Banning of Unregulated Deposit Schemes Ordinance, 2019

   Are you seeking for help in the form of money from your close friend or distant relative? Are you planning to organize a chit fund scheme and collect money from various investors? Well, wait! You need to understand the new rules proposed by the government recently and then it is advisable to take any final decision. Gone are the days when it was easy to handle large amounts of cash and then deposit it in banks or give it to your friend or relative and earn some interest. After the implementation of demonetization, cash handling has been turned down considerably.The new rule dealing with banning of unregulated deposit schemes was introduced in order to be vigilant regarding deposit transaction activities.

 

On 21^st February, 2019, the President of India promulgated banning of Unregulated Deposit Schemes Ordinance 2019 which is an attempt to control or rather put a check on Ponzi schemes,black money generation and money laundering. The intention is to purely protect the depositors from defaulters by illicit or Ponzi schemes. The new law bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. According to this diktat, any individual or group of individuals cannot take any deposit or loan from any other person other than relatives. Partnership firms can take deposit or loan from relatives of partners only. The definition of relatives in this case is limited to only immediate family members. The ban does not apply to normal business deposits or loans. So, a business ownercan borrow money from a non-relative as long as his borrowings are only for business purposes.

 

The order was into force immediately after its announcement and is applicable to entire India except Jammu And Kashmir State. It should be understood that the ban is held only on unregulated deposit schemes and not on deposits. The deposits from the following are permitted :

• loan from scheduled bank or co-operative bank.
• loan from public financial institutions
• loan from government
• loan from foreign banks or foreign governments
• partners capital
• amount payable on purchase of any goods or immovable property
• any amount received in the course of or for the purpose of business.

 

For those who don’t have a clear understanding of what unregulated deposit schemes mean, here’s the explanation. Those schemes or arrangement under which deposits are accepted or requested by any deposit taker by way of business and which is not a regulated deposit scheme, as specified under Column (3) of the First Schedule are defined as unregulated deposit schemes.

 

It is equally important to understand what regulated deposit schemes are. Regulated deposits schemes are schemes specified under Column (3) of the First Schedule to this law. In general, these are the schemes which are regulated by SEBI, RBI, IRDA, State Government or UT government, National Housing Bank, Pension Fund Regulatory and Development Authority, EPFO, Central Registrar, Multistate Cooperative Societies, MCA and any scheme notified by central government or deposits accepted under any scheme registered with any regulatory body constituted under a statute.

 

This means that the deposit taker cannot accept or operate any unregulated deposit schemes. Also, there is ban on any prize chit or money circulation scheme that is banned under the provisions of Prize Chits and Money Circulation Scheme (Banning) Act, 1978 is also considered as unregulated deposit schemes.

 

It becomes essential here to understand who is considered a depositor and relative. A depositor is a person who deposits the money and is

• an individual;
• a Hindu Undivided Family;
• a company;
• a trust;
• a partnership firm;
• a limited liability partnership;
• an association of persons;
• a co-operative society registered under any law for the time being in force relating to co-operative societies;
• every artificial juridical person not falling within any of the preceding sub-clauses;
• amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable);
• amounts received by an asset re-construction company;
• any deposit made under section 34 or an amount accepted by a political party under section 29B ofthe Representation of People Act, 1951;
• 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;
• any other amount collected for such purpose and within such ceilings as may be prescribed by the State Government

 

Such depositor makes a promise to return the money

• whether after a specified period
• either in cash or in kind
• in the form of a specified service
• with or without any benefit in the form of interest, bonus, profit, or in any other form.

 

A depositor does not include

• a corporation incorporated under an act of the Parliament or a State legislature
• a banking company
• State Bank of India
• Regional Rural Banks
• a co-operative bank or a multi-state co-operative bank as defined in the Banking Regulations Act, 1949.

 

Any money taken from immediate relative by the depositor is permissible under this ordinance. The definition of relative is similar to that given in the Companies Act, 2013. A relative means anyone who is

• member of a Hindu Undivided Family
• husband or wife
• father (including step father)
• mother (including step mother)
• son (including step son)
• son’s wife
• daughter
• daughter’s husband
• brother (including step brother)
• sister (including step sister)

 

Consequences of Non-compliance

If a depositor as defined above happens to violate the ordinance and gets engaged in any transactional activities dealing with unregulated deposit schemes, section 21 of the ordinance defines penalties.

If a depositor solicits such transaction, the person may be punished with imprisonment for a term more than 1 year which may be extended to 5 years. Additionally, a fine of not less than Rs. 2 lakhs which may extend to Rs. 10 lakhs will be imposed.

If a depositor accepts such money, an imprisonment of not less than 2 years which may be extended to 7 years with a fine not less than Rs. 3 lakhs which may be extended to Rs. 10 lakhs will be ordered.

In case a depositor accepts such money and fails to repay such deposits or in rendering any specified service in any fraudulent manner, he will be punished with imprisonment for a term of minimum 3 years which may be extended to 10 years with a fine of minimum Rs. 5 lakhs which may be extended to twice the amount of aggregate funds collected from subscribers, members or participants in the unregulated deposit schemes.

 

The result will also affect the beleaguered real estate sector even more. Now, developers or property sellers can accept deposits for a designated transaction only and the amount can be adjusted against future sale consideration.

 

The Unregulated Deposit Schemes Ordinance is said to be the biggest change after the DeMo, GST, and RERA and is also said to be taken on the similar lines. With an intention to mitigate future risks of money laundering¸converting black money into white and similar fraudulent casesand to protect the sincere earning individuals from getting trapped into any Ponzy schemes, the government has taken this laudable step last week. The author of the blog believes that this law will definitely prevent the gullible investors engaging into fraudulent activities and will appropriately penalize the defaulter.