of money-lending has taken loans, advances or deposits from relatives
he will not be considered as  having
contravened the provisions of the Ordinance since such  loans, advances or deposits do not come within
the definition of ‘Deposit’ u/s. 2(4) of the Ordinance. The same will be the
position if such loans, advances or deposits are taken from relatives of a
partner of a partnership firm.  However,
if such loans, advances or deposits are taken from relatives of any partner of
an LLP carrying on money-lending business, which is not falling within the
definition of Regulated Deposit Scheme, the LLP will be considered as violating
the provisions of the Ordinance.  This is
because deposits from a relative of a partner of an LLP is not excluded from
the definition of a deposit under the Ordinance.

(v)    Amounts received by way of
contributions towards the capital by partners of any partnership firm or an LLP
are not considered as ‘Deposit’ u/s. 2(4) of the Ordinance.  A partnership deed of any partnership firm or
LLP specifies the initial contribution to be made by partners towards
capital.  Further, the deed also provides
that further contribution of money shall be made by the partners in such manner
as may be mutually agreed upon by the partners. 
Therefore, it is possible to take the view that any further funds
brought in by the partners in the partnership firm or LLP will be considered as
contribution towards capital by partners. 
Further, even if the amount received from a partner is considered as a
‘Deposit’ u/s. 2(4) of the Ordinance, it will not be considered as a deposit
under Unregulated Deposit Scheme if the partnership firm or LLP is not carrying
on money-lending or finance business.

(vi)   If a company is accepting
deposits from public and is complying with Chapter V  (Acceptance of Deposits by Companies) of the
Companies Act, 2013, such deposits will not be considered as deposits under
Unregulated Deposit Scheme.

(vii)   If an LLP engaged in manufacturing business takes
a loan of Rs. 2 crore from a partnership firm carrying on Money-Lending
Business, the provisions of the Ordinance will not apply.  This is for the  reason that the  term ‘Deposit’ in section 2(4) of the
Ordinance does not include any amount received in the course of or  for the purpose of business of LLP and having
a genuine connection to the business.

(viii)  If a subsidiary company
takes a loan from its holding company it will not be contravening the
provisions of the Ordinance. This is because u/s. 2(4) of the Ordinance
‘Deposit’ taken by a company is given the same meaning as assigned to it in the
Companies Act, 2013. Section 2(31) of the Companies Act read with Rule 2(1) (c)
(vi) of the Companies (Acceptance of Deposits) Rules, 2014 provides that “Any
amount received by a company from any other company is  not to be considered as a deposit.

(ix)   If a buyer of goods receives
credit of 45 days from the seller, the same will not be considered as an
Unregulated Deposit and the Ordinance will not apply to such credit.  This is because such credit is not considered
as a Deposit u/s. 2(4) of the Ordinance.

(x)    Section 3 of the Ordinance
bans the Unregulated Deposit Schemes w.e.f 21^st
February, 2019. It also prohibits, w.e.f. 21^st
February, 2019, any deposit taker from,
directly or indirectly, promoting, operating, issuing any advertisement or
accepting deposits in pursuance of an Unregulated Deposit Scheme.  This will mean that a Deposit Taker cannot
take any fresh deposit under such scheme on or after 21^st
February, 2019.  However, it is not clear from this section as
to what is the position of the deposits already taken before 21^st
February, 2019 under any Unregulated Deposit
Scheme.  This issue — whether the Deposit
Taker has to refund such outstanding deposits to the depositor and, if so,
within what period? — requires clarification from the government.

7.     COMPETENT AUTHORITY

(i)     The provisions of the
Ordinance are to be administered by the State Governments and the Union
Territories (Appropriate Governments). Section 7 of the Ordinance authorises
the Appropriate Governments to appoint one or more officers (not below the rank
of Secretary to that government) as a Competent Authority.

