Demystifying Banning of Unregulated Deposit Schemes Ordinance, 2019

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Background:

There has been a lot of hue and cry on the recent ordinance as introduced by the government on the unorganized and unregulated field of Ponzi Deposit Schemes and Arrangements. These Ponzi Schemes eat into the hard earned savings of small and uneducated investors. Our current laws do not provide much regulatory protection to them, unlike the investors in the organized shares and securities market where SEBI provides adequate protection. India, which has a significant illiterate and unaware population, has many incidents where many people fall prey to such schemes.

The Banning of Unregulated Deposits Scheme Ordinance puts a check on illicit deposit schemes that dupe investors and does not prohibit any schemes regulated by statutory authorities as mentioned in Column – 3 of the First Schedule to the Ordinance.

The promulgation and publication of this ordinance into the public domain has created a perception where it is very easy to misunderstand the objectives of the law, especially when the Ordinance went viral in the social media along with superfluous and flippant comments attached to them. It is easy to understand as to why such panic was spread as regards the Ordinance. However, the analysis of the agencies causing the panic and their motivations are beyond the scope of this paper.

In an official tweet, the Department of Financial Services has clarified that the ordinance exempts Individuals, Firms, Companies and LLPs for taking any loans and deposits in the course of their business as per section 2(4) and other such provisions. However, despite such clear official communication from the authorities, there were perceptions out of proportion with the law. Responsible news agencies viz. The Hindu, The Financial Express, The Indian Express and other such similar agencies have made efforts to put the ordinance into the correct perspective.

It is in this backdrop, there is a need to inform the public at large of the Substantively Operative and Penal provisions of the ordinance in a demystified manner. While doing so, the administrative portions of the Ordinance have been discussed on low key basis so as to make it easy for the layman.

I. The Banning Of Unregulated Deposit Schemes – Introductory:

On 21^st February, 2019, Hon’ble President Ram Nath Kovind promulgated the Banning of Unregulated Deposit Schemes Ordinance, 2019. The Lok Sabha passed this bill on the 13^th February, 2019, the final day of the budget session, by a voice vote. However, the legislation could not get the approval of the Rajya Sabha, as it was not in session on that day. Thus, the law was promulgated in the form of an Ordinance, which was approved by Union Cabinet. The motive and purpose of the Ordinance has been supported by the “Statements of Objects and Reason” accompanying the Ordinance – wherein certain schemes have been mentioned as demonstrative of the pain experienced by the Indian Population.

II. The Substantive Law – Banning Of Unregulated Deposit Schemes – Chapter II:

Chapter II, vide sections 3 to 6 are the substantively operative portion of the ordinance which contain the objective mandate towards two kinds of Deposit Schemes i.e. Unregulated Deposits Schemes and Regulated Deposits Schemes. Section 3 has been reproduced hereunder to understand it convincingly.

1. Section 3(A) – Unregulated Deposit Schemes Shall Be Banned:

Section 3(a) says that the Unregulated Deposit Schemes shall be banned on and from the date of commencement of this ordinance. This requires us to know what is an Unregulated Deposit Scheme and this phrase is defined vide section 2(17) of the Ordinance. Let us look at the definition.

On reading the definition of Unregulated Deposit Scheme (“UDS” for Convenience), we will be able to draw out the following important ingredients for our analysis and understanding.

√ UDS Is A Scheme Or An Arrangement

Acceptance of deposits, across the board, are not sought to be regulated by this Ordinance. Only UDS, which are accepted or solicited as a part of some such Scheme / Arrangement of accepting or soliciting Deposits, are only a subject matter of banning by this Ordinance.

√ Deposits Are Accepted Or Solicited By Any Deposit Taker By Way Of Business

It is clarified here that, only when the acceptance of or solicitation of Deposits by anyone as a part of some Scheme or Arrangement is done by way of business, does it become a UDS. Thus, by implication, it can be seen that, taking deposits or soliciting them has to be the sole business goal of the Deposit Taker and that deposit taking or soliciting them is the primary business function.

