Ordinance Banning Unauthorized Deposits: Biting Off More Than It Could Chew?

“Lloyd’s people were amazed when I pointed out that it was illegal to use their client’s money for their own investments. They asked where it said that in the new Act of Parliament regulating Lloyd’s. The Lloyd’s Chief Executive Ian Hay Davison said: “It’s not in the Act but in the ten commandments”.

-      Bennion on Statutory Interpretation (page v, sixth edition, but the seventh edition unfortunately failing to retain this timeless quote) citing Lord Wyatt of Weeden.

From ancient times to our day, the principle has stood that it is wrong to steal other people’s money and that money obtained from others as loan or borrowing should be re-paid. Usurious and unconscionable rate of interest was of course frowned upon by both law and religions. In our populous country with millions scraping by in life or working hard for middle class existence, it is natural for many people to be tempted to part with their earnings to others claiming to give a high return. Cheating has not ceased even in the age of Income tax PAN and digital economy. For people who deposited their hard-earned money in the schemes of people who turn out swindlers, their lives are ruined. It is with a view to tighten the screws on fraudsters and schemers out to steal deposits placed with them by their investors, that the central government has conceived of an over-arching law to throttle such scamsters. The result is the BUDS law – “The ‘Banning of Unregulated Deposit Schemes Ordinance, 2019”, the same being necessitated by the lapse of the bill of the same name in the last session of the Lok Sabha.

The backdrop to the bill was the reported increasingly large-scale scams in the country wherein fraudsters floated dubious schemes collecting deposits offering high returns and made off with the money of their depositors. Many people committed suicide unable to bear the life-ruining losses. To be sure, many states already prohibit unauthorized collection of money, especially schemes like prize chits, money circulation and multi-level marketing etc. But the law is seen to be largely ineffective and weakened by delayed and diluted enforcement. Hence a strong signal of law emanating from the central government was felt essential to deal with the increasing menace of unauthorized collection of deposits by unscrupulous and virtually unregulated persons and entities masquerading as normal businesses.

The new law aims to create a unified and tough law banning unauthorized collection of deposits by virtually anyone. It promulgates a clear nationwide prohibition of unauthorised deposit-taking and also bans the promotion and advertising of unauthorized schemes. Its most deterrent provision is that it criminalises unregulated deposits with measures to confiscate proceeds of the crime and refund depositors’ money. In brief, all deposit schemes that have not been specifically cleared under specified law stand banned without remorse.

The salient features of the ordinance:

A: Unregulated deposit schemes are banned.

B: No deposit-taker shall promote, operate or solicit enrolment or participation in such scheme nor shall he accept any deposits for the scheme.

C: Prize chits and money circulation schemes are specifically treated as unauthorized schemes under the ordinance.

D: It permits acceptance of deposits only under a regulated deposit scheme as provided in schedule I of the ordinance such as specified schemes allowed by SEBI, RBI, Banks, Pension Funds, NHB, IRDS, EPFO, MCA, registered societies, state and central governments etc as regulated deposit schemes that will not run afoul of the ordinance. permit acceptance of deposits only under a regulated deposit scheme as provided

E: Since deposits are the main focus of this law, the ordinance defines deposits a follows:

“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”.

 The exclusions from deposits

• Loans received from banks;
• Loans/ financial assistance from private finance institutions (PFIs)  or any registered non-banking financial companies (NBFCs), regional financial institutions and insurance companies;
• Amount received from or guaranteed by appropriate government;
• Amount received from a statutory authority;
• Amounts received from foreign government, foreign banks, and foreign authorities or person resident outside India as per the provisions of the Foreign Exchange Management Act (FEMA) 1999;
• Capital contributions by partners of a partnership firm or LLP;
• Loans received by an individual from his relatives;
• Loans received by a firm from relatives of partners;
• Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable);
• Amounts received by a registered Asset Reconstruction Company (ARC);
• Amounts received under Section 34 or Section  29B of the Representation of the People Act, 1951;
• Any periodic payment made by the members of self-help groups as per the ceiling prescribed by state/ Union territory government;
• Amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business for following and which has not become refundable (including for reasons where deposit taker did not obtain the 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):

• Payment, advance or part payment for supply/ hire of goods / services;

• Advance received in connection with and adjusted towards consideration of an immoveable property under an agreement or arrangement;

• Security & Dealership deposit;

• Advance under long-term projects for supply of capital goods;

Hefty fines & punishments for various violations of the law

There are fines and imprisonments for various types of contraventions ranging from one to ten years and fines going upto fifty crore rupees or more in terms of Section 21 to 27 of the Ordinance. Barring the offences under section 22 and 26 involving fraudulent default by companies under section 4 and failure to provide information required to be made under section 10 of this law, all other offences are cognizable and non-bailable. Whether the penal provisions will be effective will depend not on the letter of the law alone but mainly on proper and informed enforcement by the Regulator and the government agencies.

