CA Sharad Jain

CA Sharad Jain

Banning of Unregulated Deposit Schemes Ordinance, 2019 – Whether Applicable To Normal Business Activities?

1. Introduction to Banning of Unregulated Deposit Schemes Ordinance, 2019

The Banning of Unregulated Deposit Schemes Ordinance, 2019 has been promulgated by the President of India on 21st February, 2019. The same is applicable “at once” i.e., from 21st February, 2019 itself.

It has been brought with intension to ban the illicit deposit schemes / ponzi schemes etc. to save the depositors from being defrauded.

In this regard, an issue is being discussed in public at large that whether it is also applicable to the deposits, unsecured loans etc. accepted / taken for the normal trading, manufacturing etc. activities or for personal needs.

According to the author it is ample clear from the language of the Ordinance itself as well as from the various other related material e.g., Budget Speech, Press Releases etc. that the same is not applicable to the deposits etc. for normal business etc. In this article an attempt has been made to discuss various reasons / basis  which  support the above view.

2. Arguments For Non Applicability To Deposits Etc. For Normal Business ETC. :

2.1 Intention Behind The Ordinance :

From the budget speech, press release etc. by the Government it can be said that the Ordinance is intended to protect the depositors from being defrauded by illicit deposit / ponzi schemes etc. The normal business deposits etc. may not be intended to be banned by it.  Some of them are mentioned below :

2.1.1  Finance Ministers Budget 2016-17 Speech :

The relevant part of the same is as under :

VI. Financial Sector Reforms

(viii) In the recent past, there have been rising instances of people in various parts of the country being defrauded by illicit deposit taking schemes. The worst victims of these schemes are the poor and the financially illiterate. The operation of such schemes are often spread over many States. I, therefore, propose to bring in comprehensive Central legislation in 2016-17 to deal with the menace of such schemes.

2.1.2  Finance Ministers Budget 2017-18 Speech :

The relevant part of the same is as under :

VI. Financial Sector

98.The draft bill to curtail the menace of illicit deposit schemes has been placed in the public domain and will be introduced shortly after its finalisation. There is an urgent need to protect the poor and gullible investors from another set of dubious schemes, operated by unscrupulous entities who exploit the regulatory gaps in the Multi State Cooperative Societies Act, 2002. We will amend this Act in consultation with various stakeholders, as part of our ‘Clean India’ agenda.99.

2.1.3  Statement Of Objects and Reasons To The Banning Of Unregulated Deposit Schemes Bill, 2018 :

Earlier the above Bill was passed by the Lok Sabha for the same purpose. However, the Bill could not have been passed by the Rajya Sabha. Therefore, the provisions of the above Bill have been made effective through the above Ordinance. The relevant part of the Statement Of Objects And Reasons to the above Bill are as under :

“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.”

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

2.1.4  Press Release Dated 03 August, 2018 By Finance Ministry (Status Report in Chit Fund Scam) :

Some of the relevant parts of the above press release are as under :

“As of February, 2018, the Enforcement Directorate (ED) has taken up investigations in 52 cases against Ponzi schemes floated by firms/ companies under the provisions of the PML Act, 2002, where small investors have been cheated.”

“As of February, 2018, the Central Bureau of Investigation (CBI) has registered and investigated 133 cases in the last 3 years (11 in 2015, 12 in 2016 and 110 in 2017) against various Ponzi companies for fraud and scams on the basis of complaints and also on the basis of directions of the Courts.”

“The Banning of Unregulated Deposit Schemes Bill, 2018 has been introduced in the Lok Sabha on 18.07.2018. The proposed Bill will ban all such deposit schemes which are unregulated.”

2.2.1  Specific Exclusion Of Normal Business Deposits From The Definition Of Deposit :

The deposits for normal business purposes have been specifically excluded from the definition of the term “deposit” in the Ordinance itself. The relevant part of the same is as under :

“(4) “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—

(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):

Important : It is mentionable here that the above clause (I) of the definition of deposit is “inclusive” i.e., it does not excludes only items mentioned in sub clauses (i) to (iv) but also excludes each and every type of amount received in the course of or for the purpose of normal trading etc. business.

2.2.2   Press Release Dated 20th February, 2018 By Finance Ministry :

The relevant part of the same is mentioned as under :

“Deposit” is defined in such a manner that deposit takers are restricted from camouflaging public deposits as receipts, and at the same time not to curb or hinder acceptance of money by an establishment in the ordinary course of its business.

2.3.1  Applicable Only Where Deposit has Been Taken By Way Of Business :

The Ordinance is applicable to the “Unregulated Deposit Scheme”. The definition of “Unregulated Deposit Scheme” has been given in clause (17) of the Ordinance. The same is as under :

(17) “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.

As per the above definition only those deposits are covered by the Ordinance which have been accepted by way of business.

“Which deposits will be said to have been accepted by way of business”  has not been clarified in the Ordinance or otherwise. However, logically it can be said that it is applicable to the business of taking deposits i.e., where collecting deposit is the prime / substantial activity. In cases of normal trading, manufacturing etc. businesses, the trading / manufacturing etc. remains the prime business activities and not the acceptance of deposits. The acceptance of deposits remains only supportive activity.

An Another Issue – Bogus Loans / Deposits : It is also being asked that whether the above Ordinance is also applicable to the bogus loans / deposits / cash credits etc. found in the books of account. In this regard, the author is of the view that the same is not applicable to the bogus loans etc. The same is applicable only in respect of the actual loans taken in contravention of the provisions of the Ordinance. The Ordinance is to protect the actual depositors from being defrauded by the deposit takers. In case of bogus loans, there will be no real depositor who is to be protected. Therefore, the Ordinance may not be applicable to the bogus loans etc.


Q1. Whether The Loans Etc. Taken For Personal Needs Are Also Banned :

In the opinion of the author, the same are not banned by the Ordinance as the ban is applicable only on “Unregulated Deposit Scheme”. As per the definition of “Unregulated Deposit Scheme” as given in sub clause (17) of clause (2), only those deposits are covered which have been accepted by way of business. The loan taken for personal need are not covered by the above definition as they are not accepted by way of business.

Q2. Whether The Individual, Firm, HUF etc. Can Obtain Deposit Etc. From Non Relative Etc. For Money Lending Business :

The author is of the opinion that by consolidated reading of definition of “Deposit”, ‘Unregulated Deposit Scheme”, Section 45S and 45-I of the Reserve Bank of India Act, 1934, it can be said that the deposit etc. accepted by Individuals etc. from other than relatives etc. for money lending business is not permissible. In such cases the deposit may be “by way of business”. Therefore, the Ordinance will be applicable. Further, as per Section 45-S read with Section 45-I of the Reserve Bank Of India Act, acceptance of deposits etc. from non relatives for financing activities is not permissible.

Q3. In Sub Clause (e) and (f) of Definition Of “Deposit” Only Capital From Partners And Loans From Relatives Of Partners And Proprietors Have Been Excluded What Is Its Impact :

In the opinion of the author, from the consolidated reading of sub clause (e), (f) and (I) it can be said that for normal trading etc. business / personal needs the amounts can be obtained from non relatives etc. also. But where the amount is being taken “by way of business” i.e., for money lending / financial activities it can be taken only from the partners, relatives etc.

Conclusion: Thus, there are ample reasons / basis from which it may be logically concluded that the above ban is not applicable to the normal business etc. deposits.

Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author do not owns any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.

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