The term business is not defined in this Ordinance. However, there are many fiscal laws defining the term and so it is easy to ascertain whether a person has been accepting deposits to pursue his own Business (Say for Manufacturing Widgets) or was accepting or soliciting them by way of business (i.e. the business of accepting or soliciting deposits as a part of the scheme or arrangement).

Under various statutes, while dealing with the term Business, the courts have resorted to scrutinizing parameters like frequency of transactions, regularity of conduct, profit / commercial motives, adventure in the nature of commerce, and so on and so forth. When a term is not defined in any statute, it becomes a subject matter of judicial interpretation. However, until then, we have to interpret the term on the basis of the meaning assigned to it in similar or dissimilar fiscal or non-fiscal laws. In this case, we see that the only obvious interpretation of the word business and its use in the ordinance is that, the Ordinance seeks to ban only those Unregulated Deposit Schemes operated by Deposit Takers whose business it is to accept deposits or promote deposit schemes by solicitation through advertisements etc.

√ UDS Is Not A Regulated Deposit Scheme As Per Column (3) Of First Schedule To The Ordinance

The Ordinance, in its First Schedule and vide Column (3) thereof, seeks to classify many such Deposit Schemes which are all regulated by various laws and authorities in India and therefore they are all Regulated Deposit Schemes. The Column (2) of the said First Schedule mentions Regulators who are regulating many statutorily required schemes mentioned in Column (3). The list is long and therefore the same is not reproduced here. However, the scope of Regulated Deposits Schemes is limited and so none of the Deposit Schemes operated by unorganized sector do not find their place in this list. The Central Government is now empowered to expand the list of Regulated Deposits Schemes by notification.

In the process of reading and understanding the term Unregulated Deposit Schemes as defined by section 2(17), we have come across two other terms – “Deposits” and “Deposit Takers”.  Admittedly, these two terms are defined widely to cover therein any deposits or any persons.

At this stage, we need to categorically understand that these two terms cannot be read in isolation. It is these two very definitions, and their all encompassing span, which have caused lack of clarity amongst the professional and Business Fraternity. Nonetheless, these terms will have to be read in the context in which they are used in the substantively operative provisions i.e. Sections 3 to 6 and only to give effect to such provisions. We will now make efforts to understand in what context section 3 to 6 uses these very widely defined terms.

To be specific, we will have to appreciate that the term Deposit and Deposit Takers are used under sections 3 to 6 and these sections either ban Unregulated Deposit Schemes or regulate the Regulated Deposit Schemes. Thus, in order to avoid any misunderstanding, it would be futile to see these definitions without the context given to these terms under section 3 to 6. The rules of Interpretation of Statutes can come to our rescue here and will mandate us to read the definitions in the restricted context of section 3 to 6.

2. Section 3(B) – Promotion, Operation, Issue Of Advertisements Soliciting Participation Or Enrolment Or Acceptance Of Deposits In Unregulated Deposit Schemes Also Banned:

On reading clause (b) of section 3, it is obvious that it prohibits a deposit taker to promote, operate or issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.

3. Section 4 : Dos And Don’ts For Regulated Deposit Schemes:

Let us now understand the substantive provisions for Regulated Deposits Scheme i.e. the Schemes specified under Column (3) of the First Schedule.

Section 4 prescribes a code or good governance for all deposit takers, while accepting deposits pursuant to a Regulated Deposit Schemes. Such deposit takers, should not commit any fraudulent default in the repayment or return of deposit on maturity, or in rendering any specified service promised against such deposit. Thus, this section is ensuring further protection for depositors from operators of even Regulated Deposit Schemes mentioned in Column – 3 of Schedule – I to the Ordinance.

4. Section 5 : Dos And Don’ts For Any Person Inducing Investment Or Participation In Unregulated Deposit Scheme:

Section 5 protects depositors by prohibiting any person from knowingly making any statement, promise or forecast, which is false or deceptive or misleading in material facts; or deliberately conceal any material facts with a view to induce any other person to invest in or become a member or participant of any Unregulated Deposit Scheme.

