Banning of Unregulated Deposits : All you wants to Know !

By | March 13, 2019
(Last Updated On: March 13, 2019)

Banning of Unregulated Deposits Ordinance 2019

Govt of India has notified Banning of Unregulated Deposit Schemes Ordinance 2019 . ( Download here ) in Official Gazette on 21.02.2019 . The Ordinance define “Deposit Taker” and “Deposit” comprehensively;

Meaning of unregulated deposit 

 “Unregulated Deposit Scheme” means a Scheme or 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. [ Section 2(17) of Banning of Unregulated Deposit Schemes Ordinance 2019 .]

Who is Deposit Taker as per Banning of Unregulated Deposits Ordinance 2019

  • Deposit Takers” include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation;

Section 2(6) of Banning of Unregulated Deposits Ordinance 2019

“deposit taker” means—

(i) any individual or group of individuals;

(ii) a proprietorship concern;

(iii) a partnership firm (whether registered or not);

(iv) a limited liability partnership registered under the Limited Liability Partnership Act, 2008;

(v) a company;

(vi) an association of persons;

(vii) a trust (being a private trust governed under the provisions of the Indian Trusts Act, 1882 or a
public trust, whether registered or not);

(viii) a co-operative society or a multi-State co­operative society; or

(ix) any other arrangement of whatsoever nature,

receiving or soliciting deposits, but does not include—

(i) a Corporation incorporated under an Act of Parliament or a State Legislature;

(ii) a banking company, a corresponding new bank, the State Bank of India, a subsidiary bank, a regional rural bank, a co-operative bank or a multi-State co-operative bank as defined in the Banking Regulation Act,1949;

What is Deposit under Unregulated Deposits Ordinance 2019

  • “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;

Section 2(4) of Banning of Unregulated Deposits Ordinance 2019

 “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, but 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.

Explanation.— For the purposes of this clause,—

(i) in respect of a company, the expression “deposit” shall have the same meaning as assigned to it under the Companies Act, 2013;

(ii) in respect of a non-banking financial company registered under the Reserve Bank of India Act, 1934, the expression “deposit” shall have the same meaning as assigned to it in clause (bb) of the section 45-I of the said Act;

(iii) the expressions “partner” and “firm” shall have the same meanings as respectively assigned to them under the Indian Partnership Act, 1932;

(iv) the expression “partner” in respect of a limited liability partnership shall have the same meaning as assigned to it in clause (q) of section 2 of the Limited Liability Partnership Act, 2008;

(v) the expression “relative” shall have the same meaning as assigned to it in the Companies Act, 2013;

Whether Deposit can be received from Relative ?

The expression “relative” shall have the same meaning as assigned to it in the Companies Act, 2013; [As per Explanation (v) of Section 2(4) of Banning of Unregulated Deposits Ordinance 2019 ]

As per Section 2(77) of Companies Act 2013

relative‘‘, with reference to any person, means any one who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed;

Rule 4 of the Companies (Specification of definitions details) Rules, 2014 reads as follows
List of relatives in terms of clause (77) of section 2.-
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 step-mother.
3. Son:
Provided that the term “Son” includes step-son.
4. Son’s Wife.
5. Daughter.
6. Daughter’s husband.
7. Brother:

Provided that the term “Brother” includes step-brother.
8. Sister:
Provided that the term “Sister” includes step-sister.

However, following needs to be understood. Father, mother, son, brother and sister include the step-counterparts but there is no specific mention about step-daughter. Thus  plain interpretation of the section indicates that step daughter is not a relative.

Persons on which this Ordinance is Applicable

“person” 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;

(vii) a co-operative society registered under any law for the time being in force relating to co­operative societies; or

(ix) every artificial juridical person, not falling within any of the preceding sub-clauses;

Benefits of Banning of Unregulated Deposits

The proposed Ordinance will immediately tackle the menace of illicit deposit taking activities in the country launched by rapacious operators, which at present are exploiting regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings, by altogether banning unregulated deposit taking schemes, and having adequate provisions for punishment and disgorgement / repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.

Offences under Banning of Unregulated Deposits Ordinance 2019

  • The Ordinance contains a substantive banning clause which bans Deposit Takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme. The principle is that the Ordinance would ban unregulated deposit taking activities altogether, by making them an offence ex-ante rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags
  • The Ordinance creates three different types of offences, namely,
    • running of Unregulated Deposit Schemes,
    • fraudulent default in Regulated Deposit Schemes, and
    • wrongful inducement in relation to Unregulated Deposit Schemes.

Penalty under Banning of Unregulated Deposits Ordinance 2019

 
Ordinance provides for severe punishment and heavy pecuniary fines to act as deterrent.

Reason For Punishments Who is liable for Punishments Quantum of punishment
Solicits deposits in contravention of section 3 Deposit taker For a term which shall not be less than one year but which may extend to five years and fine which shall not be less than two lakh rupees but which may extend to ten lakh rupees.
Accepts deposits in contravention of section 3 Deposit taker For a term which shall not be less than two years but which may extend to seven years and fine which shall not be less than three lakh rupees but which may extend to ten lakh rupees.
Accepts deposits in contravention of section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service, Deposit taker For a term which shall not be less than three years but which may extend to ten years and 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 21 of Banning of Unregulated Deposits Ordinance 2019

21. (1) Any deposit taker who solicits deposits in contravention of section 3 shall be 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.

(2) Any deposit taker who accepts deposits in contravention of section 3 shall be 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.

(3) 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, shall be 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.

