6 March 2019

LEGAL UPDATE | ORDINANCE ON BANNING OF UNREGULATED DEPOSIT SCHEMES

Introduction:

The Finance Minister in his budget speech of 2016-17 had announced that a comprehensive central legislation would be brought in to deal with the menace of illicit deposit taking schemes. The Lok Sabha passed the Banning of Unregulated Deposits Schemes Bill, 2018 (Bill) on 13 February 2019. However, as the Parliament ceased to be in session the Bill could not be introduced in the Rajya Sabha. Consequently, the President promulgated the Banning of Unregulated Deposit Schemes Ordinance, 2019 (Ordinance) on 21 February 2019. This update seeks to provide a broad overview of the provisions of the Ordinance.
Objectives of the Ordinance: The Ordinance seeks to (a) provide for a comprehensive mechanism to ban unregulated deposit schemes; (b) protect the interest of depositors.

Key Highlights of the Ordinance:

• Deposit: Section 2(4) of the Ordinance contains a comprehensive definition of a deposit and also specifies what is not considered to be a deposit. A deposit is 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. However, the definition of ‘deposit’ excludes inter alia the following:
  
  • Loans received from banks (including co-operative banks);
  • Loan or financial assistance from public financial institutions / non-banking financial companies/ insurance companies;
  • Amounts received from the Government or statutory authority or from any other source whose repayment is guaranteed by the Government;
  • Amount received from foreign sources;
  • Amount received by way of capital contribution from a partner in partnership firms / LLP;
  • In case of individuals, amounts received by way of loan from his relatives. In case of any firm, amounts received by way of loan from the relatives of any of its partners;
  • Amount received in the course of business and bearing genuine connection with business.
• Regulated Deposit Scheme: As per Section 2(14) of the Ordinance, regulated deposit schemes are defined to mean those schemes which are specified in the First Schedule (Regulated Deposit Schemes). The First Schedule to the Ordinance specifies the list of schemes which inter alia include, those schemes which are regulated by Securities and Exchange Board of India, Reserve Bank of India, Insurance Regulatory and Development Authority of India, Central or State Government and National Housing Bank.
• Unregulated Deposit Scheme: An ``unregulated deposit scheme`` is a deposit scheme which is not a Regulated Deposit Scheme (Unregulated Deposit Scheme). The Ordinance imposes a ban on the operation, issuance of any advertisement or promotion of an Unregulated Deposit Scheme.
• Central Database: The Ordinance requires the Central Government to designate an authority to create, maintain and operate an online central database for information on deposit takers operating in India. All existing and new deposit takes are required to inform the database authority about their business within the time period as maybe prescribed.
• Competent Authority: The Ordinance provides for the appointment of one or more government officers, not below the rank of Secretary to the State or Central Government, as the Competent Authority. Police officers receiving information about offences committed under the Ordinance must report it to the Competent Authority. Further, police officers (not below the rank of an officer-in-charge of a police station) 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.
• Designated Court: The Ordinance provides for the constitution of one or more Designated Courts in specified areas by the appropriate government. The Designated Court will be headed by a judge who is not below the rank of a District and Sessions Judge, or Additional District and Sessions Judge. No other Court has the jurisdiction in respect of matters to which the provisions of the Ordinance apply. After provisional attachment of the deposit taker’s assets, the Competent Authority shall approach the Designated Court to: (i) make the provisional attachment absolute, and (ii) ask for permission to sell the assets. The Competent Authority must also open a bank account to realise and disburse money to depositors under the instructions of the Designated Court.
• Priority of Depositor’s claim: Section 12 of the Ordinance provides that 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 levies payable to the Government or the local authority. This provision is subject to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016.

MHCO COMMENT:

The definition of ‘Business Purpose’ in the Ordinance does not appear to be adequate and could lead to confusion in determining whether a scheme is regulated or unregulated.
Further, the Ordinance (a) has introduced a new regime for regulation of Unregulated Deposit Schemes; and (b) provides Depositors priority over all other debts and all revenues, taxes payable to the Government or the local authority.

By ensuring stringent consequences in cases of contravention, this Ordinance is a step in the right direction for safeguarding the interest of general public who are fooled by illicit deposit schemes run by unscrupulous elements of society.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.