FAQs on the Banning of Unregulated Deposit Schemes Ordinance, 2019
K. Vaitheeswaran (Advocate)
1. What is the need for this Ordinance?
The Banning of Unregulated Deposit Schemes Bill, 2019 was passed by the Lok Sabha on 13.02.2019 but could not be passed by the Rajya Sabha. Since the Parliament is not in session, the Ordinance has been issued by the President of India vide Notification dt. 21.02.2019.
2. What is the objective?
The Ordinance is to provide for a comprehensive mechanism to ban Unregulated Deposit Schemes and to protect the interest of the depositors and for matters connected therewith.
3. What is an unregulated deposit scheme (URDS)?
A scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business which is not a regulated deposit scheme as specified in the First Schedule.
4. What is a regulated deposit scheme?
- Schemes that are listed in Schedule-I. Currently, schemes that are regulated by SEBI, RBI, IRDA, State Government, Union Territory Government, National Housing Bank, Pension Fund Regulatory and Developmental Authority, EPFO, Multi-State Co-Operative Society, Deposits accepted or permitted under Chapter-V of the Companies Act and any deposits accepted by a company declared as a Nidhi or a Mutual Benefit Society under the Companies Act are regulated deposit schemes.
- Deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute is also considered as a regulated deposit scheme.
- Further, Central Government, has a power to notify any other scheme as a regulated deposit scheme.
5. What is a deposit?
Section 2(4) defines a deposit to mean an amount of money received by way of an advance or loan or in any other form by a 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.
6. Are there any exclusions?
The exclusions are set out in Section 2(4) itself.
7. Are loans from banks excluded?
Loans from scheduled banks or co-operative banks or any other banking company are excluded.
8. Are there any other exclusions in the context of institutions?
Amounts received as loan or financial assistance from public financial institutions notified by Central Government in consultation with RBI or any NBFC registered with RBI or any Regional Financial Institutions or Insurance Companies are excluded.
9. What is the position with reference to partnerships?
(i) Amounts received by way of contribution towards capital by partners of any partnership firm or limited liability partnership is excluded from the definition of ‘deposit’.
(ii) Any amount received by a firm by way of a loan from the relatives of any of its partners is excluded.
10. What is the position with reference to individuals?
Amounts received by an individual by way of loan from his relatives are excluded.
11. What about transactions on credit?
Amounts received as credit by a buyer from a seller on the sale of any property whether movable or immovable is excluded.
12. What about political parties?
Any deposit made under Section 34 or any amount accepted by a political party under Section 29B of the Representation of People Act, 1951 is excluded.
13. What about amount received in the course of or for the purpose of business?
Any amount received in the course or for the purpose of business or bearing a genuine connection to such business including
- Payments, advance, part payment for the supply or hire of goods or provision of services and is repayable in the event the goods or services are in fact sold, hired or otherwise provided.
- Advance received in connection with consideration of an immovable property under an agreement / arrangement subject to the condition that the advance is adjusted against such immovable property as per agreement.
- Security or dealership deposits for the performance of contract or for supply of goods or provision of services.
- Advance under long term projects for supply of capital goods.
14. Is there any prohibition in the context of URDS?
In terms of Section 3, unregulated deposit schemes are banned and no deposits taker shall directly or indirectly promote, operate, issue advertisement, solicit participation or enrolment in or accept deposits in pursuance of an unregulated deposit scheme.
15. What is the position of prize chits or money circulation schemes?
Any prize chit or money circulation schemes banned under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an URDS.
16. Are there penal consequences for soliciting deposits in contravention of Section 3?
There are fines as well as imprisonments in terms of Section 21 of the Ordinance.
17. What are the compliance requirements for person taking deposits?
Every deposit taker which commences or carries on business after the commencement of the ordinance shall intimate the authority about its business in the form and manner and within the time prescribed. The requirement of intimation is applicable to deposit taker accepting or soliciting deposits as defined in Section 2(4). In terms of explanation, the requirement of intimation is applicable even to a company that accepts deposits under Chapter-V of the Companies Act, 2013.
18. What are practical issues and what would be the impact on businesses?
In India business is carried on significantly through sole proprietorship and partnership formats. Most businesses are started and continued with funds from friends and associates. While the object of the Ordinance is to bring to book perpetrators of various fraudulent schemes which dupe the poor investor, this Ordinance is likely to create the following unintended issues:
(i) There is a general panic that partnership firms would no longer be in a position to accept loans from friends. Loans from relatives of partners are excluded from the scope of deposits in terms of Section 2(4). This logically leads the question as to loans from third parties and other firms. Section 2(4)(l) is a general exclusion which deals with amounts received in the course of or for the purpose of business and bearing a genuine connection to such business including … … This exclusion is significant and should cover loans taken in the course or for the purpose of business. Whether this clause can come to the rescue or not is a matter of interpretation.
(ii) Sole proprietors and individuals are also identified as deposit takers. An individual can take a loan from his relatives as the same is excluded from the purview of deposits. What is the position of loans taken from an individual from friends and associates? Whether Section 2(4)(l) which is the exclusion in the context of business would prevail over Section 2(4)(f) or not can be a question?
(iii) While Section 3 operates as a ban for URDS, Section 10 requires intimation by every deposit takers and verification by a competent authority as to whether the deposits are pursuant to an URDS. In other words, deposits as defined not falling within the exclusion if taken by any deposit taker would require an intimation to the authority in the prescribed format. On one hand, Section 3 operates as a ban and the regulated schemes are very limited in the list set out in the First Schedule. On the other hand, Section 10 requires, intimation. There appears to be a conflict between Section 3 and Section 10 given the fact that the list in Schedule-1 is very limited.
(iv) A deposit accepted or permitted under Chapter V of the Companies Act is listed in Schedule-1 and is therefore considered as a regulated deposit scheme. However, Section 10 requires intimation even in respect of a company accepting deposit Chapter-V of the Companies Act.
(v) In the context of companies, deposit is defined in terms of Section 2(31) of the Companies Act, 2013 and the exclusions are in terms of Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014. The scope of ‘deposit’ in the context of the Ordinance is significant and the exclusions are limited compared to Company Law.