Punishment for contravention of section 4 of Banning of Unregulated Deposit Schemes Ordinance, 2019

Reason For Punishments Who is liable for punishments Quantum of punishment
Contravention of the provisions of section 4 Deposit taker 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.

 Punishment for contravention of section 5 of Banning of Unregulated Deposit Schemes Ordinance, 2019

Reason For Punishments Who is liable for Punishments Quantum of punishment
Contravention of the provisions of section 5 Any Person 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.

Punishment  for repeat offenders.

Reason For Punishments Who is liable for Punishments Quantum of punishment
Punishment  for repeat offenders Whoever having been previously convicted of an offence punishable, except the offence under section 26 P unishable with imprisonment for a term which shall not be less than five years but which may extend to ten years and with fine which shall not be less than ten lakh rupees but which may extend to 

Punishment for contravention of section 10 of Banning of Unregulated Deposit Schemes Ordinance, 2019.

Whoever fails to give the intimation required under sub-section (1) of section 10 or fails to furnish any such statements, information or particulars as required under sub­section (2) of that section, shall be 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.

Penalty if loans & Deposits not returned within Due Date ?

Repayment of Deposit under Banning of Unregulated Deposits Ordinance 2019

The Ordinance has adequate provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.

Designated Court has been given  the power realisation of assets of the deposit taker and for repayment of the same to the depositors of such deposit taker or on any other matter or issue incidental thereto. [ Section 18 of Banning of Unregulated Deposits Ordinance 2019 ]

Property Attachment under Banning of Unregulated Deposits Ordinance 2019

  • The Ordinance provides for attachment of properties / assets by the Competent Authority, and subsequent realization of assets for repayment to depositors;
  • Clear-cut time lines have been provided for attachment of property and restitution to depositors;

Where the Competent Authority or officers appointed  has reason to believe (the reason for such belief to be recorded in writing), on the basis of such information and particulars as may be prescribed that any deposit taker is soliciting deposits in contravention of section 3, he may, by order in writing, provisionally attach the deposits held by the deposit taker and the money or other property acquired either in the name of the deposit taker or in the name of any other person on behalf of the deposit taker from the date of the order, in such manner as may be prescribed.[ Section 7 of Banning of Unregulated Deposits Ordinance 2019 ]

The Competent Authority shall, within a period of thirty days, which may extend up to sixty days, for reasons to be recorded in writing, from the date of the order of provisional attachment, file an application with such particulars as may be prescribed, before the Designated Court for making the provisional attachment absolute, and for permission to sell the property so attached by public auction or, if necessary, by private sale.

[ Section 14 of Banning of Unregulated Deposits Ordinance 2019 ]

The Designated Court shall endeavor to complete the proceedings under this section within a period of one hundred and eighty days from the date of receipt of the application [ Section 15 of Banning of Unregulated Deposits Ordinance 2019 ]

Online Central Database for deposit-taking activities

  • The Ordinance enables creation of an online central database, for collection and sharing of information on deposit-taking activities in the country;

(1) The Central 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.

(2) The authority designated under sub-section (1) may require any Regulator or the Competent Authority to share such information on deposit takers, as may be prescribed. [ Section 9 of Banning of Unregulated Deposits Ordinance 2019 ]

Responsibility of implementing Banning of Unregulated Deposits Ordinance 2019

  • Being a comprehensive Union Law, the Bill adopts best practices from State laws, while entrusting the primary responsibility of implementing the provisions of the legislation to the State Governments.

Banning of Unregulated Deposits Bill

The Banning of Unregulated Deposit Schemes Bill, 2018 was introduced in Parliament on 18th July, 2018 and was referred to the Standing Committee on Finance  , which submitted its Seventieth Report on the said Bill to Parliament on 3rd January, 2019. The Banning of Unregulated Deposit Schemes Bill 2018 : Download

Banning of Unregulated Deposit Schemes Bill 2018 : Approved by Govt of India

History of Banning of Unregulated Deposits

The Finance Minister in the Budget Speech 2016-17 had announced that a comprehensive Central legislation would be brought in to deal with the menace of illicit deposit taking schemes, as in the recent past, there have been rising instances of people in various parts of the country being defrauded by illicit deposit taking schemes. The worst victims of these schemes are the poor and the financially illiterate, and the operations of such schemes are often spread over many States. As per information provided by RBI, during the period between July, 2014 and May, 2018, 978 cases of unauthorized schemes were discussed in State Level Coordination Committee (SLCC) meetings in various States/UTs and were given to the respective regulators/law enforcement agencies in the states. A large number of such instances have been reported from the eastern part of the country. Subsequently, the  Finance Minister in the Budget Speech 2017-18 had announced that the draft bill to curtail the menace of illicit deposit schemes had been placed in the public domain and would be introduced shortly after its finalisation.

The Banning of Unregulated Deposit Schemes Bill, 2018, which was introduced in Parliament on 18th July, 2018 provides a comprehensive legislation to deal with the menace of illicit deposit schemes in the country through,

(a) complete prohibition of unregulated deposit taking activity;

(b) deterrent punishment for promoting or operating an unregulated deposit taking scheme;

(c) stringent punishment for fraudulent default in repayment to depositors; (d) designation of a Competent Authority by the State Government to ensure repayment of deposits in the event of default by a deposit taking establishment;

(e) powers and functions of the competent authority including the power to attach assets of a defaulting establishment;

(f) Designation of Courts to oversee repayment of depositors and to try offences under the Act; and

(g) listing of Regulated Deposit Schemes in the Bill, with a clause enabling the Central Government to expand or prune the list.

Banning of Unregulated Deposits Ordinance 2019
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