Section 4 of the law turns its radar to Regulated Deposit Schemes

The ordinance in its preamble makes the banning of unregulated deposit schemes and the protection of depositors as its twin goals. While this is understandable and welcome, what would attract a good deal of attention is section 4 of the ordinance which goes as follows:

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”.

This provision extends this law that signally bans un-authorized deposit schemes to Regulated deposit schemes, contrary to the general impression that regulated deposit schemes are off the radar of this law. However, in respect of regulated deposit schemes, this law only targets fraudulent defaults committed by deposit-takers. At first blush, section 4 appears a sweeping power standing like a sentinel over any permitted deposits taken by authorized persons and entities in so far as they fail to repay the depositors as promised. Given the wide definition of deposit under this law, the authorized categories of business arrangements involving deposits known to involve a bewildering variety of promises both pecuniary and services as return would pose huge challenges of enforcement. For example, a company A may offer a deposit or a timely loan to company B with low or affordable interest or stand guarantee for a non-performing loan taken by company A and expect directorships on the Board of company B or its valuable agency or dealerships. What if company B does not perform the bargain for opaque reasons and company A complains to the Regulator? Will company B be considered to be in fraudulent default? In my view, the scope of fraudulent default under section 4 cannot be stretched to such limits of corporate chicanery but applied only to the deceitful non-payment of money lent to one entity by another entity.

Fraudulent default penalized by section 4

Fraudulent default is witnessed when the deposit-taker has money enough but does not wilfully re-pay, or has intent to enrich himself at the cost of the depositor or does not re-pay intending to injure the interests of the depositor/lender or has diverted funds to induce or obtain circumstances of default or has not shown due diligence in meeting the re-payment obligation with the lack of diligence exceeding mere or gross negligence, testifying to an original intention not to re-pay.

Companies seem let off the hook

It will be interesting to note that while section 4 does not in itself provide any exemption for any deposit-taking business, section 27 keeps companies safe from the strict requirement of section 4. Now read this section 27, as follows:

“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”.

It is strange that an exemption from the scope of section 4 is not found in section 4 as a proviso, for example, but is discovered in another section relating to cognizance of offences. It will be of doubtful validity that a proviso to one section can be read effectively as a proviso to another section and be permitted in law to state things unrelated to the section to which it is appended. The Courts may likely interpret section 27 as being restricted to non-corporates rather than taking a blanket view that section 4 does not cover companies as deposit-takers. Nevertheless, taking the proviso at face value, companies may not worry about any defaults and being hauled up under this law. However, section 4 will doubtless cover proprietors, association of persons, HUF, partnerships, trusts, societies and other non-corporates in regard to deposit-taking even under Regulated deposit schemes.

Problem areas of the law

It may look unfair to subject a new law purporting to protect common depositors from the greed and deceit of deposit-takers to searching scrutiny even before the law got going. Reaction to the new law will only be expected since the law has adopted sweeping definitions of deposits and extends also to fraudulent defaults happening even in the Regulated deposit schemes. Unless a minimum exemption threshold is granted, the ordinance could deal a blow to small groups of women across the country engaged in micro-level money-saving and operating lending & repaying network among themselves. Many such women groups may not want to graduate to open, politicised self-help groups. Many Jewellers have been operating large-scale deposit schemes as an alternative to other costlier formal finance, though some of them have cheated. Now they will have to be regularized. The ordinance will have an effect - whether intended or not, whether for the good or not, which we do not know at this stage of this law- of money in this country being capable of circulation beyond the immediate family only under governmental or statutory approval. The new law could engender durable reductions in the level of informalization of the economy. It may ultimately boost tax collection. That’s a sweetener for the State.