Yogesh Dharnidharka, Partner – M&A Tax, PwC India

 Yogesh DharnidharkaIn light of various Ponzi/ chit fund schemes, the President of India promulgated the Banning of Unregulated Deposit Schemes Ordinance, 2019 on 21 February, 2019. By bringing this ordinance into effect, the Government has cracked down on unregulated deposit schemes, which lured investors with high interest rates and duped them of their investments.

The ordinance provides a comprehensive mechanism to ban unregulated deposit schemes and protect the interest of depositors.

The ordinance is divided into 42 sections, comprehensively covering provisions relating to deposits, information on deposit takers, protection to depositors, offences, penalties, etc.

Broadly, the deposit taking activities have been classified into two categories:

– Regulated Deposit Schemes: An exhaustive list of Schemes by various regulators (such as the RBI, SEBI, IRDA, State Governments, NHB, PFRDA, NHB, EPFO, MCA, Registered Multi-State Cooperative Societies) under this category have been specifically covered in Schedule I

– Unregulated Deposit Schemes: A Scheme or an arrangement under which deposits are accepted or solicited by any deposit takerby way of business and which is not a Regulated Deposit Scheme.

Further, the ordinance provides for banning of unregulated deposit scheme and prohibits the deposit taker from

– Promoting any unregulated deposit scheme

– Operating or issuing any advertisement in respect of unregulated deposit schemes

– Soliciting participation or enrolment in or accepting deposits (directly or indirectly) in respect of unregulated deposit schemes.

A key aspect of this ordinance is the definition of the term “deposit.” The term “deposit” has been defined in section 2(4) of the ordinance as under:

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”.

Certain exclusions are specified in the definition of deposits, which inter alia, cover amounts received by way of:

  • loans from scheduled banks/ financial institutions;
  • deposits against purchase of property;
  • contributions of capital by partners to partnership firm/ limited liability partnership;
  • loan from relatives;
  • loan received by firm from the partners relatives
  • Amounts received in the course of business or for the purpose of business, bearing a genuine business connection.

On analysing the definition of deposits along with exclusions specified therein, one may interpret that to term any scheme as an unregulated deposit scheme, the element of receipt of money by a deposit taker with a promise to return the same in future in any form should be present. However, if one is able to justify that this for the purpose of business and bearing a business connection, it is then out of the purview of unregulated deposit schemes.

Based on the above, two limbs of deposits are not banned. First, regulated deposit taking schemes of various regulators, and second, the exclusions specified in the definition of deposit provided in section 2(4) of the ordinance.

As the ordinance came into effect from 21 February, 2019, there is no clarity whether deposit schemes prior to 21 February, 2019 are permissible. The ordinance would have a huge impact on existing deposits with builders, jewellers and other types of businesses that are completely unregulated.

Overall, the ordinance is likely to have far-reaching impact on the flow of money circulating in unorganised sectors, which rely mainly on funds from third parties based on trust and are largely unregulated. However, it seems the Government has made the ordinance effective in haste, as there remain many open issues that require clarification, for the smooth implementation of this ordinance in the long run.

(The views expressed in this article are personal. This article  includes inputs by Chetan Shah – Manager, M&A Tax, PwC India and Ayush Jain – Associate – M&A Tax, PwC India.)

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