Unregulated Deposit Schemes Banned

Government issued an ordinance “The Banning of Unregulated Deposit Schemes Ordinance 2019” on 21 Feb 2019.

This article discusses what is deposit, what is regulated deposits scheme and unregulated deposit scheme, what is banned and what is not banned, from when is the Ordinance applicable, to whom, List of Regulated Deposit Scheme and FAQ

What is Unregulated Deposit Scheme?

“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.

What is banned as per the Ordinance?

  • All kinds of Unregulated Deposit Schemes are banned.
  • No deposit taker shall solicit deposits or accept deposits in pursuance of an Unregulated Deposit Scheme.
  • Any fraudulent default in the repayment of deposit or in rendering any specified service promised against such deposit in Unregulated Deposit Scheme.
  • Any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit in Regulated Deposit Scheme.
  • Wrongful inducement in relation to Unregulated Deposit Schemes by one person to another person.
  • A prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an Unregulated Deposit Scheme as  per the Ordinance. e.g. lottery system, kitty system.

What is not Banned?

  • Regulated Deposit Scheme (RDS) means the schemes that falls under column (3) of the First Schedule (refer below)
  • Deposits or loans taken from relatives
  • Deposits or loans or any amount taken from non relatives like friends or unrelated persons for personal use, medical emergencies or for running of the business , in the course of business or for the purpose of business and bearing a genuine connection to such business (other than money lenders who are into the business of deposit taking)

Why is Unregulated Deposit Banned?

The objective is to curtail the menace of illicit Deposit Schemes. Curb Multi – level – marketing, Ponzi Schemes  and Ponzi  Companies that dupe people.

Applies to whom?

This provision applies to any person who makes a deposit under this Ordinance like Individuals, Hindu Undivided Family, Proprietorship Concern, Partnership Firms, LLP, AOP, Trusts, Co-operative Society etc. It excludes Companies as Provisions of Acceptance of Deposits by Companies shall apply to them.

From when?

All kinds of Unregulated Deposit Schemes are banned with immediate effect from February 21, 2019. i.e on and from the date of commencement of Banning of Unregulated Deposit Schemes Ordinance, 2019.

How do I check whether my deposit is banned or not?

It is very important to check the meaning of Deposit as per Section 2 (4) of  Act. (Refer below)

    • If deposit given is excluded from the definition of Deposit: Ordinance doesn’t apply.
    • If it is a ‘deposit’ under Regulated Deposit Scheme (RDS), which are issued by specified Regulators. : Ordinance doesn’t apply.
    • If it is a deposit but doesn’t fall under Regulated Deposit Scheme (RDS) then it shall be termed as Unregulated Deposit Schemes (URDS).  Then, Unregulated Deposit Scheme Ordinance, 2019 will apply.

What is a “deposit”?

As defined in Section 2(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

It does not include:

  • 2.4 (e) amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership;
  • 2.4 (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;
  • 2.4 (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.

Who is a Deposit taker?

As defined in Section 2(6) Deposit taker means:

  1. Any individual or group of individuals;
  2. A proprietorship concern;
  3. A partnership firm (whether registered or not);
  4. A limited liability partnership registered under the Limited Liability Partnership Act, 2008;
  5. A company;
  6. An association of persons;
  7. A Trust (being a private trust or a public trust, whether registered or not);
  8. A co-operative society or a multi-State cooperative society; or
  9. 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 multiState co-operative bank as defined in the Banking Regulation Act,1949; 

What is by way of business?

By way of Business includes those cases where taking deposits constitute business itself.

List of Regulated Deposit Scheme

Sr. No Regulator Regulated Deposit Scheme
1 Securities and Exchange board of India (SEBI) Any scheme or arrangement registered under:

  • (i) SEBI (Collective Investment Scheme) Regulations, 1999.
  • (ii) SEBI (Alternative Investment Funds) Regulations, 2012.
  • (iii) SEBI (Portfolio Managers) Regulations, 1993.
  • (iv) SEBI (Share Based Employee Benefits) Regulations, 2014 or providing for employee benefits under the Companies Act, 2013 (18 of 2013).
  • (v) SEBI Act, 1992 (15 of 1992), or the regulations made there under.
  • (vi) SEBI (Mutual Funds) Regulations, 1996.
2 Reserve Bank of India (RBI) Any scheme or arrangement under which:

