1) The power to regulate the business of money lending is delegated to the States under entry no. 30 of the  State List , Schedule VII to the constitution of India:

“30. Money-lending and money-lenders; relief of agricultural indebtedness.”

2) Pursuant to this power many States have already promulgated legislation of this point and one such legislation prevalent in Maharashtra is The Bombay Money Lenders Act 1946.Under this legislation the States made it compulsory for all persons who were to engage in the business of accepting deposits and lending money to get a License from the State before he commenced the business of money lending.

3) Some of the vital provisions of this Act are as under:

a) “business of money-lending” means the business of advancing loans whether in cash or kind whether or not in connection with or in addition to any other business;

b) “loan” means an advance at interest whether of money or in kind. Therefore amount advanced without interest is  not covered by the Act. Moreover loans  advanced on the basis of Bill of Exchange or cheque could be given  to the traders without license.

c) No money-lender shall carry on the business of money-lending except in the area for which he has been granted a license and except in accordance with the terms and conditions of such license;

d) Considering the above provisions, it could be concluded that this legislation covers only those transactions which are covered by the definition of “business of money-lending”. All other transactions, whether related to business or not,  are not covered.

4) Thus this legislation proposed to cover mostly those transactions wherein a Sahukar i.e. money lender, used to lend money to farmers and other needy persons at exorbitant rate of interest and that too against the pledge of some valuable tangible property like Gold.

5) Over the years, as the country progressed towards being a global economy, many complex transactions in money were generated which were not covered under this legislation of 1946. In order to cover such transactions in money, this Ordinance has been promulgated.

6) As the country progressed, some legislations were made to control the acceptance of deposits and making of loans & advances but they were applicable mostly to the organized entities like a company and an NBFC. However there was no legislation to regulate such deposits taken by many non-corporate entities like, individual, Firm, Cooperative Societies, Trusts etc. Banning of Unregulated Deposit Schemes Ordinance, 2019 proposes to control the flow of deposits amongst non-corporate assessees.

7) The basic & important features of this Ordinance are as under:

a) Banning of Unregulated Deposit Schemes Ordinance, 2019 provide for a comprehensive mechanism to ban the Unregulated Deposit Schemes and to protect the interest of depositors and for matters connected therewith or incidental thereto. (For example schemes like Sharda Chit Fund and  Rose Vally Scam of West Bengal which has cheated 17 Lakhs small depositors to the extent of Rs. 20,000 Crores and which is at present under CBI investigation)

b) This Ordinance has come in to effect at once.

c) The provisions of this Ordinance has an overriding effect over all other legislations made by the States or U.T. except where explicitly excluded.

d) The provisions of this Ordinance are in addition to, and not in derogation of, the provisions of any other law for the time being in force.

e) The definition of deposit under the Companies Act, 2013 and under the Non-Banking Financial Company Act shall prevail over the definition of deposit as given in this Ordinance.

f) Under the provisions of this ordinance a separate Court will be designated to exclusively try offences made under it.

g) The Central Government will designate an Authority to prepare a central depository of all the deposits taken, refunded or defaulted by all the depositors.

h) Each State or Union Territory Government will create a competent authority for the State. Such competent authorities will maintain a depository for each of such state and record all the relevant information relating to deposits.

i) All the state competent authority shall share all the information that they may have with Central Designated Authority.

j) The designated authority shall share the information with the CBI.

8) Provisions have also been made for offences that may be committed and a imprisonment for a varying period of  1 year to 7 years and a fine of varying amount of Rs. 1 lakh to 25 lakhs which may extend to Rs. 25 to 50 Crore under certain circumstances have been provided.

9) The purpose of this ordinance is to totally ban

a) all forms of the Unregulated Deposit Schemes

b) advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.

c) any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.

d) statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, to induce another person to invest in, or become a member or participant of any Unregulated Deposit Scheme.

e) A prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an Unregulated Deposit Scheme under this Ordinance.

10) The above purpose is proposed to be achieved by controlling all deposit schemes by appointing regulators for such schemes. Any specified scheme which is regulated by any of the following regulators shall be called a Regulated Deposit Scheme

a) Security & Exchange Board of India

b) Reserve Bank of India

c) Insurance Regulatory & Development Authority of India

d) State or U T Government

e) National Housing Bank

f) Pension Fund Regulatory & Development Authority of India

g) Employees Provident Fund Organization

h) Central Registrar Multi-state Cooperative Societies

i) Ministry of Corporate Affairs

j) deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute; and

k) any other scheme as may be notified by the Central Government under this Ordinance.

11) Thus the purpose of this Banning of Unregulated Deposit Schemes Ordinance, 2019 is to totally ban all forms of the Unregulated Deposit Schemes. 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.

