India, has in the recent times witnessed a glut of financial frauds in forms of ponzi schemes, chit fund scams etc. In order to deter the illegal operators from running such deposit schemes luring deposits, and to regulate them, the government brought in the ‘Banning of Unregulated Deposit Schemes Bill, 2018’ in the Parliament. However, the same could not be passed in Rajya Sabha. Subsequently, the ‘Banning of Unregulated Deposit Scheme Ordinance, 2019’ was promulgated on February 21, 2019.
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The Banning of Unregulated Deposit Schemes Ordinance, 2019
The Ordinance provides for a mechanism to completely ban unregulated deposit schemes to protect the interests of depositors and provides for stringent penalties for the offences involving wrongful inducement, solicitation or acceptance of deposits under an unregulated deposit schemes as well as fraudulent default in repayment or return under a Regulated Deposit Scheme. The Ordinance also seeks to amend three laws, i.e., the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992 and the Multi-State Co-operative Societies Act, 2002.
What is the need of the Banning of URDS Ordinance?
The Banning of Unregulated Deposit Scheme Bill 2019 was passed by Lok Sabha but could not be passed by Rajya Sabha to make it as an enacted Act. Hence, to make the provisions effective immediately the Ordinance was promulgated by Hon’ble President of India on 21 st February 2019 and is applicable from that date onwards.
What is the objective of Banning of URDS Ordinance?
The Ordinance is to provide for a comprehensive mechanism to ban Unregulated Deposit Schemes and to protect the interest of the depositors and for matters connected therewith or incidental thereto
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When has this Ordinance come into force?
The Banning of Unregulated Deposit Schemes Ordinance, 2019 has come into force from 21 st February 2019.
What is appropriate government under the Ordinance?
As per Section 2(1) of the Ordinance, “appropriate Government” means in respect of matters relating to,
- the Union territory without legislature, the Central Government;
- the Union territory of Puducherry, the Government of that Union territory;
- the Union territory of Delhi, the Government of that Union territory; and
- the State, the State Government
The appropriate government would appoint one or more officers not below the rank of Secretary to that Government, as the Competent Authority under Section 7 of the Ordinance.
What is deposit?
Section 2(4) of the Ordinance defines the term deposit as an amount of money received by way of an advance or loan or in any other form, by any deposit taker with a promise to return whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form. However, certain deposits are excluded from the definition and as such the excluded deposits are not within the scope of the Ordinance.
What are specific exclusions from the definition of deposits
The exclusions are set out in Section 2(4) of the Ordinance itself that defines ‘deposits’ which are as follows:
- Loans received from banks;
- Loans/ financial assistance from private finance institutions (PFIs) or any registered non-banking financial companies (NBFCs), regional financial institutions and insurance companies;
- Amount received from or guaranteed by appropriate an government;
- Amount received from a statutory authority;
- Amounts received from foreign government, foreign banks, and foreign authorities or person resident outside India as per the provisions of the Foreign Exchange Management Act (FEMA) 1999;
- 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;
- Any periodic payment made by the members of self-help groups as per the ceiling prescribed by state/ Union territory government;
- Amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business for following and which has not become refundable
- Payment, advance or part payment for supply/ hire of goods / services;
- Advance received in connection with and adjusted towards consideration of an immoveable property under an agreement or arrangement;
- Security deposit;
- Advance under long-term projects for supply of capital goods;
What are the specific exclusions for a partnership firm or limited liability partnership?
- Amounts received by way of contribution towards capital by partners of any partnership firm or limited liability partnership are excluded from the definition of ‘deposit’.
- Any amount received by a firm by way of a loan from the relatives of any of its partners is excluded
Are advances from customers for the purpose of business excluded from the definition of deposits?
Yes, only if the advance confirms requirements for exclusion stated in Section 2(4)(l) of the Ordinance. Accordingly, the following amounts are excluded from the definition of deposits if these are received in the course or for the purpose of business or bearing a genuine connection to such business including
- Payments, advance, part payment for the supply or hire of goods or provision of services and is repayable in the event the goods or services are in fact sold, hired or otherwise provided.
- Advance received in connection with consideration of an immovable property under an agreement / arrangement subject to the condition that the advance is adjusted against such immovable property as per agreement.
- Security or dealership deposits for the performance of contract or for supply of goods or provision of services.
- Advance under long term projects for supply of capital goods.
However, when the aforesaid amounts (i) to (iv) become refundable, such amounts are deemed to be deposits on expiry of fifteen days from the date on which they become due for refund.
Whether the Deposit received by a Political party covered by this Ordinance?
Any deposit made under Section 34 or an amount accepted by a political party under Section 29B of the Representation of the People Act, 1951 are exempt by virtue of Section 2(4)(i) of the Ordinance. Section 29B of the Representation of the People Act, 1951 reads: Political parties entitled to accept contribution.—Subject to the provisions of the Companies Act, 1 956, every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government company: Provided that no political party shall be eligible to accept any contribution from any foreign source defined under clause (e) of Section 2 of the Foreign Contribution (Regulation) Act, 1976 (49 of 1976)
Meaning of ‘depositor’ under the Banning of Unregulated Deposit Schemes Ordinance, 2019?