Thus, by this section, malafide marketers or inducers of UDS are also sought to be discouraged by providing for a specific ban on such activities.

5. Section 6 : Deemed Unregulated Deposit Scheme:

Section 6, which is the last substantive operative part of the Chapter – II is very specific and deals with a Prize Chit or a Money Circulation Scheme banned under the provisions of Prize Chits and Money Circulation Scheme (Banning) Act, 1078, and considers all such schemes as Unregulated Deposits Schemes under this ordinance thereby also ensuring protection to depositors from such schemes.

III. Penalties For Violation Of Substantive Provisions Of The Ordinance:

6. Chapter VI of the Ordinance contains Offenses and Punishments. Let us see the Penalties in the Contexts of Offences in a tabular form so that the Offences and Penalties can be better appreciated.

The Penalty provisions are straight forward. The quantum of the fines and jail time are sufficient to act as deterrents. Further, there are provisions for penalties to be levied on the person in charge of or responsible for the offence, where the offence is committed by entities other than Individual / Proprietor.

Any such person proving that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such an offence(s), is given immunity from penalty provisions.

IV. Authorities Under The Ordinance – Competent Authority & Designated Court Functions And Powers – Chapter III:

Chapter III of the Ordinance containing sections 7 and 8, provide for powers to appoint a Competent Authority (“CA” for convenience), to be appointed by the Central Government, who should not be below the rank of Secretary to the Government. The State Government will appoint other relevant officers to assist the Competent Authority, and they will collectively discharge the functions of this ordinance.

The CA and his subordinate authorities will have powers to attach the deposits of all Deposit Takers in respect of whom they have received information and where there is a reason to believe that there is contravention of Section 3 of the ordinance. While conducting investigation or inquiry, the CA will have same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908. These powers are very wide.

Further, the appropriate government shall also constitute one or more courts to be known as a Designated Court to be presided over by a judge, not below the rank of a District and Sessions Judge or Additional District and Sessions Judge. The Designated Court will have exclusive jurisdiction to the matters and offences concerning this Ordinance.

V. Rights And Liabilities Of Deposit Takers & Other Agencies Of UDS:

Chapter IV containing Sections 9 to 11 also provide for powers to Central Government to designate an authority who shall maintain central repository of information of all such UDS. The duty is cast on every Deposit Taker, existing or new, to intimate such authority in a prescribed manner. Thus, the Ordinance provides for the creation of a body that maintains an online database of legitimate deposit takers and schemes operating in India.

The CA may also direct the Deposit Taker to furnish such statements, information or particulars as are considered necessary. All the information received by the CA shall be shared with CBI and Central Repository Authority appointed under section 9. There shall be complete information sharing amongst the CG, CA, IT and any other Investigating Agency who have investigated any offence under any law with the Police and the CBI.

The process that the CA is supposed to follow in dealing with any offence under this Ordinance has also been duly codified vide Chapter V named as “Restitution to Depositors”, vide Sections 12 to 20. The appeal against the order of the CA shall lie with Jurisdictional High Court.

The law provides for attachment of properties or assets and subsequent realization of assets for repayment to depositors. Clear cut timelines have been provided for attachment of property and restitution of depositors.

The Banking sector has also been cast with the responsibility to share information of any Deposit Takers, on the basis of their account operation behavior on the lines of PMLA – Suspicious Transaction Reports already being filed by financial and various other sectors. The law also makes it incumbent upon newspapers to verify the advertisements placed in them to ensure that none of them are for unregulated deposit schemes. If an advertisement is placed for such a scheme, then the government can direct the newspaper to place a “full and fair retraction” in the same position, free of cost.

The Financial Express noted, in its online article dated 25^th February, 2019, that before making a deposit in any of the schemes, an investor should check whether it is a regulated scheme with approvals from its regulatory authority. Schemes promising returns which are too-good-to-be-true should clearly be avoided. What matters is “Return of Capital” and not “Return on Capital”.

