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Banning of Unregulated Deposit Schemes Ordinance, 2019 by CA. Harsh Mathur

Banning of Unregulated Deposit Schemes Ordinance, 2019

This ordinance is promulgated by the President of India which is effective into force at once as a mechanism to ban unregulated deposits taken by persons with a promise to repay with or without any benefit. Many genuine lenders have been duped by various organizations in the past regarding deposits and its fake rewarding schemes. The government intent to bring this in force at once is a very strict step in the election year.

What is deposit?

The definition of deposit in the ordinance is as below:

4) “deposit” means 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,

If we take a literal interpretation of the law, it gives an impression that a union of sorts is created which includes each and every possible combination of arrangement. The important point here to note is that a promise to return has been specifically included in the definition which gives it a way out to many to create a colorable device by just drafting the agreement using different words like “intent to pay”. The government is clearly not including organized sectors into the definition but could have done better per se.

Exclusions to Deposits

Deposit does not include—

(a) amounts received as loan from a scheduled bank or a co-operative bank or any other banking company as defined in section 5 of the Banking Regulation Act, 1949; -

(b) amounts received as loan or financial assistance from the Public Financial Institutions notified by the Central Government in consultation with the Reserve Bank of India or any non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 and is registered with the Reserve Bank of India or any Regional Financial Institutions or insurance companies;

(c) amounts received from the appropriate Government, or any amount received from any other source whose repayment is guaranteed by the appropriate Government, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature;

(d) amounts received from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Government owned development financial institutions, foreign export credit collaborators, foreign bodies corporate, foreign citizens, foreign authorities or person resident outside India subject to the provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder;

(e) amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership;

(f) amounts received by an individual by way of loan from his relatives or amounts received by any firm by way of loan from the relatives of any of its partners;

(g) amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable);

(h) amounts received by an asset re-construction company which is registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(i) any deposit made under section 34 or an amount accepted by a political party under section 29B of the Representation of People Act, 1951;

(j) any periodic payment made by the members of the self-help groups operating within such ceilings as may be prescribed by the State Government or Union territory Government;

(k) any other amount collected for such purpose and within such ceilings as may be prescribed by the State Government;

(l) an amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business including—

(i) payment, advance or part payment for the supply or hire of goods or provision of services and is repayable in the event the goods or services are not in fact sold, hired or otherwise provided;

(ii) advance received in connection with consideration of an immovable property under an agreement or arrangement subject to the condition that such advance is adjusted against such immovable property as specified in terms of the agreement or arrangement;

(iii) security or dealership deposited for the performance of the contract for supply of goods or provision of services; or

(iv) an advance under the long-term projects for supply of capital goods except those specified in item (ii):
Provided that if the amounts received under items (i) to (iv) become refundable, such amounts shall be deemed to be deposits on the expiry of fifteen days from the date on which they become due for refund:

Provided further that where the said amounts become refundable, due to the deposit taker not obtaining 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, such amounts shall be deemed to be deposits.

Many of us will be interested in the last part of the exhaustive list of exclusions.

“Amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business”

The Law has stated inclusive definition about what constitutes amount received in connection of business:

  1. The advance received in course of purchase of goods and services- This shall never be a part of definition of deposits as this is a general trade parlance the condition included is that purchase return of goods/ services must also form part of agreement.
  2. Advance received in connection with consideration of an immovable property- The only condition brought under this category is that advance must be adjusted against consideration of such immovable property only.
  3. Security or dealership deposited for the performance of the contract for supply of goods or provision of services- This is to give relief to many rental income survivors/ dealers who takes deposits as part of initial negotiation and trust.
  4. An advance under the long-term projects for supply of capital goods except those specified in item (ii):

The First proviso of the above points is a triggered situation as per the agreement between parties. For example if the lease deed expires and the tenant wants to cease the agreement, the deposit must be repaid within 15 days of cessation. If not paid within the stipulated time it will straight away fall in the definition of deposit and the ordinance will apply.

OFFENCES AND PUNISHMENTS

Section – 3 Banning of Unregulated Deposit Schemes

Any deposit taker who solicits deposits - punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which shall not be less than two lakh rupees but which may extend to ten lakh rupees.

Any deposit taker who accepts deposits- punishable with imprisonment for a term which shall not be less than two years but which may extend to seven years and with fine which shall not be less than three lakh rupees but which may extend to ten lakh rupees Any deposit taker who accepts deposits in contravention of section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service- punishable with imprisonment for a term which shall not be less than three years but which may extend to ten years and with fine which shall not be less than five lakh rupees but which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in the Unregulated Deposit Scheme.

Section – 4 Fraudulent default in Regulated Deposit Schemes

Punishable with imprisonment for a term which may extend to seven years, or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of the fraudulent default referred to in said section, whichever is higher, or with both.

Section – 5 Wrongful inducement in relation to Unregulated Deposit Schemes

Punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which may extend to ten lakh rupees.

Section – 10 Intimation of business by deposit taker

Punishable with fine which may extend to five lakh rupees

Offences by deposit takers other than individuals

(1) Where an offence under this Ordinance has been committed by a deposit taker other than an individual, every person who, at the time the offence was committed, was in charge of, and was responsible to, the deposit taker for the conduct of its business, as well as the deposit taker, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

(2) Nothing contained in sub-section (1) shall render any such person liable to any punishment provided in this Ordinance, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

(3) Notwithstanding anything contained in sub­section (1), where an offence under this Ordinance has been committed by a deposit taker other than an individual, and it is proved that the offence—

(a) has been committed with the consent or connivance; or

(b) is attributable to any neglect on the part of any director, manager, secretary, promoter, partner, employee or other officer of the deposit taker,

such person shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

The wide scope of exclusions coupled with non cognizable offence makes the provisions of this ordinance easy to be played upon. The government should constitute a team which comprise of experts from all walks of life to make it more implementable,