Banning of “Unregulated Deposits”

Have you accepted deposits/ loans for business or other purposes? Have you made sure that the deposits/ loans accepted by you are still legal? Have you examined the impact of the new law – “THE BANNING OF UNREGULATED DEPOSIT SCHEMES ACT, 2019”?

Here is what you should know.

From when is this law applicable?

This law shall be applicable from the 21st day of February 2019.

Purpose

The primary purpose of this law is to ban Ponzi schemes, unregulated chit funds including unregulated money circulation schemes, unregulated deposits schemes, and to prevent fraudulent default under a regulated deposit scheme. The law aims to protect the interest of depositors.

Are all types of acceptance of money banned?

Broadly there are four types of acceptance of money under this Act. They are

  1. Receipts excluded from the definition of deposits
  2. Regulated deposits schemes
  3. Unregulated deposit schemes
  4. Other deposits

As you can see in the above chart, only unregulated deposit schemes have been banned by this law. If a receipt is excluded from the definition of deposits, then the same is out of the purview of this Act, and hence there is no reporting requirement. In the case of regulated deposits and other deposits, the deposit taker has the responsibility to report information to the central database.

So, the next question is how to identify and segregate deposits into the above classifications.

Deposit

The term “deposit” has been defined very broadly under the Act to include receipt of any advance or loan by deposit taker with a promise to return the same. Repayment may be after a specified period or otherwise, with or without interest or profit, in cash or kind. But certain receipts have explicitly been excluded from the definition of deposits.

Exclusions from the definition of “deposit”.

Receipts excluded from the definition of deposits are out of the purview of this Act. The exclusion list has many items, and some of the important ones include the following receipts:

  • Loan received from banks, cooperative banks, public financial institutions, NBFCs
  • Amount received from Government or statutory authority or foreign Governments, foreign financial institutions, international banks, foreign citizens, NRIs subject to the provisions of FEMA
  • Amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership
  • 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;
  • Amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable)
  • An amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business including— 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;
  1. Advance received in connection with consideration of 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;
  2. Security or dealership deposited for the performance of the contract for the supply of goods or provision of services; or
  3. 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 a refund:

Regulated deposit schemes

Regulated deposit schemes currently include schemes regulated and monitored by nine regulating agencies which are SEBI, RBI, IRDA, the State Government or Union Territory Government, The National Housing Bank, The Pension Fund Regulatory and Development Authority, The Employees’ Provident Fund Organisation, The Central Registrar, Multi-State Co-operative Societies and the Ministry of Corporate Affairs. Deposit takers falling under this category should furnish information about their business to the central database.

Unregulated Deposit Schemes

Accepting and soliciting unregulated deposits are totally banned. Unregulated deposit schemes are those schemes under which deposits are accepted or solicited by any deposit taker “by way of business” and not a regulated deposit scheme. It is important to note that the words used are “by way of business” meaning thereby, the business of the deposit taker is acceptance of deposits. If the business of the deposit taker is legitimate and other than the business of deposit-taking, then the same will not fall under unregulated deposit schemes.

Other deposits

Deposits which do not fall under regulated deposit schemes and unregulated deposit schemes will come under this category—for example, a genuine business loan taken by a trader from his friend (not relative). Deposit takers falling under this category should furnish information about their business to the central database.

Applicability to individuals

The law applies to all type of entities including individuals, partnerships, companies, trusts, AOP, societies etc.

Responsibility of deposit taker to furnish information

The Central Government may designate an authority, which shall create, maintain and operate an online database for information on deposit takers. Every deposit taker which commences or carries on its business as such on or after the commencement of this Act shall intimate the authority about its business in such form and manner and within such time, as may be prescribed.

As on this date, the authority has not been constituted. The form and dates have been prescribed in the Rules. However, there is no clarity on what needs to be done at this point of time, since the authority and database are not ready. We hope that once the authority is constituted, we will have more information on the next steps to be taken. Currently, it seems that all deposit takers, including regulated deposit takers, will need to furnish information in the database once it is ready.

Offences and punishment under this law

  1. In respect of unregulated deposits schemes

All unregulated deposit schemes are banned. No deposit taker shall solicit, promote, operate, advertise or accept deposits in pursuance of an unregulated deposit scheme. Various offences carry penalties ranging from Rs. 2 lakhs to Rs. 50 crores with imprisonment ranging from one year to 10 years

a) In respect of regulated deposits schemes

Fraudulent default of regulated deposit schemes is an offence under the Act punishable with imprisonment for a term which may extend to seven years, or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of the fraudulent default referred to in said section, whichever is higher, or with both

b) For failure to furnish information/ forms

c) Whoever fails to give the intimation required or fails to furnish any such statements, information, shall be punishable with fine which may extend to five lakh rupees.

Is there any punishment for depositors?

The object of this law is to protect the interest of depositors, and hence there are no punishments provided for depositors.

Repayment to depositors and priority of depositors’ claims

Except as otherwise provided in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or the Insolvency and Bankruptcy Code, 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.

Frequently asked questions

Does the law ban the acceptance of the following?

  • Acceptance of business loans from relatives

If the loan accepted from a relative is for a genuine business purpose, not being the business of taking loans/ advances, the same is excluded from the definition of deposits. Hence, it is permitted and is out of the purview of this Act.

  • Acceptance of business loans from non-relatives

If the loan accepted is for a genuine business purpose, not being the business of taking loans/ advances, the same is covered under the definition of deposits. Since it is a deposit and although permitted under the Act, furnishing of information/ forms will be necessary.

  • A personal loan taken from a non-relative

If the loan accepted is for a personal purpose not being used in the business of taking loans/ advances, we are of the opinion that although it is a deposit, it is permitted and no intimation/ reporting needs to be done.

  • A loan taken by partnership firm from its partner

A loan taken from the partner will partake the character of capital, and the same is excluded from the definition of deposits. Hence, it is permitted and is out of the purview of this Act.

  • Advance received in respect of the sale of immovable property

There is no clarity on this aspect, but we are of the opinion that it is permitted and no intimation/ reporting needs to be done.

  • A loan was taken from non-relative for business purpose. But later since the money could not be used in business, the same was used for further lending and earning interest

These types of transactions will have to be studied based on the facts of each case. There is a high chance that it will be treated as unregulated deposit schemes.

Conclusion      

A deposit taker should make sure that the acceptance of monies will not be treated as unregulated deposit scheme. Also, information/ forms in respect of permitted deposits should be furnished with the authorities within the time provided. As a depositor, it is not advisable to invest in unregulated deposits. Even in the case of regulated deposits, make sure that your deposit is safe and will be repaid to you without any issues

 

Author: CA Antony Mathias, ACA

 

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