Compliances

Banning of Unregulated Deposit Schemes Ordinance 2019

Just a while ago, on the 21st of February, 2019, the Government of India took a step to ban unregulated deposits by releasing the “Banning of Unregulated Deposit Schemes Ordinance 2019”. This ordinance has been passed by the Government with the motive to formalize the deposit-taking activities in the country and to protect unaware investors from unregulated deposit schemes; you may also call them Ponzi schemes. This step will keep deposit-taking activities under control, and it will also punish unlawful deposit-taking activities. Lok Sabha has given its assent on this bill through a voice vote on the basis of the Cabinet’s request to the President.

So let’s take a closer look at this Ordinance;

Applicability & Objective of the “Banning of Unregulated Deposit Schemes Ordinance 2019”

The ordinance is applicable to the whole of India except Jammu & Kashmir, with effect from 21st February 2019. It has been issued under clause (1) of Article 123 of the Constitution of India. This bill was passed on 13th February 2019 by the Parliament. Ban of Unregulated Deposit Schemes ordinance announced by the President of India as it could not be taken up for consideration in Rajya Sabha. The main objective of this ordinance is to ban unregulated deposit schemes as well as to protect the interest of depositors.

Need of “Banning of Unregulated Deposit Schemes Ordinance 2019”

As per the laws enacted by the government, there are various non-banking entities which are eligible to raise public deposits. However, in India, the regulatory framework for carrying out deposit-taking activities is not harmonious, which results in an unauthorized collection of money. Thus, there was a need for the introduction of this unregulated deposit scheme ordinance. This fresh ordinance will keep an eye on the deposit-taking activities in India and will also penalize instances of soliciting, the activity of accepting deposits in relation to an unregulated deposit scheme.

To whom “Banning of Unregulated Deposit Schemes ordinance” is applicable?

The ordinance is applicable to deposit takers who are involved in deposit-taking activities through regulated or unregulated deposit schemes.

Purpose of the “Banning of Unregulated Deposit Schemes Ordinance 2019”

The main purpose of this scheme is to ban “Unregulated Deposit Schemes”. Deposit-taking activities under Unregulated Deposit Schemes are banned from now onward.

The “Banning of Unregulated Deposit Schemes Ordinance” said that

Creation of type of Offences to Regulate the Deposits under Ordinance

To regulate the deposits in the country, the statute created the following types of offences:

• Fraudulent Default in Regulated Deposit Scheme

In pursuant to a Regulated Deposit Scheme, it has been ordered to deposit acceptors to not commit any fraudulent default in the repayment of deposit at the time of maturity. They are also ordered to render any specified services which they have promised to render against such deposit.

• Wrongful Inducement Concerning Unregulated Deposit Scheme

To make another person member or participant of an unregulated deposit scheme, no false statement or promise shall be made along with this; facts shall not be misled in order to induce another person.

• Carrying out Unregulated Deposit Schemes

An unregulated Deposit Scheme means a scheme which is banned under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978. Any person pursuant to such schemes is liable to be punished under the Ordinance.

Leading Provisions of “Banning of Unregulated Deposit Schemes Ordinance 2019”

• Provisions regarding availing of Deposits

Under this Ordinance, it is prohibited for individuals or groups of individuals to avail deposits or loans from a person other than relatives. While partnership firms can avail of deposits or loans from relatives or partners only.

• Penalty Provisions

The penalty provisions are prescribed under the ordinance in case of any default is made. The fine may range from Rs. 2 lakhs to Rs. 50 crores, along with imprisonment of one to ten years. Likewise, it contains adequate provisions for the repayment of deposits for depositors in such instances where unregulated schemes try to raise deposits in an unlawful manner.

• Provisions regarding Attachment of Properties

For the repayment of deposits, the ordinance prescribes the provisions regarding the attachment of properties/assets and their subsequent realization.

• Provisions regarding Maintenance of Database

It is crucial to track deposit-taking activities in India; therefore Central Government may nominate an authority for maintaining and operating an online database of deposit-taking activities in India.

• Intimation of Business to the Concerned Authority

This ordinance is making compulsory for deposit takers to intimate the concerned authority about the deposit-taking activities in the prescribed manner. In case such concerned authority finds that deposits are being accepted pursuant to the Unregulated Deposit Scheme, then it may ask for furnishing necessary information.

What are the powers of Police Officers in this regard?

A police officer is authorized to initiate proceedings against a suspected defaulter who made a default in complying with the provisions of the ordinance, but that police officer must not be below the officer-in-charge of a police station.

As it is clear from the above that the officer is authorized to initiate proceedings, he/she may make essential seizures of records or property and may take the defaulter into custody in order to produce such person in court. In case the officer cannot enforce seizure, then a written order may be produced regarding the freeze of the property, account, deposits or valuable securities of the deposit taker. Nonetheless, searches & seizures and arrests conducted must comply with the provisions of the Code of Criminal Procedure, 1973.

Key Observations

• Loans obtained during the course of business will not constitute a deposit;
• The central Government may nominate an authority for maintaining and operating an online database of deposit-taking activities in India as per section 9 of the ordinance;
• The deposit taker has to pay the due amount of the depositors in priority, prior to the payment of debts, revenue, taxes and cesses;
• In case of any contravention, the Central Bureau of Investigation (CBI) will look after the matter;
• Under this ordinance, a search can be conducted by the police officer in charge of the police station without any warrant.

Well, for a better understanding of this article, it is important to get knowledge of crucial terms;

What are the Unregulated Deposit Schemes?

Unregulated Deposit Schemes are those types of schemes under which deposits are accepted through unregulated deposit schemes, which are prescribed under the first schedule column (3). These are the schemes which are not registered with the government.

What are the Regulated Deposit Schemes?

Regulated Deposit Schemes are those types of schemes which are regulated by regulatory authorities like SEBI, RBI, IRDA, NHB and PFRDA, EPFO etc. These types of schemes are defined under column (3) of the first schedule.

What is covered under Deposits?

According to the ordinance, a deposit means the amount of money received in the following manner:

• Money received by way of advance;
• Money received by way of a loan;
• Money received in any other form;

“with a promise to return after some time in cash or in kind or in any other form with or without any benefit in the form of interest, bonus, and profit or in any other form.”

Who falls under the definition of Relatives?

As per the Companies Act 2013, the definition of relative covers:

• Members of the Hindu Undivided Family;
• Husband & Wife;

For someone to be a relative of another, they have to be the following below mentioned:

• Father
• Mother
• Son
• Daughter
• Brother
• Sister
• Daughter in law
• Son in law

Who falls under the category of Depositors?

• An Individual
• Hindu Undivided Family
• Company
• Trust
• Partnership Firm
• Limited Liability Partnership
• AOP (Association of Persons)
• Co-operative Society
• Every other artificial judicial person

Takeaway

This ordinance has been introduced by the government to protect the interest of investors from unregulated deposit schemes. This step will surely eliminate illicit deposit-taking activities. Thus, we really appreciate the intent of the government of curbing the black money from the economy. This is an applaudable step taken by the government after the implementation of the GST and Demonetization.

Also, this ordinance will create a roadblock for regular businesses. Likewise, deposits can be accepted by LLP from partners in the form of “partner’s capital contribution” and not in the form of “loans”, while partnership firms can accept loans from relatives of partners in place of partners. So, the acceptance of deposits under an unregulated deposits scheme will result in the freezing of assets and imprisonment / fine penalty for the defaulter.

I hope this article has given you relevant information on a recent ordinance issued by the government. For more information, please contact us at info@enterslice.com