Commencement, scope and overriding effect:

The Ordinance called the Banning of Unregulated Deposit Schemes Ordinance, 2019 notified on 21^st February 2019 came into force on the same date.

It extends to the whole of India except the State of Jammu and Kashmir. The Ordinance is in addition to provisions of other law Sec.35[/efn_not]. The Ordinance has overriding effect over other laws framed by the Central Govt or the State Governments. [Sec.34]. It amends the RBI Act, SEBI Act and the Multi-State Co-operative Societies Act. [Sec. 42, r/w the Second Schedule.].

It prohibits ‘deposit takers’ from accepting “unregulated deposits”. It provides for stringent penalties and most offences are made cognizable and non-bailable.

Though Chapter IIB of the Reserve Bank of India Act, 1934 prohibits acceptance and solicitation of deposits by unincorporated persons, it has not achieved its purpose as there is no mechanism to monitor the compliance of the same. The new Ordinance deals with the menace with fierce hands. It also provides for certain compliances to be done by the Companies and other entities.All money accepted falls under the definition of ‘deposit’ and hence deposit taker (other than Companies (NBNFCs) and NBFCs) need to check if it falls outside the exemption granted within the definition of the ‘deposit’ or not. If not, then one need to consider is it accepting and/or soliciting the deposit which is considered as ‘unregulated deposit’. If it is so, the same is banned/prohibited.

Deposit taker:

The Ordinance defines “deposit takers” as an individual, a group of individuals, or a company who asks for (solicits), or receives deposits.  Banks and entities incorporated under any other law are not included as deposit takers[efn_note]Sec.2(6)[/efn_note].

Every ‘deposit taker’ which carries on 21/2/2019 or commences business thereafter of accepting or soliciting deposits is required to intimate to the authority about its business. Even companies accepting deposits under Chapter V of the Companies Act 2013 need to intimate.[Sec.10].

‘Deposit taker’ of regulated deposits shall not make ‘fraudulent’ default in repayment or return or deposit on maturity or in rendering any specified services promised against such deposit [Sec.4]. And in case of any such fraudulent default by the deposit taker, punishment is of imprisonment up to 7 years or fine ranging from minimum Rs.  5 lakh to Rs.25 crore or 3 times the amount of profits made, whichever is higher or both [Sec.22].

Unregulated deposit:

The “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. [Sec.2(17)]

On and from the date of commencement of the Ordinance the “Unregulated Deposit Schemes” is banned and-

1. No deposit taker should participate or enrol or accept deposits in pursuance of Unregulated Deposit Scheme.
2. No Deposit taker should commit fraud in repaying or returning of deposit on maturity or in rendering any specified service promised against such deposit while accepting deposits pursuant to a Regulated Deposit Scheme.
3. No person should knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, to induce another person to invest or become a member or participant of Unregulated Deposit Scheme.
4. A prize chit or money circulation scheme banned under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 should be deemed to be an Unregulated Deposit Scheme.

Regulated Deposit:

Following are recognised as the “regulated deposits” under the Ordinance:

1. Deposits accepted by companies as per Companies Act,  2013,
2. Deposits by Nidhi or mutual benefit Society u/s.406 of the Companies Act, 2013,
3. Deposits by Chit funds registered with State Govt. under the Chit Funds Act, 1982,
4. Deposits by money lenders under the laws of States / Union Territories,
5. Any scheme or an arrangement by a prize chit or money circulation scheme under section 11 of the Prize Chit and Money Circulation Schemes (Banning) Act, 1978, (However, other banned Prize Chits or Money Circulation schemes under the said Act are treated as Unregulated Deposits),
6. Deposits accepted by registered NBFCs,
7. Deposits accepted by SEBI registered entities as Portfolio Managers, Mutual Funds, Collective Investment Scheme, Alternate Investment Funds, Employee Benefits (ESPS/ESOP), any other scheme or arrangement registered under the SEBI Act, 1992,
8. Deposits from voting members by a registered Multi-State Co=operative Society,
9. Deposits under PF, ESIC, Pension under respective laws,
10. Deposits under a scheme or arrangement as per the National Housing Board Act, 1987,
11. deposits accepted under any scheme or an arrangement registered with any regulatory authority established under a Statue; and
12. any other scheme as may be notified by the Central Government.

The Ordinance defines a “deposit” as an amount of money received through an advance, a loan, or in any other form, with a promise to be returned with or without interest. Such deposit may be returned either in cash or as a service, and the time of return may or may not be specified. Further, the Ordinance defines certain amounts which shall not be included in the definition of deposits. [efn_note]Sec.2(4)[/efn_note] For example, loan received by an individual or partnership firm from relatives (relative of partners), amount received by partnership / LLP as capital, self help groups receiving periodic payments from its members subject to ceiling to be specified, amount received in the course of or for business purpose and bearing a genuine connection to such business. The definition of ‘deposit’ under the BUDs Ordinance u/s.2(4) excludes many things. One important exemption is under clause (l) which says ‘an amount received in the course of or for the purpose of business and bearing a genuine connection to such business’ is permitted. Then it gives a list of items which are only illustrations and such illustrated items are permitted category of receipt of money. 

For Companies, the meaning of ‘deposit’ is the same as that under Companies Act 2013 and for NBFCs, the meaning of ‘deposit’ is the same as under the RBI Act, 1934. 

