The Banning of Unregulated Deposit Schemes Act, 2019 (Pending President’s assent)

The Act seeks to provide for a comprehensive mechanism to ban unregulated deposit schemes and to protect the interest of the depositors and for matters connected therewith. It aims to prevent such unregulated deposit schemes or arrangements at their inception and at the same time makes soliciting, inviting or accepting deposits pursuant to an unregulated deposited scheme as a punishable offence.

Unregulated deposit scheme: Section 2(17) of the Act defines a scheme as unregulated where deposits are accepted or solicited by any deposit taker by way of business and which is not registered with the regulators listed in the Act. Section 6 of the Act states that a Prize Chit or Money Circulation Scheme which is banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, shall be deemed to be an Unregulated Deposit Scheme.

Regulated deposit scheme: Section 2(14) of the Act defines a scheme as regulated if it is specified in the first schedule of the Act which specifies the regulator and regulated scheme. Currently, nine regulators oversee and regulate various deposit-taking schemes including IRDA, RBI, SEBI, MCA, NHB, PFRDA, EPFO, Central Registrar- Multi state Cooperative societies, State and Union territory governments etc. For example, RBI regulates deposits accepted by non-banking financial companies, SEBI regulates mutual funds and issue of other securities, State and Union territory governments regulate chit funds, among others. All deposit-taking schemes are required to be registered with the relevant regulator. Further, Central Government, has power to notify any other scheme as a regulated deposit scheme.

Deposit: Section 2(4) defines a ‘Deposit’ as 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, following are excluded from the definition of ‘Deposit’.

• Loans received from banks;
• Loans/ financial assistance from private finance institutions (PFIs) or any registered NBFCs, regional financial institutions and insurance companies;
• Amount received from or guaranteed by an appropriate government;
• Amount received from a statutory authority;
• Amounts received from foreign government/banks/ authorities or person resident outside India
• Capital contributions by partners of a partnership firm or LLP;
• Loans received by an individual from his relatives;
• Loans received by a firm from relatives of partners;
• Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable);
• Amounts received by a registered Asset Reconstruction Company (ARC);
• Amounts received under Section 34 or Section 29B of the Representation of the People Act, 1951;
• Periodic payment by the members of self-help groups as per ceiling prescribed by government;
• 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 supply/ hire of goods / services;
  • Advance received in connection with and adjusted towards consideration of an immovable property under an agreement or arrangement;
  • Security deposit;
  • Advance under long-term projects for supply of capital goods;

Deposit taker: Section 2(6) defines ‘deposit taker’ as an individual, a group of individuals, a properietory concern, a partnership firm, a LLP, a company, an AOP, a trust, a co-operative society or any other arrangement of whatsoever nature, who solicits or receives deposits. Banks and entities incorporated under any other law are not included as deposit takers.

Competent Authority, its powers and procedures: The Act 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 Act will 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 Act, 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. The Competent Authority will have powers similar to those vested in a civil court.

Designated Courts, its powers and procedures: The Act provides for the constitution of one or more Designated Courts in specified areas. This Court will be headed by a judge not below the rank of a district and sessions judge, or additional district and sessions judge. After provisional attachment of the deposit taker’s assets, the Competent Authority will approach the Designated Court to: (i) make the provisional attachment absolute, and (ii) ask for permission to sell the assets. The Competent Authority will have to approach the Court within 30 days (extendable to 60 days). It will also open a bank account to realise and disburse money to depositors under the instructions of the Designated Court. The Designated Court will have the power to: (i) make the provisional attachment absolute, (ii)vary or cancel the provisional attachment, (iii) finalise the list of depositors and their respective dues, and (iv)direct the Competent Authority to sell the property and equitably distribute the money realised among the depositors. The Court will seek to complete the process within 180 days of being approached by the Competent Authority.

Central database: The Act provides for the central government to designate an authority to create an online central database for information on deposit takers. All deposit takers will be required to inform the database authority about their business. The Competent Authority will be required to share all information on unregulated deposits with the authority.

Offences and penalties: The Act defines different types of offences, and penalties related to them. Broadly, these offences are: (i) running (advertising, promoting, operating or accepting money for unregulated deposit schemes, (ii) fraudulently defaulting on regulated deposit schemes, and (iii) wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts. For example, accepting unregulated deposits will be punishable with imprisonment between 2 to 7 years, along with a fine ranging from ₹ 3 lakh to ₹ 10 lakh. Defaulting in repayment of unregulated deposits will be punishable with imprisonment between 3 to 10 years, and a fine ranging from ₹ 5 lakh to twice the amount collected from depositors. Repeated offenders under the Act will be punishable with imprisonment between 5 to 10 years, along with a fine ranging from ₹ 10 lakh to ₹ 5 crore.

Impact of the Act: With enactment of this law, forming and running any UDS accepting any deposits thereunder is prohibited. It also prohibits and punishes a person who is inducing another person to participate in UDS by falsifying the facts. Simultaneously, it also punishes a person for non-repayment of deposits.

An issue which requires clarification is about the position of such UDS started before 21.2.2019. There is no specific mention about the same. There is also no provision for refund of money to depositors of such existing schemes within a particular period. Section 10 of the Act requires every person carrying on business or profession of receiving loans, advances or deposits to report to the Authority to be appointed by the government in the prescribed form. Whether the form is to be filed only once or every year on an ongoing basis is not clear. This requirement and certain other procedural requirements under the Act are dependent on the rules to be prescribed by the government.