  • (i) Deposits are accepted by NBFC registered with the RBI
  • (ii) Funds are accepted by individuals or entities engaged as Business Correspondents and Facilitators by banks subject to the Guidelines and Circulars issued by the Reserve Bank of India from time to time.
  • (iii) Funds are received by a system provider operating as an authorized payment system under the Payment and Settlement Systems Act, 2007 (51 of 2007).
  • (iv) Any other scheme or an arrangement regulated under the Reserve Bank of India Act, 1934 (2 of1934), or the guidelines or circulars of the Reserve Bank of India.
3 The Insurance Regulatory Authority of India A contract of insurance pursuant to a certificate of registration obtained in accordance with the Insurance Act, 1938 (4 of 1938).
4 State Government or Union Territory Governement Any scheme or an arrangement:

  • (i) By a co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912)
  • (ii) Commenced or conducted as a chit business with the previous sanction of the State Government in accordance with the provisions of the Chit Funds Act, 1982 (40 of 1982).
  • (iii) Regulated by any enactment relating to money lending which is for the time being in force in any State or Union territory.
  • (iv) By a prize chit or money circulation scheme under section 11 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (43 of 1978).
5 National Housing Bank Any scheme or an arrangement for acceptance of deposits registered under the National Housing Bank Act, 1987 (53 of 1987).
6 Pension Fund Regulatory and Development Authority Any scheme or an arrangement under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013).
7 Employee Provident Fund Organization Any scheme, Pension Scheme or Insurance Scheme framed under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (19 of 1952).
8 Central Registrar, Multi State Co-operative Societies Any scheme or an arrangement for acceptance of deposits from voting members by a Multi-State Co-operative Society registered under the Multi-State Co-operative Societies Act, 2002 (39 of 2002).
9 Ministry of Corporate Affairs, Government of India
  • (i) Deposits accepted or permitted under the provisions of Chapter V of the Companies Act, 2013 (18 of 2013).
  • (ii) Any scheme or an arrangement under which deposits are accepted by a company declared as a Nidhi or a Mutual Benefit Society under section 406 of the Companies Act, 2013 (18 of 2013).
10 As Specified
  • (i) deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute; and
  • (ii) any other scheme as may be notified by the Central Government under this Act.

Frequently asked Questions

  • Whether I can take loan from my friend for marriage, medical emergencies or personal purpose?
    • Yes, as that amount will be spend for specified purpose and not used by way of business.
  • Whether amount brought by partner as loan in his partnership firm be termed as deposits?
    • Yes, amounts received by partner in the partnership firm is termed as deposit. But amounts received by any partnership firm by way of loan from the relatives of any of its partners is not a deposit.
  • Whether amount brought by partner as loan in his partnership firm for running of the business be termed as Unregulated deposits?
    • No, amount brought by partner as loan for running of the partnership firm’s business will not be Unregulated deposits. But that amount is used by way of business for further lending then it will be termed as Unregulated deposits and not permitted.
  • What would happen to my existing deposits taken from non relatives before the Ordinance date?
    • Such Deposits would definitely qualify as Unregulated Deposits but will not be impacted by the Ordinance until the promised repayment date. Renewal of such deposits will not be permitted as per the Ordinance.
  • Whether the monthly Gold schemes run by the Jewellers be termed as Unregulated deposits?
    • No. Such scheme allows an individual to deposit a sum of money every month for 10 or 6 months which can be redeemed against a jewellery purchase on maturity of the scheme. As such deposits are received in the course of business, it is excluded in the definition of deposits. Hence it is not governed by the Ordinance.
  • In case where deposits are given by the clients to the share broking agencies, whether such deposits be termed as Unregulated deposits?

    • Amount received by way of deposits from the clients is in direct connection to the business, hence it is not termed as Unregulated deposits. But cases where the share broking agencies are utilizing these amount for the purpose of further lending and earning interest thereon then such deposits shall be treated as Unregulated Deposits and then will be governed by the Ordinance.

References

  1. The Banning of Unregulated Deposit Schemes … – Gazette of India: Dated 21 Feb 2019

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