Analysis of Banning of Unregulated Deposit Schemes Ordinance 2019

MCA has vide its notification dated 21^st February, 2019 notified an ordinance for banning the Unregulated Deposit Scheme with immediate effect. Ordinance is named ‘The Banning of Unregulated Deposit Schemes Ordinance, 2019‘.

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 whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form, but does not include – 

• Amounts received from Bank
• Amounts received from Public Financial Institution or NBFC
• Amount received from Government, from any other source whose repayment is guaranteed by Govt, from any statutory authority constituted under Parliament  or a state legislature
• Amounts received foreign Govt, foreign banks, foreign institutions etc.
• Amounts received from partners of Partnership Firm or LLP as Capital contribution
• Amounts received by Individual from his relatives as loan or amounts received by firm from relatives of its partner as loan
• Amounts received on sale of property
• Amounts received by assets re-construction company
• Amounts accepted by a political party
• Periodic payment made by the members of the self-help groups
• Amount collected for help purpose
• Amount received in the course of, or for the purpose of Business and bearing a genuine connection to such business including-(a) payment, advance for supply or hire of goods or provisions of services (b) advance received against immovable property under an agreement (c) Security or dealership deposit for supply of goods or services (d) advance under long term project for supply of capital goods provided that if the amounts received under option (a) to (d) become refundable, such amount must be refunded within 15 days otherwise will be treated as deposit.

Note: The above ‘Deposit’ definition cover Individuals, Proprietorship Concern, HUF, Partnership Firm, LLP, AOP, Trust, Co-operative Society.

For Companies, Deposit shall have meaning as defined in Companies Act, 2013 and regulated deposit means deposited accepted or permitted under Companies Act, 2013.

Deposit under In respect of NBFCs registered under RBI, the expression “Deposit” shall have the same meaning as assigned to it in clause (bb) of the Section 45-I of the said Act.

“Depositor” means any person who deposit under this Ordinance;

 “Deposit Taker” means-

• any individual or group of individuals;
• A proprietorship concern;
• a partnership firm (whether registered or not);
• a LLP;
• a company;
• an association of persons;
• a trust (being a private trust governed under the provisions of the Indian Trusts Act, 1982 or a Public trust, whether registered or not);
• a co-operative society or a multi-state co-operative society;
• any other arrangement of whatsoever nature, receiving or soliciting deposits, but does not include a corporation, banking company.

“Person” includes-

• an individual;
• a HUF;
• a company;
• a partnership firm;
• a LLP
• an AOP
• a co-operative society
• Every artificial juridicial person, not falling within any of the preceeding clauses.

Unregulated Deposit Scheme (UDS)means a Scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme i.e such deposit taking activities are not regulated by RBI, SEBI, MCA, IRDA, State Government or Union territory Govt, National Housing Bank, Pension Fund Regulatory and Development Authority, EPF Organization, Central Registrar Multi-State Co-operative Societies etc.

Transaction banned after commencement of this Ordinance (Section 3, 4, 5 & 6)–

1. all unregulated deposit scheme shall be banned

2. no deposit taker shall promote or advertise any UDS

3. In case of Regulated Deposit Scheme, no deposit taker shall fraudulently makes default in repayment of deposit on maturity or rendering any service against such deposit

4. False, wrongful or misleading inducement in relation to UDS

5. Chit fund and money circulation scheme shall be deemed to be an UDS

Competent Authority (CA) (Section 7)–

• The appropriate govt may appoint CA and such other person as the govt may think necessary to assist the CA.
• CA or officer has reason to believe that any deposit taker is soliciting deposit, he may, provisionally attach the deposits, money or other property acquired by the deposit taker.
• CA shall have the power to summon any person.
• Person summoned by CA shall bound to attend in person or through authorised representative.

Designated Court (Section 8) –

• Only Designated Court shall have jurisdiction in respect of any matter to which provisions of this Ordinance apply

Central Database (Section 9) –

Central Government may designate an authority to create, maintain and operate an online database for information on deposit takers.

Intimation of business by deposit taker (Section 10) –

• Every deposit taker which commences business on after commencement of this Ordinance shall intimate the authority about its business.
• If CA has reason to believe that the deposits are accepted pursuant to UDS, he may direct the deposit taker to produce such information as he may deem fit.

Information to be shared (Section 11) –

• The CA, the appropriate govt or any regulator shall share all the information in respect of the offence investigated under this Ordinance with CBI or police.
• Principal officer of banks shall forthwith inform the CA, if they have reason to believe that any client is operating under UDS.

Priority of Depositors Claim (Section 12) –

• Any amount due to the depositors from a deposit taker shall be paid in priority over all other debts and all revenues, taxes, cesses payable to appropriate govt or local authority.

