In the aftermath of the Saradha scam, the Standing Committee of Finance (Committee) in its 21st report dated September 21, 2015 suggested the introduction of a comprehensive regulatory framework governing all entities engaged in activities involving acceptance of deposits from the public. While making this recommendation, the Committee observed that certain entities were engaged in financial as well as non-financial activities and therefore, it was difficult to identify the appropriate regulator for such entities. Such entities fall under the jurisdiction of various regulatory bodies and in spite of overlapping regulations, several such entities were not regulated by any regulator.
In view of the suggestions of the Committee, a high level Inter-Ministerial Group (Group) was formulated for identifying gaps in the existing regulatory framework. The Group suggested the enactment of a comprehensive central act to criminalise the solicitation, promotion, acceptance and/or operation of ‘unregulated deposit schemes’. In line with the recommendations of the Committee and the Group, the Banning of Unregulated Schemes Ordinance, 2019 (Ordinance) was promulgated on February 21, 2019.
Purpose of the Ordinance
The purpose of the Ordinance is to prohibit solicitation or acceptance of ‘deposits’ outside the ‘Regulated Deposit Scheme’ and to ban ‘Unregulated Deposit Schemes’. The aforesaid terms are defined under the Ordinance.
Deposits under the Ordinance vis-à-vis Deposits under Companies Act
The term ‘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, whether 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. However it excludes certain types of amounts received viz., amounts received as loans/ financial assistances from banks, public financial institutions, non-banking finance companies, foreign institutions, amounts received by political parties etc.
For companies receiving amounts, the definition of deposit under the Companies Act, 2013 (Companies Act) will be applicable and not the definition under the Ordinance. Therefore, if the receipt of monies is specifically excluded under Section 2(31) of the Companies Act read with the Companies (Acceptance of Deposit) Rules, 2014, then, the provisions of the Ordinance will not apply to such receipt of monies.
The definition of the term ‘deposit’ under the Ordinance and the exemptions contained therein, are similar to the exemptions provided under the Companies (Acceptance of Deposits) Rules, 2014.
The term ‘Unregulated Deposit Schemes’ refer to an arrangement under which deposits are accepted or solicited by way of business and which are not regulated. The term appears to suggest that the deposit taker should be in the business of accepting deposits. There has been some consternation as to the interpretation of this provision and whether businesses (such as real estate development) which accept monies from individuals, who are not relatives for instance, will qualify as ‘deposit takers’. The Ordinance also clarifies that monies received as an advance in the course of doing business and bearing a connection with such business are exempt and if such amounts are refundable they shall be treated as deposits, on expiry of 15 days from the date that they become due for refund. The same also applies to monies received as advance towards purchase of immovable property.
Regulated Deposit Schemes (i.e. deposits which are specifically permitted), are listed in Schedule I of the Ordinance. The purpose of this term is to exclude schemes that are regulated by the Securities Exchange Board of India (SEBI), Reserve Bank of India (RBI) and other relevant regulators, from the ambit of the Ordinance. Regulated Deposit Schemes include within its scope schemes registered with SEBI (such as schemes of alternative investment funds, mutual funds, portfolio managers, employee staff option plans, collective investment schemes), schemes regulated by the RBI (such as funds accepted by business correspondents, funds received by payment system providers), schemes registered under the National Housing Bank Act, 1987, schemes regulated by the State Governments including amounts received by co-operative societies, chit business, and deposits accepted under Chapter V of the Companies Act.
The entities which are regulated under this Ordinance as ‘deposit taker(s)’ include individuals (or groups of individuals), proprietorship concerns, partnership firms (whether registered or not), limited liability partnerships registered under the Limited Liability Partnership Act, 2008, companies, association of persons, a trust (being a private trust or a public trust), and co-operative societies or multi-state co-operative societies. None of these persons, therefore, can operate an Unregulated Deposit Scheme.
The Ordinance provides for the creation of an online database by an authority designated by Central Government for maintaining information on deposit takers that are operating in India (Online Database). A deposit taker is required to inform the authority (which is maintaining the online database) in such form and manner as prescribed. The authority can seek further information if it is of the view that the deposits are being solicited or accepted as a part of an ‘unregulated deposit scheme’.
It is relevant to note that in addition to other compliances, a company under the Companies Act is also required to intimate the relevant authority of the deposits accepted by it under Chapter V of the Companies Act. It is clarified that a company is not required to make a filing, if the monies received by such company fall within the exclusions under the Companies Act (read with the Companies (Acceptance of Deposits) Rules, 2014).
Penal Provisions and Restitution Mechanism
The Ordinance also lays down stringent penalties for violation of the provisions of the Ordinance. A deposit taker who solicits unregulated deposit schemes, will be liable for imprisonment of at least one year and a deposit taker who accepts such deposits, will be liable for imprisonment of at least two years. Each of these offences will also attract a penalty of up to INR 10 Lakhs.
In the past, regulators have faced difficulties in recovering monies from the defaulters of a Ponzi scheme. In order to overcome such difficulty, the Ordinance seeks to put in place a restitution mechanism to repay the depositors out of the proceeds of attachment of the properties of the deposit takers. Now, every State Government is required to appoint the ‘Competent Authority’ (Authority) for the purpose of the Ordinance. Such Authority will be vested with the power of the Civil Court and can provisionally attach the deposits held by the deposit taker or other properties of the deposit taker.
In addition, a State Government with the consent of the Chief Justice of the relevant High Court of such state, will constitute a special court to determine the violation of the provisions of the Ordinance (Designated Court). The Designated Court will be presided over by the District and Sessions Judge or an Additional District and Sessions Judge. The provisional orders passed by the Authority can be made absolute by an order of the Designated Court in accordance with the provisions of the Ordinance. Any appeal from the order of the Designated Court will lie in the High Court of the relevant State.
Offences committed in breach of the Ordinance are cognisable and non-bailable, save and except any failure on the part of a deposit taker to provide information to the online database and any fraudulent default on repayment of a deposit by a deposit taker under a regulated deposit scheme. In order to minimise the circulation of information about ‘unregulated deposit schemes, the Ordinance grants power to the State Government to direct any newspaper or publication containing material or advertisement relating to an ‘unregulated deposit scheme’ to publish full and fair retraction of the material or advertisement free of cost.
The Ordinance is an attempt on the part of the Government to bridge the regulatory gap and create an online central database wherein information regarding all kinds of deposits will be available to the investors. Regulators and State Governments have, in the past, faced difficulties in investigating ponzi-schemes which were operated in multiple States. Now, persons collecting monies as a part of their business (such as individuals operating websites not regulated under SEBI or RBI) have to ensure that the provisions of the Ordinance are not violated, failing which such deposit takers will be subject to penal consequences. While the Ordinance has laid down a comprehensive union law, the responsibility of implementing certain provisions of the Ordinance vests with the State Governments. It is expected that every State Government will designate the relevant Authority to oversee the implementation of this Ordinance.