The Banning of Unregulated Deposits Schemes Ordinance, 2019

Introduction:

1. On 21.02.2019, Govt. Of India has brought has an ordinance with following objectives: -

• For banning of unregulated deposits schemes;
• To protect the interest of depositors; and
• Other matters relating to or connected to the above two objectives

2. The Banning of Unregulated Deposit Schemes Bill, 2019 was passed by the Parliament on 13.02.2019 but the same could not be taken up for consideration by the Rajya Shabha, therefore the said law has been enacted through an ordinance promulgated by the Hon'ble President of India.

3. The said ordinance has been promulgated by the Hon'ble President of India in exercise of clause (1) of Article 123 of the constitution. Such power can be exercised by Hon'ble President when the Parliament is not in session and it is considered necessary by the Hon'ble President on the recommendation of Union Cabinet.

4. The ordinance issued under clause (1) of Article 123 of The Constitution of India holds the same force as an Act of Parliament.

5. The ordinance is applicable w.e.f. 21.02.2019 and it applies to all whole of India except of state of Jammu and Kashmir.

To whom this ordinance applies?

This ordinance applies to those deposit takers who are in the business of taking or accepting deposits whether through unregulated or through regulated deposits schemes.

What has been banned?

On and from 21-02-2019, 'Unregulated Deposits Schemes' have been banned. Where deposit takers are in the business of acceptance or solicitation of deposits and which is not a regulated deposit scheme, the same has been banned.

What are Unregulated Deposits Schemes?

Unregulated Deposits Schemes or 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.

What are Regulated Deposits Schemes?

Regulated deposits schemes are schemes specified under column (3) of the First Schedule to this ordinance. In general, there are the schemes which are regulated by SEBI, RBI, IRDA, State Government or UT government, National Housing Bank, Pension Fund Regulatory and Development Authority, EPFO, Central Registrar, Multistate Cooperative Societies, MCA and any scheme notified by central government or deposits accepted under any scheme registered with any regulatory body constituted under a statute.

What Shall Constitute as a Deposit?

Deposit as per this ordinance means an amount of money received by way of advance or loan or an in any other form with a promise to return whether after a specified period or otherwise either in cash or in kind or in form of specified service with or without any benefit in form of interest, bonus, profit or in any other form. It will include money taken in following forms:-

1. Money received by way of advance;
2. Money taken by way of Loan;
3. Money taken in any other form;

which is taken with a promise to return whether after a specified period or otherwise either in cash or in kind or in form of specified service, whether interest bearing or free of interest, whether with any benefit in form of bonus or profit or in any other form.

Money Receipts No To Be Treated As Deposits

There are twelve exceptions to the money received, which will not be treated as deposits. Out of the twelve exceptions, twelfth exception (l) is the most important and is worth observing : -

1. Loans from Scheduled Bank, Co-operative Banks or a company engaged in the business of banking.
2. Loan or financial assistance from Notified Public Financial Institutions or Registered NBFC Companies or Regional Financial Institutions or Insurance Companies.
3. Amount received from Central Govt., UT, State Govt., UT of Delhi or UT of Puducherry or amount received from Statutory Authorities constituted under Act of Parliament or State Legislature.
4. 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 persons resident outside India subject to the provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder;

Thus, deposits from Foreign Citizen and person Resident outside India subject to the provisions of FEMA, 1999 and Rules and Regulations there under are not deposits.

1. Capital contributions by partners of partnership firm or a LLP;
2. Loan from relatives by an individuals or loans received by any partnership firm or LLP from the relatives of its partners;

Relatives for the purpose of this ordinance, monies received from whom not to be treated as deposits.

For the purpose of this ordinance term relative is the same meaning as assign to it in the Companies Act, 2013. As per Companies Act, 2013 relative means anyone who is related to another, if—

(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or

A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely: -

(1) Father: Provided that the term 'Father' includes step-father.
(2) Mother: Provided that the term 'Mother' includes the step-mother.
(3) Son: Provided that the term 'Son' includes the step-son.
(4) Son's wife.
(5) Daughter.
(6) Daughter's husband.
(7) Brother: Provided that the term 'Brother' includes the step-brother;
(8) Sister: Provided that the term 'Sister' includes the step-sister.

Depositor means any person who makes deposit under this ordinance and it includes

(i) an individual;
(ii) a Hindu Undivided Family;
(iii) a company;
(iv) a trust;
(v) a partnership firm;
(vi) a limited liability partnership;
(vii) an association of persons;
(viii) a co-operative society registered under any law for the time being in force relating to co-operative societies; or
(ix) every artificial juridical person, not falling within any of the preceding sub-clauses;

1. Credit facilities received by a buyer from a seller on sale of moveable or immovable property;
2. Amounts received by asset re-construction company registered with the Reserve Bank of India under SARFAESI Act;
3. Any deposit made or amount accepted by political parties under the Representation of the People Act, 1951;
4. Payment received from the members of self help groups within the prescribed ceiling by State Government or UT Government.
5. Payment collected on the prescription of State Government.
6. Most important 'clause l' of the exceptions which specifies that amount received in the course of or for the purpose of business and bearing a genuine connection to the business in the course of which the amount has been received does not fall under the definition of deposit. 'Clause l' specifies following inclusive items which will not be considered as deposits:-

(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.

Amount received in the course of, or for the purpose of, business and having a genuine connection to such business.

'Clause l' specifies four inclusive items received in the course of or for the purpose of business and bearing a genuine connection to such business not to be treated as a deposit. It is a inclusive definition

The author is of the firm view that subject to provisions of the respective statues governing the respective business entities, loans raised by the businesses in the course of business or for the purpose of business from persons other than relatives would also be out of the definition of deposits.

Key observations:

1. Loans taken in the course of or of the purpose of business and bearing a genuine connection with such business are also not deposit.
2. Section 9 of this ordinance provides that Central Government may designate an authority which shall maintain and operate an online database for information on deposit takers operating in India.
3. Save as otherwise provided under SARFAESI and IBC, amount due to depositors from a deposit taker shall be paid in priority over all other debts and revenue, taxes and cesses.
4. Matters contravening the provisions of this ordinance shall be investigated by Central Bureau of Investigation.
5. Power to conduct a search has been vested in officer-in-charge of a police station without any warrant under this ordinance.

This article is written by Manu Gawri and CS. Bharti Malik. The authors can be reached at Information.rkg@gmail.com