Precedence of attachment (Section 13) –

• An order of provisional attachment passed by CA to the extent of claims of depositors, shall have precedence over any other attachment by any other authority for repayment of debts, revenues, taxes, cesses payable to appropriate govt or local authority.
• The CA shall open a bank account in scheduled bank to deal with the money realised under this ordinance which shall not be utilised except under the instruction of Designated Court.
• Without permission of designated court, CA can not dispose or alienate the property or money attached except perishable items.

Application for confirmation of attachment and sale of property (Section 14) –

• CA within 30 days which may extend to 60 days file an application before designated court for making the provisional attachment absolute and permission to sale the property by public or private auction.

Confirmation of attachment by designated court (Section 15) –

• The designated court shall issue a notice to

1. Deposit taker

2. Any person whose property is attached

to show cause, within a period of 30 days from the date of issue of notice, as to why the order of attachment should not be made absolute.

• The designated court shall, pass an order- a) making the provisional order of attachment absolute, b) may release a part of the property from an attachment, c) canceling the provisional order.
• Designated Court shall complete the proceedings within 180 days from the date of the receipt of the application.

Attachment of property of malafide transferees (Section 16) –

• Where the designated court has reason to believe that deposit taker has transferred any property otherwise than in good faith and not for commensurate consideration, it may, by notice, require any transferee of such property.
• If the transferee doesn’t appear and show cause on the specified date, designated court may order to attach property of the transferee equivalent to the value of consideration.

Payment in lieu of attachment (Section 17) –

Any deposit taker whose property has been attached, may at any time before confirmation of attachment apply to pay fair value of the property. Designated court may order to pay the cost of the proceeding.

Powers of Designated Court (Section 18) –

• Approve the statement of dues of deposit takers
• Assess the value the property of deposit takers
• Power to direct CA to take possession of property and to sell, transfer or realise the attached assets either by public or private auction and to approve the expenditure incurred for realisation of the property.
• Power to pass an order to CA for full payment to depositors or make proportionate payment to depositors in case money so realised is not sufficient to make the entire payment.
• Power to direct any person to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.
• Designated court on application by a person interested in any property attached may order CA to pay reasonable maintenance of the applicant and of his family and for expenses connected with the defence of the applicant and safeguarding the interest of any business.

For Section 18 “Deposit Taker” includes Directors, Promoters, Managers or Members of said establishment or any other person whose property or assets have been attached under this ordinance.

 Appeal to High Court (HC) (Section 19) –

Any person including CA, if aggrieved by order of Designated Court may appeal to HC within 60days of order.

Power of Supreme Court (SC) to transfer cases (Section 20) –

• The SC can direct to move a case from one designated court to another.
• The SC may act under this section only on an application filed by CA or any interested party.
• Power to order the applicant to pay for frivolous case not exceeding fifty thousand rupees.

Punishment for contravention of Section 3 (Section 21) –

• Imprisonment not less than 1 (one) year but which may extend to five years and fine not less than 2,00,000 (two lakhs) but may extend to 10,00,000 (ten lakhs) for soliciting unregulated deposits.
• Imprisonment not less than 2 (two) years but may extend to 7 (seven years) and fine not less than 3,00,000 (three lakhs) but may extend to 10,00,000 (ten lakhs) for accepting unregulated deposits.
• Imprisonment not less than 3 (three) years but  may extend to 10 (ten years and fine not less than 5,00,000 (five lakhs) but may extend to twice the amount of aggregated funds collected from the subscriber or participants in the unregulated deposit scheme for accepting unregulated deposits and frequently defaulting in repayment of such deposit or in rendering any specified services.

Punishment for contravention of Section 4(Regulated Deposit) (Section 22) –

Imprisonment may extend to 7 (seven) years or fine not less than 5,00,000 (five lakhs) but may extend to 25,00,00,000 (twenty five crores) or three time the amount of profits made out of the fraudulent default whichever is higher or with both for fraudulent default in the repayment or return of deposit on maturity or in rendering any specified services promised against such regulated deposit.

Punishment for contravention of Section 5 (Section 23) –

Imprisonment not less than 1 (one) year but which may extend to 5(five) years and fine which may extend to 10,00,000 (ten lakhs).

Punishment for repeat offenders (Section 24) –

Imprisonment shall not be less than 5 (five) years and which may extend to 10 (ten) years and with fine which shall not less than 10,00,000 (ten lakh) but which may extend to 50,00,00,000 (fifty crores).

