The Reserve Bank of India (RBI) has clarified that a company in the structure of Hindu undivided family (HUF) cannot access public deposits if it is in the business of finance and on-lending. It can only access funds from relatives and family members. However, companies of such structures can access public deposits (inter-corporate deposits) as defined under the company law if their operation is other than financing.

The logic cited is that depositors do not know the prospects of the other businesses where the HUF will be onlending their money if it is into financing.

In the other case, if the HUF is not into financing, the depositors lend their money knowing fully well the business of the company.

These views have been sent in response to the Supreme Court query in the case of Margadarshi Financiers, a part of Ramoji Rao HUF.

Banking sources said that the clarification was necessary since the operations of HUFs were a grey area. They (HUFs) do not come under the category of non-banking finance companies but access public deposits, they added.

The sources further said that if the Supreme Court does not uphold the view of the RBI, the central bank will push for an amendment to the Chapter III (c) of the Banking Regulation Act to clarify this.

The case of Margadarshi Financiers is with the Supreme Court following a complaint that the HUF has been raising deposits contravening the RBI Act.

Ramoji Rao HUF reportedly runs several businesses, including the Margadarshi Financiers, and owns more than 99 per cent shareholding in large concerns forming part of the group like Ushodaya Enterprises Ltd and Usha Kiran Movies.

As per Indian Law, Hindu united family or a joint Hindu family is an extended family arrangement under which many generations live under the same roof.

In its reply to an Andhra Pradesh government committee report, Ramoji HUF had reportedly stated that Margadarshi Financiers had never defaulted in its commitment to depositors towards payment of interest as well as repayment of deposits on due dates.

It had also said that the HUF could pay off substantial commitments by just divesting 26 per cent shareholding in one of the group concerns and through part financing from banks.

Recently, US-based Blackstone group had evinced interest in picking up 26 per cent equity in Ushodaya Enterprises Ltd for a consideration of $275 million (Rs 1,217 crore).

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