Depositors have priority except under SARFAESI and IBC:

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, any amount due from a deposit taker shall be paid in priority over all debts and all revenues, taxes, cesses and other rates payable to the Appropriate Government or the local authority. The Competent Authority shall open an account in a scheduled bank for crediting and dealing with money realized under this Ordinance. [efn_note]Sec.12[/efn_note]. Also, provisional attachment by the Competent Authority has priority, to the extent of the claims of the depositors, over any attachment any authority, except under SARFAESI or IBC, for repayment of any debt, revenue, taxes and cesses and other rates payable to State Govts. or local authorities.[Sec.13]

Implementation:

1. Authority for online database:

The Central Govt. to establish an authority (existing or new) to create an online central database for information on “deposit takers”. And such authority to seek information on ‘deposit takers’ operating in India from Competent Authority or any regulator. [Sec.9]. The Competent Authority will be required to share all information on unregulated deposits with the authority. All deposit takers will be required to inform the database authority about their business. 

2. Competent Authority with a power to attach property, search and seize documents etc.

It intends to appoint ‘competent authority’ who shall be a person designated by the State Government and can be of the rank of Secretary of the State or higher.[Sec.7]. State Govt may nominate more than one such person. And any officer can be notified by State Govt. as an assistant to the Competent Authority. Competent Authority or any officer assisting him (and as notified by State Govt), after recording in writing reasons, provisionally attach the deposits of ‘deposit taker’ who are accepting or soliciting Unregulated deposits. It can also attach money or any property of ‘deposit taker’[Sec.7(3)]. Further, officers may enter, search and seize any property believed to be connected with an offence under the Ordinance, with or without a warrant.  The Competent Authority may: (i) provisionally attach the property of the deposit taker, as well as all deposits received, (ii) summon and examine any person it considers necessary for the purpose of obtaining evidence, and (iii) order the production of records and evidence. He may impound and retain in his custody, the records produced (after recording reasons for such impounding) for such period as may be prescribed by the Rules. For retaining records beyond three months, officers require the prior approval of the Competent Authority. The Competent Authority will have powers similar to those vested in a civil court. And proceedings before him are judicial proceedings u/s.193 and 228 of IPC.

3. Sharing of information with investigating agency:

Banks, State Govts., any regulator, income tax authorities or any investigating agency if having any information in respect of offence investigated by the Police or the CBI, shall share the same to the Police or the CBI.[Sec.11(2) and (3)].

4. Designated Courts:

The Ordinance provides for Designated Courts.  This Court will be headed by a judge, not below the rank of a district and sessions judge, or additional district and sessions judge. After provisional attachment of the deposit takers’ assets, the Competent Authority will approach within 30 days (extendable to 60 days)[Sec.14] the Designated Court to: (i) make the provisional attachment absolute, and (ii) ask for permission to sell the assets. It will also open a bank account to realise and disburse money to depositors under the instructions of the Designated Court.

The Designated Court will have the power to: (i) make the provisional attachment absolute, (ii) vary or cancel the provisional attachment, (iii) finalise the list of depositors and their respective dues, and (iv) direct the Competent Authority to sell the property and equitably distribute the money realised among the depositors. The Court will seek to complete the process within 180 days of being approached by the Competent Authority.[Sec.15(6)]

The Designated Court may take cognizance of offences under the Ordinance without accused being committed to it for Trial.[Sec.32] Thus, it appears that upon the filing of charge sheet by police or the CBI, the Magistrate need to not take any cognizance and remit the matter to the Designated Court.

The Designated Court may also try the accused of an offence other than under the Ordinance, with which the accused may be charged under the Criminal Procedure Code, at the same trial as under the Ordinance. Designated Court is also given the power of disgorgement.[Sec.18(1)(f)]

Designated Court to take cognizance of an offence under the Ordinance only upon a complaint filed by the RBI, SEBI, IRDAI, NHB, PFRDA, EPFO, Central Registrar of Multi-State Co-op. Societies, MCA or any State Govt./Union Territories. However, where a company is accused, cognizance can be taken upon complaint of any person.[Sec.27]

The Competent Authority needs to file an application for making provisional attachment absolute and permission to sell the property. Upon receipt of an application, the Designated Court shall issue a notice to the deposit taker, any person whose property is attached to show cause notice., all other persons represented to it. The Designated Court shall then pass the necessary order.

Appeal from the order of the Designated Court shall be to High Court within 60 days.[Sec.19]

4. Rules

The Ordinance is intended to be implemented by State Governments. It authorises the Union and State Government to frame rules. The Rules are expected to provide for, inter alia, the following:

(i) manner in which and the period for which property may be impounded by the Competent Authority or his assistant officers,

(ii) particulars in the application to be made by the Competent Authority to the Designated Court,

(ii) procedure to be adopted by the Designated Court in dealing with provisionally attached property.

5. Offences and penalties

The Ordinance defines three types of offences, and penalties related to them.  These offences are: (i) running (advertising, promoting, operating or accepting money for) unregulated deposit schemes, (ii) fraudulently defaulting on regulated deposit schemes, and (iii) wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.  For example, accepting unregulated deposits will be punishable with imprisonment between two and seven years, along with a fine ranging from three to 10 lakh rupees.  Defaulting in repayment of unregulated deposits will be punishable with imprisonment between three and 10 years, and a fine ranging from five lakh rupees to twice the amount collected from depositors.  Repeated offenders under the Ordinance will be punishable with imprisonment between five to 10 years, along with a fine ranging from Rs 10 lakh to five crore rupees.[Sec.24]

Conclusion:

With the Ordinance in place, now the entire gamut of financial transactions are governed by the law. Unregulated deposits have been the last lag over which there were many legal points remained unanswered. Now the ordinance fills the gap and aggrieved parties, as well as regulators, get clarity on the matter.