Offences by deposit takers other than individuals (Section 25) –

• Every person who at the time of the offence was committed, was in charge of the deposit taker as well as the deposit taker, shall be deemed to be guilty of the offence.
• Above clause shall not be applicable, If a person proves that the offence was committed without his knowledge.
• Where an offence is committed by a deposit taker other than individual and it is proved that the offence-
• Has been committed with the consent
• Is attributable to any neglect on the part of any director, manager, secretary, promoter, partner, employee or other officer of the deposit taker

Such person shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

Punishment for contravention of Section 10(Intimation of business by deposit taker) (Section 26) –

If a person who fails to give intimation as required shall be punishable to fine which may extend to 5,00,000 (five lakh).

Cognizance of offence (Section 27) –

Notwithstanding anything contained in Sec 4, no designated court shall take cognizance of an offence under that section unless the complaint is made by the Regulator.

Provided that section 4 & 27 shall not apply if deposit taker is a company.

Offence to be cognizable and non bailable (Section 28) –

Every offence punishable under this Ordinance, except the offence under Section 22 and 26, shall be cognizable and non-bailable.

CA to be informed of offence (Section 29) –

The Police Officer shall, inform in writing of an offence to CA.

Investigation of offences by CBI (Section 30) –

• On receipt of information under Section 29 or otherwise, if CA has reason to believe that the offence relate to a deposit scheme where
• The depositor, deposit taker or the properties involved located in more than one state, union territory or outside India.
• Total value of the amount involved affect public interest at large.

Power to enter, search and seize without warrant (Section 31)–

• Whenever any police officer has reason to believe that any offence is conducting under this ordinance at any place within the limit of his Police Station, he may-
• Enter, search any building or premises between sunrise and sunset
• Break any door or remove any obstacle, if necessary by force
• Seize any record or property found as a result of search of said building or premises suspected to have been used for contravention of this ordinance.
• Detain, take into custody and produce before Designated court any such person whom he has reason to believe have committed any offence under this Ordinance.
• Where it is not practicable to seize the record or property, the officer authorised may freeze such account, property or valuable securities maintained by deposit taker. Provided that no bank account or property shall be freezed for more than 30 days unless the same has been authorised by Designated Court.
• The officer need to submit records in writing to Designated Court within 72 hours.

Application of code of Criminal Procedure, 1973 to proceeding before Designated Court (Section 32) –

• The Designated Court may take cognizance of offences under this Ordinance without the accused being committed to it for trial.
• Save as otherwise provided in Section 31, the provisions of the code of Criminal Procedure, 1973 shall apply-
  1. To all arrest, search, seizure made under this Ordinance
  2. Designated Court shall be deemed to be a Court of Session and the person conducting the prosecution before the Designated Court, shall be deemed to be Public Prosecutor.

Publication of advertisement of Unregulated Deposit Scheme(Section 33)  

Where any publication contains any false or misleading statement to induce any person to become a member of UDS, the appropriate govt may order the publication to publish full and fare retraction.

Ordinance have overriding effect (Section 34) –

Save as otherwise provided in this Ordinance, the provision of this Ordinance shall have effect notwithstanding anything contained in any other law for the time being in force including state or union territory law.

Application of other laws not barred (Section 35)

The provision of this Ordinance shall be in addition to and not in derogation of any other law for the time being in force.

Protection of action taken in good faith(Section 36)

No suit or prosecution lie against appropriate govt, CA or any officer for anything done under this Ordinance in good faith.

Power of CG to make rules (Section 37) –

• CG may by notification makes rules for carrying out the provisions of this Ordinance.
• Information and other particulars for attachment under sub-section 3.
• Information to be shared under sub-section (2) of section 9.
• The form and manner within which intimation shall be given under subsection (1) of section 10.
• The particulars contained in the application to be filed by the CA before the Designated Court under 14(1).
• The procedure to be adopted by Designated Court u/s 15(3)
• Rules u/s 31(1)
• The manner of publication of advertisement u/s 33
• Any other matter as may be prescribed

Power to State Govt etc to make rules(Section 38) –

• The SG or UG as the case may be in consultation with CG by notification makes rule for Ordinance.
• Without prejudice to the generality of forgoing power, such rules may provide for all or any of the following matters:
• Ceiling for self help group 2(4)(j)
• Ceiling and purpose 2(4)(k)
• The manner of provisional attachment of property by CA under 7(3)
• Other matters 7(4)(f)
• The rules relating to impounding and custody of records u/s 7(8)
• Any other matter which is required to be or may be prescribed.

Power to remove difficulties (Section 40) –

• CG has power to remove any difficulties within 3 years of commencement of this Ordinance
• Each order must be placed before each house of parliament

Power to amend First Schedule (Section 41) –

CG by notification may amend Fist Schedule.

Amendment to certain enactments (Section 42) –

The enactments specified in the Second Schedule shall be amended in the manner specified therein.

Disclaimer: This Blog is made available by me for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. This entire article is based on personal research. Further, valuable feedback(s) are welcomed.