The Banning of Unregulated Deposit Schemes Bill, 2019 was passed by the Lok Sabha on 13.02.2019 but could not be passed by the Rajya Sabha. Since the Parliament is not in session, the BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019 has been issued by the President of India vide Notification dt. 21.02.2019. According to Article 123 of the Constitution, the President have power to promulgate Ordinances during recess of Parliament.
It is noteworthy to understand the difference between ‘Act’ and ‘Ordinance’. Act is law which is passed by parliament and has also received the assent of president and is in force. An ordinance is also a ‘Law’ but without being subject to the discussion and deliberation in both or one of the houses of the Parliament. The President, subject to conditions as specified in Article 123 of Constitution, may in consultation with the Cabinet, pass a law in the form of Ordinance. Ordinance is temporary law till its expiry or till it is repealed or till it is approved by the legislature.
The Ordinance is to provide for a comprehensive mechanism to ban Unregulated Deposit Schemes and to protect the interest of the depositors and for matters connected therewith. It aims to prevent such unregulated deposit schemes or arrangements at their inception and at the same time makes soliciting, inviting or accepting deposits pursuant to an unregulated deposited scheme as a punishable offence.
What is “Unregulated Deposit Scheme”?
This term is defined in the Ordinance u/s 2(17) which provides that 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 regulated deposit schemes as specified in First Schedule of the Ordinance
The regulated schemes are such which are regulated by following regulators, namely
This Ordinance only covers the Deposit Schemes which are unregulated and which are accepted by any deposit taker by way of business such as illicit deposit / ponzi schemes / unregulated chit funds that hurt small investors.
Now question arise, whether amount received by an Individual as a loan from his friends or relative is covered under this Ordinance? The answer is NO. This Ordinance is applicable in case of unregulated deposit schemes. Any acceptance of deposit or advance from friends, whether for personal or business purposes, are out of the ambit of this Ordinance. In a series of tweets, the Department of Financial Services has also clarified that this Ordinance exempts Individual, Firm, companies & LLP etc. from taking any loan and deposit for their course of business as well as definition is also clear. So here, it is noteworthy to understand the difference between “Deposits for Business” and “Business of Accepting Deposits” and according to this Ordinance, later one i.e. “Business of Accepting Deposits” which is Unregulated, is Banned.
Offence and punishment under the Ordinance
|Offence||Imprisonment||Fine (in Rs.)|
|Solicit deposits under Unregulated Deposit Schemes||1 year – 5 years||2 lakhs to 10 lakhs|
|Accept deposits under Unregulated Deposit Schemes||2 years – 7 years||3 lakhs to 10 lakhs|
|Fraud in repayment of deposits accepted under Unregulated Deposit Schemes||3 years – 10 years||5 lakhs to 200% of aggregate funds collected|
|Fraud in repayment of regulated deposits||Up to 7 years||5 lakhs to higher of 25 crore or 3 times the amount of profit made out of such fraud|
|Failure to render service promised against regulated deposits||Up to 7 years||5 lakhs to higher of 25 crores or 3 times the amount of profit made out of such fraud|
|Wrongful inducements in relation to Unregulated Deposit Schemes||1 year – 5 years||Up to 10 lakhs|
|Repeated offenders||5 years – 10 years||10 lakhs – 50 crores|
|Failure to file intimation by deposit taker about its business, or to furnish statements, information or particulars to the competent authority||–||Up to 5 lakhs|
Bottomline / Conclusion;
Contrary to initial apprehensions regarding individuals, firms or corporate taking loans from relatives or friends for business or for other personal reasons, will not be affected by this Ordinance. Accordingly, there is no ban on Individuals / Firm / Companies receiving loans for their business purposes.
The Author is a Chartered Accountant and can be reached at [email protected], Reader’s feedback / observations are welcomed and would be appreciated.
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