12) The focal point of the ordinance is to control and regulate Unregulated Deposit Scheme. For the purpose of this ordinance deposits have been defined as under:

“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) any amount received as loan from a  banking company.

b) any amount received as loan from Public Financial Institutions, Reserve Bank of India or Registered NBFC

c) amounts received from Government or any other source whose repayment is guaranteed by the Government

d) amounts received from foreign government, foreign banks, foreign development institutions foreign citizens, foreign authorities or person resident outside India as per the provisions of FEMA.

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 amount accepted by a registered political party under section 29B of the Representation of 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 deposit 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

However if the above amounts become refundable and they are not refunded on the expiry of fifteen days, they shall be deemed to be deposits.

Moreover if the above amounts are taken to deal in the goods or properties or services which requires some necessary permission or approval  under  any  law, such amounts shall be deemed to be deposits if the necessary permission or approval are not obtained.

13) The 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.

The above definition provides answers to many questions relating to the acceptance of unsecured loans or deposits by Individuals, Partnership Firms, LLP etc.

The word Business is not defined in the Ordinance. Therefore taking a cue from the provisions of the Bombay Money-Lenders Act 1946, Business may mean the “business of money-lending” which again means the business of advancing loans whether in cash or kind whether or not in connection with or in addition to any other business;

By implication it follows that this Ordinance shall apply to only those cases in which deposits are invited or solicited by a deposit taker under a scheme or an arrangement in relation to his business of accepting deposits and advancing loans.

 The word scheme or an arrangement is very important in the definition. These words have also not been defined in the ordinance. So taking the dictionary meaning of these words, which overlap each other under different circumstances, they may mean as under:

Scheme

A large-scale systematic plan of action or arrangement for attaining some particular object or putting a particular idea into effect. It is a plan or arrangement involving many people which is made by a government or other organization.

Arrangement

A private or court-mediated agreement between a debtor and unsecured creditors, under which the creditors agree to settle for a certain fraction of monies owed by the debtor. When it is a voluntary agreement, it is properly called a scheme of arrangement and is governed by the ordinary law of contract. Otherwise (if the debtor is insolvent) it is a deed of arrangement which is governed by the relevant statute..

14) Therefore in order to be covered by the definition of Deposits, they must be invited or accepted on a large scale like taking deposit of small amounts from multiple investors.  Thus  isolated deposits taken by a Deposit taker  for the purpose of his business other than the business of money lending may not be covered by this Ordinance.

15) The intention of the ordinance is not to ban deposits taken by individuals, firms, LLP, Cooperative societies in the regular course of their business. This can be ascertained from the STATEMENT OF OBJECTS AND REASONS attached to the Ordinance

a) Non-banking entities are allowed to raise deposits from the public under the provisions of various statutes enacted by the Central Government and the State Governments. However, the regulatory framework for deposit taking activity in the country is not seamless. The regulators operate in well-defined areas within the financial sector by regulating particular kinds of entities or activities. For instance, Non-Banking Financial Companies are under the regulatory and supervisory jurisdiction of the Reserve Bank of India. Similarly Chit Funds, Money Circulation including multi-level marketing schemes and schemes offered by co-operative societies are under the domain of the respective State Governments. In the same manner, the Collective Investment Schemes come under the purview of the  securities and Exchange Board of India. Despite such diverse regulatory framework, schemes and arrangements leading to unauthorised collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes promising high returns or other benefits, are still operating in the society.

b) The Central legislations such as the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and the Chit Funds Act, 1982 and the legislations enacted by the State Governments have not been able to completely address the issue of unregulated deposit schemes run by unscrupulous elements. This regulatory gap was highlighted in the twenty first Report of the Parliamentary Related Standing Committee on Finance (Sixteenth Lok Sabha) titled as “Efficacy of Regulation of Collective Investment Schemes, Chit Funds, etc.”. The said Committee in its Report has recommended the requirement of “appropriate legislative provisions, coupled with effective administrative and enforcement measures in order to protect the hard-earned savings and investments made by millions of people”.

c) Presently, there are considerable differences among State laws in protecting the interests of depositors, and many unregulated deposit taking schemes operate across State boundaries.

d) In view of the above, it becomes necessary to have a Central legislation to ensure a comprehensive ban on unregulated deposit taking activity and for its effective enforcement.

e) The proposed Bill, namely, the Banning of Unregulated Deposit Schemes Bill, 2018, 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 deposit scheme as a punishable offence. The Bill seeks to put in place a mechanism by which the depositors can be repaid without delay by attaching the assets of the defaulting establishments. This intension has again been displayed by the following press release:

Press Information Bureau 
Government of India
Cabinet
19-February-2019 21:24 IST

Cabinet approves Promulgation of the Banning of Unregulated

Deposit Schemes Ordinance, 2019 

The Union Cabinet chaired by Prime Minister Narendra Modi has approved the Promulgation of Unregulated Deposit Schemes Ordinance, 2019.

