Banning of Unregulated Deposit Schemes Ordinance, 2019: Brief Analysis

In a bid to save credulous investors from ponzi schemes, the Central government has banned unregulated deposit schemes, a move that may help tackling the menace of illicit deposit-taking activities. Pursuant to Banning of Unregulated Deposit Schemes Ordinance, 2019 now any Individual or group of individuals cannot take any deposit or loan from any person other than relatives, whereas partnership firms can take deposit or loan from relatives or partners only.

Why This Regulation ?

• In a bid to save credulous investors from ponzi schemes, the Central government has banned unregulated deposit schemes, a move that may help tackling the menace of illicit deposit-taking activities.
• Pursuant to this ordinance now any Individual or group of individuals cannot take any deposit or loan from any person other than relatives, whereas partnership firms can take deposit or loan from relatives or partners only.

Applicability

• It extends to the whole of India except the State of Jammu and Kashmir.

Unregulated Deposit Scheme

• As per section 2(17) unregulated deposit scheme 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, as specified under column (3) of the First Schedule.

Explanation-In my opinion

• Therefore, this Ordinance applies only to those Deposit takers who are in business of taking or accepting deposits and which are not regulated.
• In my opinion, those individual and small businesses whose business is NOT of taking or accepting deposits shall be out of purview of this Act.

Regulated Deposit Schemes?

• Regulated deposits schemes are specified under column (3) of the First Schedule to this Ordinance.

Deposits Means

• As per Sec 2(4), deposits means an amount of money received by way of advance or loan or an 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 form of specified service, with or without any benefit in form of interest, bonus, profit or in any other form.

What are receipts which shall NOT be treated as Deposits ?

• Sec 2(4) of this Ordinance also provides for exclusion to definition of Deposits.

Following receipts shall not be treated as Deposits :

1. Loans received from Scheduled Bank / Cooperative Banks / other Banking Company;

2. Loan / financial assistance received from Public Financial Institutions / NBFC Companies registered with RBI / Regional Financial
Institutions / Insurance Companies;

3. Amount received from appropriate Government / Statutory Authorities constituted under Act of Parliament or State Legislature;

4. Amounts received from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Government owned development financial institutions, foreign export credit collaborators, foreign bodies corporate, foreign citizens, foreign authorities or persons resident outside India subject to the provisions of the FEMA, 1999;

5. Capital contributions by partners of partnership firm or a LLP;

6. Loan received by individuals from their relatives or loans received by any partnership firm or LLP from the relatives of its partners;

7. Credit received by a buyer from a seller on sale of imoveable or immovable property

8.Amounts received by asset re-construction company registered with the RBI;

9.Any deposit made or amount accepted by political parties under the Representation of the People Act, 1951;

10. Payment received from the members of self help groups within the ceiling prescribed by State Government or Union Territory
Government;

11. Amount received in course of business, or for purpose of business and bearing a genuine connection to such business, including :

• amount received as advance or part payment for supply of goods / services and repayable if goods / services not provided;
• advance received in connection with sale of immovable property subject to terms specified under agreement or arrangement;
• security deposit against performance of contract of supply of goods / services;
• advance under long – term projects for supply of capital goods

For the purpose of this ordinance means relatives as per Companies Act, 2013 and which are as follows

• Member of HUF;
• Husband and Wife;
• Father (including Step-Father)
• Mother (including Step-Mother)
• Son (including Step-Son)
• Son’s Wife
• Daughter
• Daughter’s Husband
• Brother (including Step-Brother)
• Sister (including Step-Sister)

Banning of Unregulated Deposit Schemes

• On and from the date of commencement of this Ordinance,—

(a) the Unregulated Deposit Schemes shall be banned;
and

(b) no deposit taker shall, directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.

Certain scheme to be Unregulated Deposit Scheme.

• A prize chit or a money circulation scheme 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.

Fraudulent default in Regulated Deposit Schemes.

• No deposit taker, while accepting deposits pursuant to a Regulated Deposit Scheme, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.

Wrongful inducement in relation to Unregulated Deposit Schemes.

• No person by whatever name called 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.

Competent Authority.

• The appropriate Government shall, by notification, appoint one or more officers not below the rank of Secretary to that Government, as the Competent Authority for the purposes of this Ordinance.

Designated Court.

• The appropriate Government shall, with the concurrence of the Chief Justice of the concerned High Court, by notification, constitute one or more Courts known as the Designated Courts for such area or areas or such case or cases as may be specified insuch notification, which shall be presided over by a Judge not below the rank of a District and Sessions Judge or Additional District and Sessions Judge.
• No Court other than the Designated Court shall have jurisdiction in respect of any matter to which the provisions of this Ordinance apply.

INFORMATION ON DEPOSIT TAKERS

(1) The Central Government may designate an authority, whether existing or to be constituted, which shall create, maintain and operate an online database for information on deposit takers operating in India.

(2) The authority designated under sub-section (1) may require any Regulator or the Competent Authority to share such information on deposit takers, as may be prescribed.

OFFENCES AND PUNISHMENTS

(1) Any deposit taker who solicits deposits in contravention of section 3 shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which shall not be less than two lakh rupees but which may extend to ten lakh rupees.

(2) Any deposit taker who accepts deposits in contravention of section 3 shall be punishable with imprisonment for a term which shall not be less than two years but which may extend to seven years and with fine which shall not be less than three lakh rupees but which may extend to ten lakh rupees.

(3) Any deposit taker who accepts deposits in contravention of section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service, shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to ten years and with fine which shall not be less than five lakh rupees but which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in the Unregulated Deposit Scheme.