1. BACKGROUND AND PURPOSE OF THE ORDINANCE
1.1 The Banning of Unregulated Deposit Schemes Ordinance, 2019 (Ordinance)1 was promulgated by the President of India on February 21, 2019 pursuant to Article 123 of the Constitution of India, with the following main objectives:-
a) To prohibit solicitation or acceptance of ‘deposits’ outside the ‘Regulated Deposit Scheme’
b) To set up a regulatory structure to curb the menace of ponzi schemes and unregulated chit funds prevalent in India.
c) To create an online central database which will act as a repository of information regarding all kinds of regulated deposits accepted by deposit takers.
2. WHAT IS A DEPOSIT?
2.1 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.
2.2 In respect of a company, the expression “deposit” shall be the amounts considered to be “deposits” under the Companies Act, 2013.
2.3 In respect of a non-banking financial company registered, the expression “deposit” shall have the same meaning as assigned to it in clause (bb) of the section 45-I of the Reserve Bank of India Act, 1934.
2.4 A Company accepting deposits under the provisions of Companies Act has to comply not only with the provisions of the said Act, but it has to also comply with the provisions of the Ordinance. However, 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.
3. AMOUNTS WHICH ARE NOT CONSIDERED TO BE DEPOSITS
3.1 The following amounts are not considered to be deposits:
i. amounts received as loan from a scheduled bank or a co-operative bank or any other banking company
ii. amounts received as loan or financial assistance from the Public Financial Institutions notified by the Central Government in consultation with the RBI or any NBFC
iii. 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
iv. 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
v. amounts received by way of contributions towards the capital by partners of any partnership firm or a LLP
vi. 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
vii. amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable)
viii. 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
ix. any deposit made under section 34 or an amount accepted by a political party under section 29B of the Representation of People Act, 1951
x. 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 xi. any other amount collected for such purpose and within such ceilings as may be prescribed by the State Government
3.2 While amounts received by an individual by way of loan from his relatives are excluded, there was ambiguity over whether relatives only included immediate family, and not friends and far-off relations. But the Ministry of Finance has clarified that individuals borrowing or taking loans or money from relatives or friends for marriage or medical emergency or business needs or any other personal reasons are not considered to be deposits.
3.3 Amounts received by a firm by way of loan from relatives of any of the partners is excluded from the definition of ‘unregulated deposits’ and is hence, allowed. But there is uncertainty over the money received from a partner as ‘loan’. However, as the partners give loan to the Firm for the purpose of business, such loan should not be considered to be a deposit.
4. WHETHER AMOUNTS RECEIVED FOR THE PURPOSE OF BUSINESS ARE CONSIDERED TO BE DEPOSITS?
4.1 An amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business is not considered to be a deposit. These amounts include-
(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
4.2 Amounts received for business purpose is widely defined. However it is essential that such amount must have a “genuine” connection to such business. It will be interesting to see the evidence which is accepted by the Court to substantiate the ‘genuineness’ of business purpose.
5. AMOUNTS RECEIVED FOR BUSINESS PURPOSE CONSIDERED TO BE ‘DEPOSITS’ IN CERTAIN CASES
5.1 If the aforesaid amounts received become refundable, such amounts shall be deemed to be deposits on the expiry of 15 days from the date on which they become due for refund.
5.2 Also 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.
6. REGULATED DEPOSIT SCHEMES
6.1 The Schemes are such which are regulated by following regulators are considered to be ‘Regulated Deposit Schemes’
1. SEBI and various regulations made under the SEBI Act, 1992
2. Ministry of Corporate Affairs (MCA)
4. State and Union Territory Government
5. National Housing Bank
6. Pension fund regulatory and development authority (PFRDA)
7. Employees Provident Fund Organisation (EPFO)
8. Central Registrar Multi-state Co-operative Societies
7. BANNING OF UNREGULATED DEPOSIT SCHEMES
7.1 All the Unregulated Deposit Schemes shall be banned.
7.2 No deposit taker shall, directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.
7.3 No deposit taker, while accepting deposits pursuant to a Regulated Deposit Scheme, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.
7.4 As per section 21 of the Ordinance, where the terms of the Deposit Scheme are entirely impracticable or unviable, the terms shall be relevant facts showing an intention to defraud.
7.5 The Ordinance provides that a deposit taker shall not commit a “fraudulent default” in the repayment or return of deposit. As per section 25 of the Indian Penal Code, a person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise. Hence, in order to hold a deposit taker guilty under the Ordinance, it is essential to have an element of mens rea. It remains seen to be seen as what cases are considered by the judicial authorities as “fraudulent”. Further, it will also be interesting to see as to how the judicial authorities interpret the terms “entirely impracticable” and “entirely unviable”.
8. MAINTAINING OF CENTRAL DATABASE AND INTIMATION OF BUSINESS BY DEPOSIT TAKER
8.1 The Central Government may designate an authority, which shall create, maintain and operate an online database for information on deposit takers operating in India.
8.2 Every deposit taker which commences or carries on its business shall intimate the said authority about its business in such form and manner and within such time, as may be prescribed.
8.3 The requirement of intimation applies to a company, if the company accepts the deposits under Chapter V of the Companies Act, 2013.
8.4 In case of companies which accept deposits under the provisions of Companies Act, 2013, have to ensure dual compliance of provisions of both the statutes, i.e. the Ordinance and Companies Act.
9. JUDICIAL AUTHORITIES SET UP UNDER THE ORDINANCE
9.1 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.
