The recently promulgated ordinance—The Banning of Unregulated Deposit Schemes Ordinance, 2019—is well-intentioned and is meant to prohibit acceptance of deposits by unscrupulous persons, causing loss of savings of common people.
Concerns have been expressed that the law is extremely harsh and will lead to hardship for many individuals, small businesses, etc. Doubts have been expressed as to whether personal loans are covered by the ban under the Ordinance. If that is the case, then a student will not be able to accept loan scholarship from a charitable trust, or a household help will not be able to take advance from the employer.
How far are these concerns justified?
Section 3 of the Ordinance places a complete ban on Unregulated Deposit Schemes (UDS). It prohibits promotion, operation of UDS, issuing of any advertisement soliciting participation in or acceptance of deposit under UDS.
The term Unregulated Deposit Scheme has been defined to mean a scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business that is not a Regulated Deposit Scheme (RDS).
RDS are listed in the Schedule to the Ordinance. Primarily these are various schemes that are regulated by authorities such as SEBI, RBI, IRDA (insurance regulator), state governments, governments of any union territory, various authorities dealing with pensions, Ministry of Corporate Affairs, etc.
What doesn’t come under the Ordinance?
For the ban to apply, the acceptance of deposit must fall within the category of UDS. That means it is necessary that there should be a scheme of arrangement under which deposits are invited or accepted by way of business. If the acceptance of loan or deposit is not in the course of business, it is completely out of the purview of section 3 of the Ordinance.
Thus, if a person accepts a loan from his friend, due to some family emergency, or there is immediate need of funds for personal reasons, such acceptance of loan or deposit is not prohibited by the Ordinance and will not be an offence.
Similarly, if an apartment owner gives his apartment on lease and licence and as a part of this, accepts a security deposit, the transaction will be outside the purview of the Ordinance. It appears that any loan or deposit accepted unrelated to a business will not be covered by the ban under the Ordinance.
What is ‘deposit’?
Now let us look at loan or deposit accepted in the course of business. The Ordinance defines the term ‘deposit’ in a very wide manner. It covers any amount of money received by way of an advance or loan or in any other form with or without any return or interest. It is not necessary that the deposit should be for any specific period so long as the amount is returnable.
The definition of the term ‘deposit’ itself has certain exclusions. These exclusions cover amounts received from banks, government, financial institutions, etc. The term deposit also excludes loans from specified relatives, business loans, etc.
There is also a provision authorising the state government to prescribe certain amounts collected, which will not be covered by the definition of deposit.
The important exclusion is any amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business. If this exclusion is interpreted in its proper spirit most of the amounts received by any person in the course of his business would not form deposit as defined in the Ordinance.
The law specifies that certain types of amounts received by way of advance or deposit shall not be treated as deposits for the purposes of this Ordinance. This includes advance received as part of the consideration for sale of property, security deposit, advance for supply or hire of goods or provision of services, etc.
The government through various Tweets has clarified the position and has reiterated that what is prohibited is acceptance of deposits by UDS and not acceptance of other business loans or advances.
Questions and confusion
While this is appreciated, the definition of deposit and exclusions from it have created substantial confusion and genuine concerns. The clause relating to exclusion of amounts received in the course of business apart from the general exclusion, also contains specific exclusions, e.g. a security deposit for the performance of contract of supply of goods or provision of services is excluded from the definition of deposits.
There are also separate exclusions for loans received by an individual from his relatives or by a partnership from relatives of its partners. If these exclusions are considered together, one wonders whether a loan for the purposes of business from a person who is not relative of the individual or any partner will be considered as a deposit under the Ordinance!
The doubt arises because on the one hand, it is a loan for the purposes of business, while on the other hand, it is not from a specified relative. Presuming that it is a deposit, will it be considered as a deposit under UDS even though the business is not of acceptance of deposits. If the intention is to exclude genuine business loans that are not part of business of accepting deposits, a circular from the authorities will certainly help to clear the confusion.
Section 4 requires that in case of RDS, no deposit taker shall commit any fraudulent default in repayment of the deposit or rendering of promised services. Section 5 deals with false, deceptive or misleading statement, promise or forecast to induce a person to invest in UDS. Section 6 deals with certain prize chits or money circulation schemes banned by the law.
The Ordinance provides stiff punishments for offences committed under the provisions of the Ordinance. The punishment ranges from imprisonment for a minimum term of one year to ten years along with hefty fine. It also provides for attachment and sale of property. The Ordinance also provides that claim of the depositors shall have precedence over all other claims with certain exceptions.
Under the Ordinance, every deposit taker has to intimate to the authority to be appointed certain specified details within prescribed time. The central government and the state governments will have to prescribe rules under this Ordinance.
While the objective of promulgating the Ordinance is laudable, considering the harsh provisions and stiff punishments and fines under the Ordinance, more clarity on its applicability is necessary. Any offence under this act will be of criminal nature. A large number of businesses are constituted as proprietary concerns and partnerships. The government needs to clarify the position of such businesses, and ensure that businesses are not unduly harassed by the authorities, and their concerns are addressed.