> Union Cabinet chaired by Prime Minister Narendra Modi approved the Promulgation of Unregulated Deposit Schemes Ordinance, 2019. President Ram Nath Kovind on Thursday promulgated the banning of Unregulated Deposit Scheme Ordinance. In this way the ordinance “The Banning of Unregulated Deposit Schemes Ordinance, 2019 No 7 of 2019 came in to existence from 21st February 2019.

> This article is restricted to elaborate the scope of “deposits” covered under this Ordinance.

> The real intention of government in promulgating the Ordinance, can better be gathered if we first directly go the charging section 3 under chapter II of the Ordinance.

a. Section 3(a) of Ordinance firstly banned the Unregulated Deposit schemes with immediate effect from date of commencement of this Ordinance.

b. Ordinance further provide under section 3(b) that 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.

> Now it is pertinent to note here that, restriction / ban has been imposed on only Unregulated Deposit Scheme and not on all deposits. It means that all deposits are not banned, and only those deposits are banned which are classified under the Unregulated Deposit Scheme.

> Now let us discuss the meaning of Unregulated Deposit Scheme, as prescribed under section 2(17) of the Ordinance:

“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”.

> If we analyse the above definition, it will be revealed that to constitute Unregulated Deposit Scheme, three elements must exist:

  • First-: There should be a “deposit”,
  • Second-:such “deposit” is not a part of “Regulated Deposit Scheme”, and
  • Third and the most crucial element -: such deposit has been taken by way of business.

> A deposit will be governed by the Unregulated Deposit Scheme, only when it qualifies all the above three parameters.

> The word “deposit” has been defined under section 2(4) of Ordinance, which is reproduced below:

“deposit” means 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, but does not include—

 (a) amounts received as loan from a scheduled bank or a co-operative bank or any other banking company as defined in section 5 of the Banking Regulation Act, 1949;

(b) amounts received as loan or financial assistance from the Public Financial Institutions notified by the Central Government in consultation with the Reserve Bank of India or any non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 and is registered with the Reserve Bank of India or any Regional Financial Institutions or insurance companies;

(c) amounts received from the appropriate Government, or any amount received from any other source whose repayment is guaranteed by the appropriate Government, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature;

(d) 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 Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder;

 (e) amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership;

(f) amounts received by an individual by way of loan from his relatives or amounts received by any firm by way of loan from the relatives of any of its partners;

(g) amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable);

(h) amounts received by an asset re-construction company which is registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(i) any deposit made under section 34 or an amount accepted by a political party under section 29B of the Representation of the People Act, 1951;

(j) any periodic payment made by the members of the self-help groups operating within such ceilings as may be prescribed by the State Government or Union territory Government;

(k) any other amount collected for such purpose and within such ceilings as may be prescribed by the State Government;

(l) an amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business including—

(i) payment, advance or part payment for the supply or hire of goods or provision of services and is repayable in the event the goods or services are not in fact sold, hired or otherwise provided;

(ii) advance received in connection with consideration of an immovable property under an agreement or arrangement subject to the condition that such advance is adjusted against such immovable property as specified in terms of the agreement or arrangement;

(iii) security or dealership deposited for the performance of the contract for supply of goods or provision of services; or

(iv) an advance under the long-term projects for supply of capital goods except those specified in item (ii):

> Now, if we simultaneously go through the definition of deposit under 2(4) and definition of Unregulated Deposit Scheme under section 2(17), two terms will emerge out, which will settle the scope of deposit under the Ordinance.

First:  “By way of business” as used in section 2(17)

Second:  “in the course of, or for the purpose of business” as used in section 2(4)(l)

> The most important parameter here to discuss is to analyse the significance of these words and the difference in their meaning.

a. “By way of business”– It means that any activity carried out as business of that nature. The word used in this context means that person is carrying on business of acceptance of deposit. Acceptance of deposit has become his business. In simple words “By way of business” means business of acceptance of deposit, which is banned as per this ordinance.

b. Whereas on the other hand, “in the course of, or for the purpose of business” means that person is carrying on some business and to meet out the requirement of business, the person has accepted deposits. For example, a trader has taken loan for purchase of goods or for purchase of machinery etc.

In other words, if a person is predominantly carrying on any business, and for meeting deficit of funds, has resorted to accept deposit, is said to be accept deposit in the course of, or for the purpose of business, and such deposit is excluded from the definition of deposit under this Ordinance.

> It is also pertinent to discuss here that semantic meaning of the word “by way of business”, might align with the meaning of “in the course or furtherance of business.” For example, if a person, carrying on the business of pawn (girvi), then accepting of deposits from public and advancing the same to public under the pawn of gold or other precious items, then in such circumstances, whether acceptance of deposit can be covered under “by way of business” or “in the course or furtherance of business”? In this regard, a further clarification is sought from the government, regarding the scope of word- “by way of business”.

> On analysing the above, it is clear that this ordinance only covers the unregulated “business of accepting deposits”, (such as ponzi scheme) and not the “deposits for business”.

> In a series of tweets, the government has clarified that the Banning of Unregulated Deposit Ordinance puts a check only on illicit deposit schemes that dupes gullible investors but it does not prohibit those regulated by law like chit funds.

“Chit fund is regulated by Chit Fund Act, 1982 and is treated as Regulated Deposit as per Schedule 1 of Banning of Unregulated Deposit Ordinance, 2019,”

> The Department of Financial Services said: “Banning of Unregulated Deposit Ordinance-2019, exempts Individual, Firm, Companies & LLP etc. for taking any loan and deposit for their course of business as per section 2(4) e,f,l and other provisions.”

> This scheme has been mainly promulgated to curb the menace of unregulated deposit scheme, also known as Ponzi schemes.

> Now, in light of the above, it is clear that, all deposits are out of scope of section 3 of the Ordinance, except the deposits which are not regulated by any scheme AND which have been taken “by way of business.”

This may further be understood by some practical examples:

1. An individual taking a loan from his friend to carry out his wife’s treatment will not be covered under deposit governed by this Ordinance. Although, it is a deposit, but the same has not been taken ‘by way of business’.

2. Likewise, where a business takes loan to purchase stock in trade, in that case, the loan taken for the purpose of ‘carrying out the business’ is outside the purview of deposits governed by this Ordinance.

> The Ordinance also cast a duty upon the deposit taker to report the details of deposits taken by him, even when the same are taken to commence or carry out his business, to the competent authority. Here, the important point to note is that the reporting responsibility is on every deposit taker who has accepted deposits, if such deposit falls within the definition of deposit prescribed under section 2(4) of the said Ordinance.

CA Anil Kumar Gupta

LL.B., A.I.C.W.A., F.C.A., DISA, CISA (USA)

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2 Comments

  1. Murthy K says:

    Now a days many of the Senior Care Service Providers hold approx 8% of cost of apartment/ villa as a PERPETUAL INTEREST FREE REFUNDABLE DEPOSIT under the guise of earnest money deposit for usage of facilities owned by service provider.
    In addition , they also hold about 3% of the cost as corpus fund for long term maintenance of assets of service provider.
    Apart from above, they also collect the charges from the users for operation and maintenance of such assets.

    The deposit is refundable only when the apartment / villa owner sells the property to another buyer who is willing to pay the deposit and subscribe to services of service provider.

    Are such deposits legitimate under the rules?

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