Banning of Unregulated Deposit Schemes Ordinance 2019: Important points

The Govt passed the Banning of Unregulated Deposit Schemes Ordinance, 2019 on 21st Feb, 2019 to ban unregulated deposits.

Article explains Who are Depositor and deposit taker, Banning of Unregulated Deposit schemes (UDS), What is Unregulated Deposit Scheme(UDC) and Regulated Deposit Scheme(RDS), What kind of deposits are considered under the Banning of Unregulated Deposit Schemes Ordinance, 2019, Fraudulent default in Regulated Deposit Schemes, Wrongful inducement in relation to Unregulated Deposit Schemes, Intimation of business by deposit taker, Attachment of property of malafide transferees, Punishment for contravention of section 4, Punishment for contravention of section 10, Cognizance of offences and Offences to be cognizable and non-bailable.

1. Who are Depositor and deposit taker

The laws defines that any person who makes deposit under this Ordinance called the depositor. All persons such any individual or group of individuals; proprietorship concern; partnership firm; LLP; company; AOP; trust; co-operative society and any other arrangement of whatsoever nature, receiving or soliciting deposits called depositor taker except following:

(i) a Corporation incorporated under an Act of Parliament or a State Legislature;

(ii) a banking company, a corresponding new bank, the State Bank of India, a subsidiary bank, a regional rural bank, a co—operative bank or a multi- State co-operative bank as defined in the Banking Regulation Act, 1949.

2. Banning of Unregulated Deposit schemes (UDS)

From the effective date of the Ordinance:

• All unregulated deposits schemes(UDS) shall be banned.
• Depositor taker can’t accept or operate any UDS.
• Ban on Fraudulent default in Regulated Deposit Scheme(RDS).
• A Prize Chit or Money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an UDS.

3. What is Unregulated Deposit Scheme(UDC) and Regulated Deposit Scheme(RDS)

Only deposit schemes listed in First Schedule of the Ordinance are Regulated Deposit Sechems(RDS). Apart from this, deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute shall be treated RDS.

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  the First Schedule.

4. What kind of deposits are considered under the Ordinance

The Ordinance is given wide definition of deposit where cover almost all cases of deposits except provided in the exhaustive list. As per clause 4 of Section 2 of the Ordinance, definition of deposit 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) amounts received as loan from a scheduled bank or a co—operative bank or any other banking company.

(b) amounts received as loan or financial assistance from the Public Financial Institutions or any non-banking financial company or any Regional Financial Institutions or insurance companies;

(c) amounts received from 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 person 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;

Relatives for the purpose of this ordinance, monies received from whom not to be treated as deposits.

For the purpose of this ordinance term relative is the same meaning as assign to it in the Companies Act, 2013. As per Companies Act, 2013 relative means anyone who is related to another, if—

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely: –

(1) Father:

Provided that the term “Father” includes step-father.

(2) Mother:

Provided that the term “Mother” includes the step-mother.

(3) Son:

Provided that the term “Son” includes the step-son.

(4) Son’s wife.

(5) Daughter.

(6) Daughter’s husband.

(7) Brother:

Provided that the term “Brother” includes the step-brother;

(8) Sister:

Provided that the term “Sister” includes the step-sister.

Depositor means any person who makes deposit under this ordinance and it includes

(i) an individual;

(ii) a Hindu Undivided Family;

(iii) a company;

(iv) a trust;

(v) a partnership firm;

(vi) a limited liability partnership;

(vii) an association of persons;

(viii) a co-operative society registered under any law for the time being in force relating to co-operative societies; or

(ix) every artificial juridical person, not falling within any of the preceding sub-clauses;

(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.

(i) any deposit made under section 34 or an amount accepted by a political party under section 29B ofthe 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;

Most important “clause l” of the exceptions which specifies that amount received in the course of or for the purpose of business and bearing a genuine connection to the business in the course of which the amount has been received does not fall under the definition of deposit. “Clause l” specifies following inclusive items which will not be considered as deposits: –

(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):

Provided that if the amounts received under items (i) to (iv) become refundable, such amounts shall be deemed to be deposits on the expiry of fifteen days from the date on which they become due for refund:

Provided further that where the said amounts become refundable, due to the deposit taker not obtaining necessary permission or approval under the law for the time being in force, wherever required, to deal in the goods or properties or services for which money is taken, such amounts shall be deemed to be deposits.

OTHER MAJOR PROVISION:

4. Fraudulent default in Regulated Deposit Schemes.

No deposit taker, while accepting deposits pursuant to a Regulated Deposit Scheme, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.

5. Wrongful inducement in relation to Unregulated Deposit Schemes.

No person by whatever name called shall knowingly make any 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.

INFORMATION ON DEPOSIT TAKERS

10. Intimation of business by deposit taker.

(1) Every deposit taker which commences or carries on its business as such on or after the commencement of this Ordinance shall intimate the authority referred (yet to be made) its business in such form and manner and within such time, as may be prescribed.

(2) The Competent Authority may, if it has reason to believe that the deposits are being solicited or accepted pursuant to an Unregulated Deposit Scheme, direct any deposit taker to furnish such statements, information or particulars, as it considers necessary, relating to or connected with the deposits received by such deposit taker.

Explanation.— For the removal of doubts, it is hereby clarified that—

(a) the requirement of intimation under sub-section (1) is applicable to deposit takers accepting or soliciting deposits ‘as defined in clause (4) of section 2; and

(b) the requirement of intimation under sub-section (1) applies to a company, if the company accepts the deposits under Chapter V of the Companies Act, 2013.

16. Attachment of property of malafide transferees.

(1) Where the Designated Court is satisfied that there is a reasonable cause for believing that the deposit taker has transferred any property otherwise than in good faith and not for commensurate consideration, it may, by notice, require any transferee of such property, whether or not he received the property directly from the said deposit taker, to appear on a date to be specified in the notice and show cause why so much of the transferee’s property as is equivalent to the proper value of the property transferred should not be attached.

(2) Where the said transferee does not appear and show cause on the specified date or where the Designated Court is satisfied that the transfer of the property to the said transferee was not a bonafide transfer and not for commensurate consideration, it shall order the attachment of so much of the said transferee’s property as in its opinion is equivalent to the proper value of the property transferred.

22. Punishment for contravention of section 4.

Any deposit taker who contravenes the provisions of section 4 shall be punishable with imprisonment for a term which may extend to seven years, or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of the fraudulent default referred to in said section, whichever is higher, or with both.

26. Punishment for contravention of section 10.

Whoever fails to give the intimation required under sub-section (1) of section 10 or fails to furnish any such statements, information or particulars as required under sub­section (2) of that section, shall be punishable with fine which may extend to five lakh rupees.  

27. Cognizance of offences.

Notwithstanding anything contained in section 4, no Designated Court shall take cognizance of an offence punishable under that section except upon a complaint made by the Regulator:

Provided that the provisions of section 4 and this section shall not apply in relation to a deposit taker which is a company.

28. Offences to be cognizable and non-bailable.

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 every offence punishable under this Ordinance, except the offence under section 22 and section 26, shall be cognizable and non-bailable.

Note: we should wait for Rules and more clarification from the Ministry of Law and Justice.