Important Points under the Banning of Unregulated Deposit Schemes Ordinance, 2019

Important points under the Banning of Unregulated Deposit Schemes Ordinance, 2019

The Govt passed the Ordinance on 21st Feb, 2019 to ban unregulated deposits. Main points has bee explored in this article.

See: Salient Features.

 1. What kind of deposits are considered under the Ordinance

The Ordinance is given wide definition of deposit where cover almost all cases of  deposits except provided in the exhaustive list. As per clause 4 of Section 2 of the Ordinance, definition of deposit as under:

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 F inancial 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 ofthe 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-] 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 0f the Limited Liability Partnership Act, 2008;

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

2. Who are Depositor and deposit taker

The laws defines that any person who makes deposit under this Ordinance called the depositor. All persons such any individual or group of individuals; proprietorship concern; partnership firm; LLP; company; AOP; trust; co-operative society and any other arrangement of whatsoever nature, receiving or soliciting deposits  called depositor taker except following:
(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.

3. Banning of Unregulated Deposit schemes(UDS)

From the effective date of the Ordinance:

• All unregulated deposits schemes(UDS) shall be banned.
• Depositor taker can’t accept or operate any UDS.
• Ban on Fraudulent default in Regulated Deposit Scheme(RDS).
• A Prize Chit or Money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an UDS.

4. What is Unregulated Deposit Scheme(UDC) and Regulated Deposit Scheme(RDS)

Only deposit schemes listed in First Schedule of the Ordinance are Regulated Deposit Sechems(RDS). Apart from this, deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute shall be treated RDS.

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  the First Schedule.

Note: See link for RDS provided at the end of this article:

5. Central database

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. Every deposit taker which commences or carries on its business as such on or after the commencement of this Ordinance shall intimate the authority about its business.

6. Priority of Depositors’ claim

Save as otherwise provided in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security. Interest Act, 2002 or the Insolvency and Bankruptcy Code, 2016, any amount due to depositors from a deposit taker shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority.

7. Precedence of attachment

Save as otherwise provided in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency and Bankruptcy Code, 2016, an order of provision attachment passed by the Competent Authority, shall have precedence and priority, to the extent of the claims of the depositors, over any other attachment by any authority competent to attach property for repayment of any debts, revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority.

8. Offences and Punishments

The Ordinance provided provision for offence and punishment under Sec. 21-27 as under:

Sec. 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.

Explanation— For the purposes of this Ordinance
(i) the expression “fraudulently” shall have the same meaning as assigned to it in section 25 of the Indian Penal Code;

(ii) where the terms of the Deposit Scheme are entirely impracticable or unviable, the terms shall be relevant facts showing an intention to defraud.

Sec. 22 Any deposit taker who contravenes the provisions of section 4 shall be 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.

Sec. 23. Any person who contravenes the provisions of section 5 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 may extend to ten lakh rupees.

Sec. 24. Whoever having been previously convicted of an offence punishable under this Chapter, except the offence under section 26, is subsequently convicted of an offence shall be punishable 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 fifty crore rupees.

Sec. 25 (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 sub— section (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.

Sec. 26. 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 sub- section (2) of that section, shall be punishable with fine which may extend to five lakh rupees.

Sec. 27. Notwithstanding anything contained in section 4, no Designated Court shall take cognizance of an offence punishable under that section except upon a complaint made by the Regulator:

Provided that the provisions of section 4 and this section shall not apply in relation to a deposit taker which is a company.

Note: Schedules and full Ordinance.