Ministry of Law and Justice notified The Banning of Unregulated Deposit Schemes Ordinance 2019 vide notification published in official Gazette on 21st February 2019. It provides a comprehensive mechanism to ban the unregulated deposit schemes and to protect the interest of depositors and matters connected thereto. This bill could not be passed in the house of Rajyasabha however, President given his consent looking at the prevailing circumstances in exercise of powers conferred by clause (1) of article 123 of the Constitution. The said ordinance is applicable immediately (effective from 21st February 2019). This law will help in tackling the risk of accepting fraudulent deposits and to safeguard the interest of investors. The law has been enacted especially to regulate Unregulated Deposit Schemes after the Saradha and Rose Valley chit fund schemes that shook West Bengal & other states. There are 166 more such chit fund cases where investors lost their monies that have been registered in the last four years. The introduction of this ordinance will regulate and control non-corporate deposit takers who tempt the public at large with lucrative schemes. Definition of “deposit takers” also include any individuals/ group of individuals, proprietorship concerns and partnership firms apart from other recognized legal structures (viz. LLP, companies, societies)
The ordinance defines “Deposit” as 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 in whatever form. Pursuant to the definition of “Deposit” and exclusions, now any individual or group of individuals cannot take any deposit or loan from any person other than relatives, whereas partnership firms can take deposit or loan from relatives or partners only. However, genuine connection to businesses like an advance for supply/hire of goods, consideration of immovable property, security or dealership deposited for the performance of the contract and supply of capital goods are excluded from the ambit of the ordinance.
The ordinance defines “Regulated Deposit Scheme” as those schemes regulated by SEBI, RBI, IRDA, State Governments or Union Territory Governments, National Housing Banks, Pension Funds Regulatory, EPFO, Central registrar Multi State Co-operative societies, MCA and other regulatory bodies. All other deposits will be considered as “Unregulated Deposits”. No deposit taker shall directly or indirectly promote, operate issue any advertisement soliciting participation or enrollment in or accept deposits in pursuance of an Unregulated Deposit Scheme. It has been further clarified through insertion of explanation in Multi State Co-operative Societies (Amendment) Act that it shall not be entitled to receive deposits from persons other than voting members. Vide amendment of section 45I of RBI Act 1934, an explanation has been inserted stating that the amount accepted by co-operative society from members/ shareholders/ associate members who do not have full voting rights in meetings shall be deemed to be deposit.
Under section 9, the government may designate an authority whether existing or to be constituted which shall create, maintain and operate an online database for information on deposit takers operating in India. As per section 10 of the ordinance, existing and new deposit takers shall intimate the designated authorities about its business in such form and manner as applicable from time to time as prescribed and if the competent authority has a reason to believe that the deposits are being accepted pursuant to an Unregulated Deposit Scheme, it may direct deposit taker to furnish documents/statements as it considers necessary relating to or connected with the deposit.
The ordinance provides for punishment ranging from 1 year to 10 years and fine ranging from Rs. 2 lakh to Rs.10 lakh in case of non-compliance. The ordinance provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors. Depositors’ have priority to all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority at the time of insolvency.
As per the literal reading of ordinance, it seems that unless the amount received by way of advance or loan is falling under the exclusions of definition of “Deposit”, then the same is subject compliances prescribed under the ordinance. As can be seen from the preamble to ordinance, the intention of the legislature is to provide for a comprehensive mechanism to ban the unregulated deposit schemes to protect the interest of depositors. It seems that routine business transactions of accepting unsecured loan should be out of ambit of the law. The ordinance further gives power to the Government to exempt further schemes by notification and one can expect some relief/clarity through notification when final rules are published. Many representations are expected to happen in coming days and it is expected that Government will come up with clarifications in the form of FAQ soon.