9.2 The appropriate Government shall, with the concurrence of the Chief Justice of the concerned High Court, constitute one or more Courts known as the Designated Courts for such area or areas or such case or cases as may be specified in such notification, which shall be presided over by a Judge not below the rank of a District and Sessions Judge or Additional District and Sessions Judge.
9.3 No Designated Court shall take cognizance of an offence punishable under that section except upon a complaint made by the Regulator (i.e. MCA, SEBI, IRDA etc as the respective case may be)
9.4 No Court other than the Designated Court shall have jurisdiction in respect of any matter to which the provisions of the Ordinance apply.
9.5 When trying an offence under this Ordinance, the Designated Court may also try an offence, other than an offence under this Ordinance, with which the accused may, under the Code of Criminal Procedure, 1973, be charged at the same trial.
10. COMPETENT AUTHORITY AND ITS POWER OF PROVISIONAL ATTACHMENT OF THE PROPERTY OF DEPOSIT TAKER
10.1 Where the Competent Authority has reason to believe (the reason for such belief to be recorded in writing that any deposit taker is soliciting unregulated deposits he may, 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.
10.2 Where an order of provisional attachment has been passed by the Competent Authority all the attached money or property of the deposit taker and the persons mentioned therein shall vest in the Competent Authority and shall remain so vested till further order of the Designated Court.
10.3 The Ordinance provided powers to the Competent Authority to attach property of not only the deposit taker but also of any other person who has acquired property on behalf of the deposit taker. This will mitigate the risks of benami transactions being undertaken by deposit takers to escape attachment.
10.4 The Ordinance does not however specify the period within which the Competent Authority has to complete the attachment of property of the from the date of filing of the plaint by the depositor.
11. PREFERENTIAL TREATMENT OF DEPOSITORS
11.1 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.
11.2 An order of provisional 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.
12. POWER OF DESIGNATED COURTS
Power to confirm the attachment and sale of property
12.1 Within a period of 30 days (and maximum of 60 days), from the date of the order of provisional attachment, the Competent Authority shall file an application 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.
12.2 The Designated Court shall endeavour to complete the proceedings within a period of 180 days from the date of receipt of the application.
Power to direct selling the assets of the Deposit Taker
12.3 The Designated Court has the power to direct the Competent Authority to take possession of any assets belonging to or in the control of the deposit taker and to sell, transfer or realise the attached assets, either by public auction or by private sale as it-deems fit depending upon the nature of assets and credit the sale proceeds thereof to its bank account.
Power to direct disgorgement
12.4 The Designated Court has the power to direct any person, who has made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of the Ordinance, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.
Power to direct the repayment
12.5 The Designated Court has the power to direct full payment to the depositors by the Competent Authority or an order for proportionate payment to the depositors in the event the money so realised is not sufficient to meet the entire deposit liability.
12.6 The expression “deposit taker” includes the directors, promoters, managers or members of said establishment or any other person whose property or assets have been attached under this Ordinance.
12.7 The Ordinance seems to have provided for personal liability of the directors, promoters, managers and shareholders of an establishment which has accepted deposits. This section may be read along with section 25 of the Ordinance, which states that, – 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. It is pertinent to note that the said section 25 provides for a non obstante clause where an offence has been committed by a deposit taker other than an individual, and it is proved that the offence has been committed with the consent or connivance or 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. Therefore, if the person can prove that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence, then there is no personal liability.
12.8 It is however not clear as to under what circumstances the directors, promoters, managers or shareholders of the deposit taking company/establishment become personally liable for the purpose of repayment of deposits.
13. APPEAL FROM THE DECISION OF THE DESIGNATED COURTS
13.1 Any person including the Competent Authority, if aggrieved by any final order of the Designated Court, may appeal to the High Court, within a period of 60 (sixty) days from the date of such order.
13.2 The High Court may entertain the appeal after the expiry of the said period of 60 (sixty) days, if it is satisfied that the appellant was prevented by sufficient cause from preferring the appeal in time.
13.3 The Ordinance does not seem to be providing for an appeal from the decision of the Competent Authority, even while it provides for an appeal from the decision of the Designated Courts.
Penalty for soliciting deposits in contravention of provisions of the Ordinance
14.1 Imprisonment for a term which shall not be less than 1 (one) year but which may extend to 5 (five) years and with fine which shall not be less than Rs. 2,00,000 but which may extend to Rs. 10,00,000.
Penalty for accepting deposits in contravention of provisions of the Ordinance
14.2 Imprisonment for a term which shall not be less than 2 (two) years but which may extend to 7 (seven) years and with fine which shall not be less than Rs. 3,00,000 but which may extend to Rs. 10,00,000.
Penalty for fraudulent default in repayment of Unregulated Deposits
14.3 Imprisonment for a term which shall not be less than 3 (three) years but which may extend to 10 (ten) years and with fine which shall not be less than INR 5,00,000 but which may extend to twice the amount of aggregate funds collected.
Penalty for fraudulent default in repayment of Regulated Deposits
14.4 Imprisonment for a term which shall not be less than 7 (seven) years or with fine which shall not be less than INR 5,00,000 but which may extend to Rs. 25,00,00,000 or thrice the amount of profits made out of the fraudulent default, whichever is higher, or with both.
Penalty for repeat offenders
14.5 Imprisonment for a term which shall not be less than 5 (five) years but which may extend to 10 (ten) years and with fine which shall not be less than Rs. 10,00,000 but which may extend to Rs.50,00,00,000.