Benefits:

The proposed Ordinance will immediately tackle the menace of illicit deposit taking activities in the country launched by rapacious operators, which at present are exploiting regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings, by altogether banning unregulated deposit taking schemes, and having adequate provisions for punishment and disgorgement / repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.

16) The Ordinance exempts the following amounts which are accepted by a person, from the definition of deposit:

a) amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership. If any partner of a firm introduces any amount as his share of capital then such amount will not be treated as deposits. However loans advanced by the partner to the firm is not exempt. !!

b) 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.

c) amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable). Therefore Sundry creditors are not covered in the definition of deposits.

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

i. Trade Advances: 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. Transaction in immovable property: 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 deposit 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

However if the above amounts become refundable and they are not refunded on the expiry of fifteen days, they shall be deemed to be deposits.

Moreover if the above amounts are taken to deal in the goods or properties or services which requires some necessary permission or approval  under  any  law, such amounts shall be deemed to be deposits if the necessary permission or approval are not obtained.

17) Precedence of deposits over amount payable under other Acts.

a) Any amount due to depositors from a deposit taker shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority except the amount due  under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency  and Bankruptcy Code, 2016,

b) Any order of provisional attachment passed by the Competent Authority, shall have precedence and priority, to the extent of the claims of the depositors, over  any  other  attachment  by  any  authority  competent  to attach property for repayment of any debts, revenues, taxes, cesses and other rates payable to the except the attachment under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency  and Bankruptcy Code, 2016,

18) “Deposit taker” means-

i. any individual or group of individuals

ii. aproprietorship concern

iii. apartnership firm (whether registered or not);

iv. a limited liability partnership registered under the Limited Liability Partnership Act, 2008;

v. a company;

vi. an association of persons;

vii. a trust (being a private trust governed under the provisions of the Indian Trusts Act, 1882 or a public trust, whether registered  or not);

viii. a co-operative society or a multi-State co­ operative society; or

ix. any   other   arrangement   of   whatsoever nature, receiving or soliciting deposits.

19)

a) It is quite interesting to know that an HUF is not included in the definition of Deposit takers. Does that mean an HUF can engage in any Unregulated Deposit Scheme? I have my own doubts.

b) Loans or deposits can be taken by any Trust only with the prior approval of the Charity Commissioner. If such approval has been taken then also it will be required to follow the provisions of this ordinance.

c) While the amount contributed by any partner in a firm by way of his share of capital is exempt, any amount advanced by the partner as a loan to the firm is not exempt.

d) A co-operative society or a multi-State co­operative society has also been included in the definition of Deposit Takers. But as per the Doctrine of mutuality as propounded by the Supreme Court, amounts advanced by the members of a cooperative society can’t be treated as deposit because no one can take deposit from himself.

20) Offences & Punishment

S.N. Type of Default Imprisonment Fine in money
1. Solicitor of deposits 1 to 5 years Rs.2 lakhs to 5 Lakhs
2. Acceptor of deposits 2 to 7 years Rs.3 lakhs to 10 lakhs
3. Fraudulent default in repayment of deposits-Unregulated Deposits 3 to 10 years Rs.5 lakhs to double the amount collected.
4. Fraudulent default in repayment of deposits-Regulated  Deposits Upto 7 years Rs. 5 lakhs to 25 Crores or 3 times the amount collected.
5. Knowingly making any statement, promise or forecast which is false, deceptive or misleading-  Unregulated Deposit Scheme. 1 to 5 Years Upto Rs. 10 Lakhs
6. Failure to give intimation of taking of deposit Upto Rs.5 Lakhs
7. Second time conviction 5 to 10 years Rs.10 lakhs to Rs.50 Crores
8. Defaulters other than an Individual Guilty- the deposit taker as well as all the officers who connived with the deposit taker.
9. Publication of wrong information of deposits in a newspaper or inducing any person to become a member  of any Unregulated Deposit Scheme, The newspaper shall publish a full and fair retraction, free of cost, in the same manner and in the same position in such newspaper or publication as may be prescribed.

 

21) Conclusion

It thus appears that this Ordinance shall apply to only those deposits taken & accepted by non-corporate entities in small amounts from multiple investors by an invitation published in a newspaper under some scheme or arrangement.

Thus  isolated ad hoc deposits taken by a Deposit taker  under no scheme of finance for the purpose of his business other than the business of money lending may not be covered by this Ordinance.

Disclaimer: The above write up is the personal opinion of the author meant only for academic use. Readers must take the opinion of their legal consultants before acting upon the write up for professional purposes. The author owes no liability for the aboe write up.

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