“Understand the concept of ‘Caution Money,’ its misuse, legal status, and the need for regulation. Explore regulations in India, legal cases, and compare international practices.”
‘Caution money’ is a sum of money that must be paid when renting property, using a service, etc. that will not be reimbursed if the renter damages the property or leaves a debt at the conclusion of the contract. The concept of caution money or security deposits are prevalent in Universities and Colleges where students are reimbursed that money for their good conduct. It is a kind of insurance against the damage of property which might take place in the event of an accident, specific liability is assigned, in the form of withholding the caution to pay for the damage caused, to the person who vitiates the property.
It is important to note that security deposits are only to act as an insurance and not as a source of revenue for the university or college. It is charged to safeguard the university’s interest in case of damage to the property and not to become a stream of income. The institution has no right to use those funds for any other purpose than the one specified above and is to be kept in a separate fund.
Caution Money in India
The practice prevalent with Indian Universities is returning the security deposit, contingent on the good conduct of the student but the issue with this practice is that the amount of the fund returned is the same after a period of 4 to 5 years, which is the average duration for technical courses in the country. Coupled with inflationary pressure the money returned is effectively lesser.
The interest accrued during this period is kept by the institutions and caution money being a substantial amount of money subsequently generates a significant interest over such a period of time. The whole of the interest being retained by institutions, private or public alike, amounts to profiteering from funds which have a very specific purpose. The universities owe the caution money and the interest accrued to the students, and it has perquisite value not to mention the various irregularities with the disbursement of caution money which is frequent.
To take an estimate, the National Law School of India University, Bengaluru charges Rs.18,000 as refundable caution money with a total number of 240 students per batch having 5 batches in total for their 5 year BA LLB(Hons.). The total fund comes to around 2.16 Crores. Assuming a 2.5% p.a. interest rate offered by most banks, the total interest earned by NLSIU would be around 5.4 lakhs per year. It is a significant sum which needs to be disbursed back to the students but instead it is used up as a source of income for the college.
Legal Status
There is no specific legislation which covers this particular issue or brings under its ambit security deposits. But there have been previous attempts to curb such misuse of the students funds. The Prohibition of Unfair Practices in Technical Educational Institutions, Medical Educational Institutions and University Bill, 2010 was introduced in the Lok Sabha but was not made into an act. The Bill seeks to prohibit specified unfair practices in technical and medical institutions and universities to protect the interest of students including demanding or paying capitation fee. Capitation fee refers to an illegal transaction in which an organization that provides educational services collects a fee higher than that approved by regulatory norms. We believe that the interest collected from the caution money could have been brought under its ambit and curbed.
In Islamic Academy of Education vs. State of Karnataka (2003), the Supreme Court in clear terms states that any money charged by the institute without statutory backing is liable to be struck down as arbitrary, unconstitutional and illegal. The Modern Dental College case and Indian School, Jodhpur case qualifies the ratio of Islamic Academy of Education and states that educational institutes must not indulge in commercialisation or profiteering activities, the students cannot be charged for services not rendered or for facilities not actually provided.
The University Grants Commission(UGC) issued a notification in 2018 clarifying the rules for refund of fees and non-retention of original certificates, the notification touched upon caution money stating that it should be returned in full to the students but further failed to comment on the interest aspect.
Various circulars have been issued by different state governments for the capping of caution money to be charged but the circulars mostly pertain to schools and therefore, a regulatory gap has been left with respect to governing the caution money charged by Universities and Technical institutes and on the interest accrued from them.
The modus operandi of the institutions can be challenged under the UGC guidelines, All India Council for Technical Education guidelines and Consumer laws which unequivocally state that the caution money should be fair and cannot be more than the actual cost of the things being gathered. Additionally, the institutions cannot charge or profit from a service which they have not provided.
Regulation in other Jurisdictions
The subject of caution money is governed by state laws in the United States of America and the policies of the educational institution and the relevant state legislation will determine whether or not a security deposit received by the institution will be refunded with interest.
In certain states, educational institutions are required to provide interest on security deposits kept for a specific amount of time. When an educational institution accepts a security deposit in these states, if the deposit is retained for a specific period of time—typically one year or more—the educational institution may be compelled to pay interest on the deposit. The obligation for educational institutions to pay interest on security deposits is not mandated by law in every state, nevertheless. In such states, an educational institution’s policy will determine whether or not it pays interest on a security deposit.
Some state policies are mentioned below:-
- Massachusetts: Educational institutes are required to pay interest on security deposits held for six months or more.
- California: Educational institutes are required to pay interest on security deposits held for more than one year, or in some cases, six months or more.
The United Kingdom has no specific regulation at this time pertaining to caution money in educational institutes, they do however have developed jurisprudence for security deposits in Tenancy laws.
An effective solution would be to deposit the funds in a Fixed Deposit(FD) with the tenure matching the duration of the course for each student. The student can be reimbursed the caution money with the interest from the FD under his name. This would lead to wealth creation for the student and ensure that the institutes do not use the caution deposit for any other purpose than intended. For the students leaving the college mid-course or leaving within a stipulated period, a reserve ratio from the total amount of caution money can be maintained in a savings account to meet such needs. This reserve ratio need not be more than 10% of the total caution money, considering the students leaving would be few in numbers, while the rest can be put away in FDs.
Caution money should be regulated and backed with proper legislation. No statutory guidance on issues lead to such malpractices and misuse of funds where institutions become commercialized rather than upholding standards of education.
Author Details – Hemant Tewari and Manjari Tripathi
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