(ii)    Where a Competent Authority
has reason to believe, on the basis of the information and particulars as
prescribed by the Rules, that any Deposit Taker is soliciting deposits in
contravention of the provisions of the Ordinance, he may provisionally attach
the deposits held by the Deposit Taker. 
He may also attach the money or other property acquired by the Deposit
Taker or any other person on his behalf. 
The procedure for such attachment will be as prescribed by the Rules.  

(iii)    For the above purpose the
Competent Authority is vested with the powers of the Civil Court under the Code
of Civil Procedure, 1908. While conducting the investigation or inquiry he can
exercise this power for (a)  discovery
and inspection, (b) enforcing attendance of any person, (c) compelling the production
of records, (d) receiving evidence on affidavits, (e) issuing commission for
examination of witnesses and documents, 
and (f) any other matter which may be prescribed  by the Rules.

(iv)   Except for the offences u/s.
4 (fraudulent default under Regulated Deposit Schemes) and intimation to be
given about accepting deposits u/s. 10, all other offences under the Ordinance
shall be cognisable and not-bailable. In other words, for these offences any
police officer can book a case on receipt of an FIR without waiting for a
magistrate’s order. The police officer has, then, to inform the Competent
Authority. On receipt of such information, the Competent Authority shall refer
the matter to CBI if the offence relates to a deposit scheme involving
depositors or properties located in more than one State or Union Territory or
outside India and the amount involved is of such magnitude as to significantly
affect public interest.  

(v)    The proceedings before the
Competent Authority shall be deemed to be judicial proceedings u/s. 193 and 288
of the Indian Penal Code.  In other
words, the Competent Authority will have to conduct the proceedings as per the
Rules to be prescribed and on the basis of principles of natural justice.

(vi)   U/s. 9(1) the Central
Government is required to designate the Authority to maintain and operate an
online database for information on Deposit Takers operating in India.  This Authority may require any Regulator
(SEBI, RBI, IRDA, State Government, Union Territory, etc.,) or the Competent Authority
to share such information about Deposit Takers as may be prescribed.  Similarly, section 11 of the Ordinance
provides that all other authorities such as Income tax  authorities, banks, regulators or any investigating
agency has to share information about any offence by a Deposit Taker with the
Competent Authority, CBI, police, etc.

(vii)   Section 10 of the Ordinance
provides that every Deposit Taker who commences or carries on its business as
such on or after 21^st February, 2019 shall intimate the Authority appointed by the
Central Government u/s. 9(1) of the Ordinance about its business in the
prescribed form.  It may be noted that
this form is required to be filed by any Deposit Taker who accepts or solicits
deposits as defined u/s. 2(4) of the Ordinance. Further, this form is to be
filed by a company which accepts deposits under Chapter V of the Companies Act,
2013. In other words, the form is required to be filed even if the deposits
taken by the Deposit Taker are under unregulated Deposit Scheme or not.

(viii)  It may be noted that the requirement of
furnishing information u/s. 10 of the Ordinance is going to be onerous as it
applies to almost all persons who are carrying on any business of manufacturing
goods, trading in goods, money lending, financing, rendering of services, etc.
The definition of ‘Deposit’ in 2(4) of the Ordinance includes any loan or
advance. Therefore, any person engaged in business or profession receiving
loan, advance or deposit, as stated in Para 3 and 4 above, will have to furnish
the information in the prescribed form to the Authority appointed u/s. 9(1) of
the Ordinance. Even a company accepting fixed deposits as specified under
Chapter V of the Companies Act, 2013 has to comply with this requirement. It is
not clear as to whether this information is to be given only once or every year
on an ongoing basis. We will have to await the relevant rule to be prescribed
or any clarification from the government.

8.     DESIGNATED COURTS

(i)     Section 8 of the Ordinance
provides that the appropriate government shall constitute one or more courts
which will be called “Designated Courts” to deal with the cases relating to
contravention of the provisions of the Ordinance.  No other court shall have jurisdiction in respect
of matters relating to the provisions of the Ordinance.

