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Unregulated Deposit Scheme Ordinance: The Details

By Sakshi Goyal, Team CNK RK

In order to address the gaps in the existing regulatory framework for deposit-taking activities and for formulation of new laws encompassing all the relevant aspects relating to the deposit-taking, the Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill, 2015 was introduced.

Presently, deposits from the public are allowed to non-banking entities under the provisions of various statutes enacted by the Central Government and State Governments. Despite existence of diverse regulatory framework and arrangements for deposit taking in the country, practices of defrauding gullible investors by illicit deposit schemes promising high returns or other benefits are still in operation.

Recently, The Banning of Unregulated Deposit Scheme Ordinance 2019 was promulgated by the President, Ram Nath Kovind, to curb the threats of illicit deposit taking activities in the country. Such unregulated deposit schemes designed to entrap naïve investors have been prohibited completely.

Unregulated Deposit Scheme

The Ordinance defines “Unregulated Deposit Scheme” as 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.

In other words, the Ordinance is applicable to entities where collection of deposits is the chief business activity.

As per the Ordinance, “No deposit taker shall directly or indirectly promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an unregulated deposit scheme”. It also makes necessary for every entity to get registered before taking any deposit, thereby, creating a central repository of all the registered entities which can take deposits.

Key features:

  • The Bill contains a substantive banning clause which bans Deposit Takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme
  • Deterrent punishment for promoting or operating an unregulated deposit taking scheme
  • Stringent punishment for fraudulent default in repayment to depositors
  • The Bill provides for attachment of properties / assets by the Competent Authority, and subsequent realization of assets for repayment to depositors
  • Creation of an online central database, for collection and sharing of information on deposit-taking activities is enabled in the country
  • “Deposit Takers” include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation
  • “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

 

Transactions exempt from the Ordinance

  • Contributions by way of Capital received by the partners of any partnership firm or a limited liability partnership
  • Loans received by
  • an individual from his relatives or
  • any firm from the relatives of any of its partners
  • Periodic payments made by the members of the self-help groups operating within the ceilings prescribed
  • Amounts received as credit by a buyer from a seller in the course of sale of movable/ immovable property
  • Loans from a scheduled bank or a co-operative bank or any other banking company as defined under the Banking Regulation Act, 1949
  • Amounts received from the Foreign Govts., International Banks, Foreign bodies Corporate, Foreign Citizens etc.
  • Acceptance of amount by the Political Parties under section 29B of the Representation of People Act, 1951
  • Amounts received by an asset-reconstruction company registered with the RBI under section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

There was confusion on various channels wherein it was mentioned that Individuals may not be able to borrow money from any one other than their relatives. This obviously caused consternation amongst the public at large. The government through the department of financial services has clarified however that

“Banning of Unregulated Deposit Ordinance-2019, exempts Individual, Firm, Companies & LLP etc. for taking any loan and deposit for their course of business as per section 2(4) e,f,l and other provisions.”

 

Penal provisions for offences under the ordinance :

S.No Offences Imprisonment Fine
1 Soliciting deposits under Unregulated deposit schemes 1 year to 5 years INR 2 lacs to 10 lacs
2 Acceptance of deposits under Unregulated deposit schemes

 

2 years to 7 years

 

INR 3 lacs to 10 lacs
3 Acceptance of deposits under Unregulated deposit schemes and Fraudulent Default

 

3 years to 10 years INR 5 lacs to twice the aggregate amount of funds collected
4 Fraudulent default in Regulated Deposit Schemes Upto 7 years INR 5 lacs to 25 cr or three times the amount of profit made out of fraudulent default
5 Wrongful inducement in relation to unregulated deposit schemes

 

1 year to 5 years Upto 10 lacs
6 Repeated Offenders

 

5 years to 10 years 10 lacs to 50cr
7 Failure to file intimation about the business to the authority Upto 5 lacs

 

Our Take

The Banning of Unregulated Deposit Schemes Ordinance, 2019 has paved the way for the clear cut regulation of Unregulated Deposit Schemes. This ordinance will provide a protective shield for the interest of general public who are maliciously induced to invest in illicit deposit schemes by making a provision for stringent consequences in cases of contravention.

However, provisions of the Ordinance against legitimate businesses can be misused due to the wide definition of the term “deposit” which is coupled with the fact  that most of the offences comes under the purview of law and are non-bailable. No consideration has been given to the consequences on legitimate businesses while drafting the provisions of this Ordinance. It is suggested that the Ordinance be critically examined by a team of experts having wide representation from people of all walks of life.

 

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