VI. Myth – The Ordinance Is Kind Of Demonetization Of Loans, Advances Or Deposits:

An Ordinance, by definition, is a speedy enactment of law. We must appreciate and clarify the difference between a speedy enactment of law versus a speedy implementation of policy. The social media has made no difference with these two very diverse government actions and have thus, inappropriately compared this Ordinance with the policy of Demonetization enacted by the government on 8^th November, 2016. Readers are encouraged to read the aptly drafted “Statements of Objects and Reasons” accompanying the ordinance, and satisfy themselves as to the real objectives for the promulgation of this law. Thus, any such myth is inappropriate and uncalled for.

The drafting of any law involves issues regarding interpretation and this Ordinance is no different. However, these interpretations shall be dealt with either by the government through appropriate amendments or they may get settled through judicial review.

VII. Some Grey Areas And Challenges That The Ordinance May Throw:

In India, most of the businesses are commenced as Proprietary or Partnership Firms and with funding from friends, relatives and associates. While the object is to punish the perpetrators of fraud, this ordinance may throw the some challenges to the genuine businesses.

Every statute is necessitated because there are certain malpractices, frauds, schemes, arrangements of a ponzi nature. However, the process of statue making is so complex that some unintended results are an unfortunate/unintended fall out. The following are the areas requiring introspection by law makers as the same may ultimately be subjected to judicial review.

√ Section 2(4), while defining the term “Deposit”, the law goes on to provide that an advance received in connection with consideration of an immovable property under an agreement or arrangement would not be considered as a deposit, provided that the same is adjusted against such immovable property in accordance with the terms of the arrangement or agreement. Here, this may give rise to a question whether the advance received by a real estate developer, which is subsequently refunded, owing to cancellation by a customer, would be considered as deposit as the advance would not be adjusted against the consideration for immovable property?

√ Another proviso which states that an amount would be deemed as deposit on expiry of 15 days from becoming due, where it becomes refundable due to the deposit taker not obtaining necessary permission or approval to deal in the goods/properties/services for which money is taken. This proviso if read in the light of provisions of recently enacted RERA, 2016 may lead to additional issues for the developers where the necessary approvals could not be obtained.

√ Deposits accepted and permitted under Chapter V of the Companies Act are listed in Schedule I, and are considered Regulated Deposit Schemes. However, section 10 of the ordinance requires intimation even in respect of a company accepting deposits pursuant to Chapter V of the Companies Act.

√ Further for Companies, the deposit is defined in terms of section 2(31) of the Companies Act, 2013 and the exclusions are in Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014. The Ordinance contains the exclusions from the meaning of the term “Deposit”. However as compared to the Company Law, these exclusions are far more toned down. So, reconciliation between these two may throw some challenges to Companies.

Although, the above situations do add woes to the genuine Business Fraternity, nevertheless, they may well be hit by some drafting lacunae or an all encompassing span of definitions of Deposit, Deposit Takers, Person together with poorly drafted exclusions. There is no option but to wait for well thought out amendments to the ordinance to set the doubts to naught, or an ultimate judicial review which will save the genuine business transactions, personal loans and advances.

We can conclude that in the way the substantively operative portions of the Ordinance and the penalty provisions are drafted, the Ordinance only seeks to regulate frauds and fraudulent schemes.

Further, the mechanism of reporting by the CA and every other investigative agency, directly to the top most investigative agency – CBI; unfettered powers vested in the Police, and constitution of a separately Designated Court are all corroborative of the fact that the legislator is eyeing serious perpetrators of fraud and operators of Ponzi schemes. The statements of objects and reasons also support this view. It can be inferred that even the Judiciary will take note of the holistic purpose and object of this legislation.

Disclaimer:

[The author is a Practicing Chartered Accountant, Visiting Professor at a B-School, National Faculty of ICAI on GST and a passionate orator speaking on varied technical (Taxation & Audit) and non-technical (Soft Skills) subjects. Author canbe reached at [email protected]]