(ii)    The Competent Authority,
within a period of 30 days (which may be extended to 60 days for the reasons to
be recorded in writing) from the date of provisional attachment of the
property, as stated in Para 7(ii) above, has to file an application to the
Designated Court for confirmation of the attachment and for permission to sell
the property so attached by public auction or by private sale.

(iii)    On receipt of such
application the Designated Court has to issue notice to the Deposit Taker, the
person whose property has been attached and other concerned persons to show
cause within 30 days as to why the attachment should not be confirmed and  these properties should not be sold.

(iv)   The Designated Court, after
adopting the established procedure, has to pass an order confirming the
attachment or such other order as it deems fit. 
The Designated Court can also pass an order that either entire or part
of the attached property may be sold by the Competent Authority by public
auction or by private sale.

(v)    The Designated Court can
pass an order or issue directions, as may be necessary, for equitable
distribution amongst the depositors of money attached or realised from the sale
of attached properties.

(vi)   When the default relates to
one or more Unregulated Deposit Schemes which are investigated by CBI, the
Supreme Court can direct that the case be transferred from one designated court
to another designated court.

(vii)   Section 15 of the Ordinance
provides that the Designated Court shall endeavour to complete the above
proceedings within a period of 180 days from the date of receipt of the
application from the Competent Authority.

(viii)  Any aggrieved person who is
not satisfied with the order of the Designated Court can file an appeal before
the High Court against the said order within 60 days of such order. The High
Court may entertain any appeal  filed after the above period if sufficient cause for the delay is explained.

9.     PUNISHMENT
FOR OFFENCES

Sections 21 to 27 of the Ordinance
provide for punishment for contravention of the provisions of the Ordinance as
under:

10.   TO SUM UP

(i)       The
present Ordinance banning Unregulated Deposits Scheme has been issued after
detailed consideration at various levels. The Standing Committee on Finance
(SCF) presented its report on the subject of “Efficacy of Regulation of
Collective Investment Schemes, Chit Funds, etc.” in the Lok Sabha.  The SCF had issued this report after
consultations with various ministry officials and other stakeholders.

(ii)    The Central Government had
appointed an Inter-Ministerial Group to identify gaps in the existing regulatory
framework for deposit-taking activities and suggest administrative / legal
measures and also to draft a new legislation to cover all aspects of deposit
taking.

(iii)    The report of this
Inter-Ministerial Group was made public for public comments.  After detailed consideration a Bill to ban
Unregulated Deposits Schemes was introduced in the Lok Sabha on 18.7.2018. The
Bill was referred to the SCF on 10.8.2018. It was only after consideration of
the SCF report that the Bill was passed by the Lok Sabha on 13.02.2019.

(iv)   From the above it is evident
that a lot of thought has gone into the drafting of this legislation. It is
only because the Rajya Sabha could not pass this Bill, before the Parliament
was dissolved, that the Hon’ble President has issued this Ordinance on 21^st
February, 2019. Let us hope this Ordinance is approved by both Houses of
Parliament after the elections.

(v)    Reading the provisions of the
Ordinance it appears to be very harsh. But considering the fact that many
ill-informed persons get lured by attractive schemes for deposits floated by
unscrupulous persons, the government has considered it necessary to enact this
legislation in order to protect the interests of small depositors. 

(vi)   An issue which requires
clarification is about the position of such Unregulated Deposits Schemes
started before 21.2.2019. There is no specific mention about the same. There is
also no provision for refund of money to depositors of such existing schemes
within a particular period. Let us hope that the government will issue
clarification in this matter. 

(vii)        Section 10 of
the Ordinance requiring every person carrying on business or profession of
receiving loans, advances or deposits to report to the Authority to be
appointed by the government in the prescribed form, is going to be an onerous
exercise. Whether the form is to be filed only once or every year on an ongoing
basis is not clear. This requirement and certain other procedural requirements
under the Ordinance are dependent on the rules to be prescribed by the
government. We have to wait for these rules which are likely to be issued
shortly.