As per Section 2(5) of the Ordinance, “depositor” means any person who makes a deposit under this Ordinance.
Who is a deposit taker?
As per Section 2(6) of the Ordinance, “deposit taker” means
- any individual or group of individuals
- a proprietorship concern;
- a partnership firm (whether registered or not);
- a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
- a company;
- an association of persons;
- a trust (being a private trust governed under the provisions of the Indian Trusts Act, 1882 or a public trust, whether registered or not);
- a co-operative society or a multi-State co-operative society;
- any other arrangement of whatsoever nature, receiving or soliciting deposits, but does not include
- Corporation incorporated under an Act of Parliament or a State Legislature;
- a banking company, a corresponding new bank, the State Bank of India, a subsidiary bank, a regional rural bank, a co-operative bank or a multi-State cooperative bank as defined in the Banking Regulation Act,1949
Whether the Trusts/Cooperatives/ Societies are covered under the Ordinance?
Yes, they are deposit takers as per Section 2(6) of the Ordinance.
What is a Designated Court?
As per Section 8 of the Ordinance, the appropriate Government shall, with the concurrence of the Chief Justice of the concerned High Court, by notification, constitute one or more Courts known as the Designated Courts for such area or areas or such case or cases as may be specified in such notification, which shall be presided over by a Judge not below the rank of a District and Sessions Judge or Additional District and Sessions Judge.
Which Court has jurisdiction in respect of any matter to which the provisions of this Ordinance apply?
Only the Designated Court and no other court shall have jurisdiction in respect of any matter to which the provisions of this Ordinance apply.
Whether the designated Court can try an offence other than an offence under this Ordinance?
When trying an offence under this Ordinance, the designated Court may also try an offence, other than an offence under this Ordinance, which the accused may under the Code of Criminal Procedure, 1973, be charged at the same trial.
What is a Regulated Deposit Scheme?
Regulated Deposit Schemes are the Scheme Specified in First Schedule to the Ordinance. Currently, schemes that are regulated by SEBI, RBI, IRDA, State Government, Union Territory Government, National Housing Bank, Pension Fund Regulatory and Developmental Authority, EPFO, Multi-State Co-Operative Society, Deposits accepted or permitted under Chapter-V of the Companies Act, 2013 and any deposits accepted by a company declared as a Nidhi or a Mutual Benefit Society under the Companies Act, 2013 are regulated deposit schemes.
Deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute is also considered as a regulated deposit scheme. Further, Central Government, has a power to notify any other scheme as a regulated deposit scheme.
What is an Un-Regulated Deposit Scheme?
As per Section 2(17) of the Ordinance “Unregulated Deposit Scheme” means a Scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme as specified in First Schedule of the Ordinance.
What is banned under The Banning of Unregulated Deposit Schemes Ordinance, 2019?
In terms of Section 3 of the Ordinance:
- Unregulated deposit schemes are banned and
- No deposits taker shall directly or indirectly promote, operate, issue advertisement, solicit participation or enrolment in or accept deposits in pursuance of an unregulated deposit scheme.
In terms of Section 4 of the Ordinance:
- No deposit taker, while accepting deposits pursuant to a Regulated Deposit scheme, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.
In terms of Section 5 of the Ordinance:
- No person by whatever name called shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts or deliberately conceal any material facts, to induce another person to invest in, or become a members or participant of any URDS.
In terms of Section 6 of the Ordinance:
- A prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an URDS under this Ordinance.
What are the powers of the Competent Authority or officers appointed by the appropriate government?
Where the Competent authority or the officers appointed under Section 7(2) of the Ordinance has a reason to believe (the reason for such belief to be recorded in writing) on the basis of such information and particulars as may be prescribed, that any deposit taker is soliciting deposits in contravention of Section 3 of the Ordinance, he may, by order in writing, provisionally attach the deposits held by the deposit taker and the money or other property acquired either in the name of the deposit taker or in the name of any other person on behalf of the deposit taker and the Competent Authority shall, for this purpose have the same powers as vested in a civil court under the Code of Civil Procedure, 1908 while conducting investigation or inquiry in respect of the following matters, namely:
a. discovery and inspection;
b. enforcing the attendance of any person, including any officer of a reporting entity and examining him on oath;
c. compelling the production of records;
d. receiving evidence on affidavits;
e. issuing commissions for examination of witnesses and documents;
f. any other matter which may be prescribed.
The Competent authority shall have the power to summon any person whose attendance he considers
necessary whether to give evidence or to produce any records during the course of any investigation or proceeding stated above.
What are the powers of the Designated Court?
The Designated Court shall exercise the following powers:
- to approve the statement of dues of the deposit taker due from various debtors;
- to assess the value of the assets of the deposit taker and finalize the list of the depositors and their respective dues;
- to direct the Competent authority to take possession of any assets belonging to or in the control of the deposit taker and to sell, transfer or realise the attached assets, either by public auction or by private sale as it deems fit depending upon the nature of assets and credit the sale proceeds thereof to its bank account;
- to approve the necessary expenditure to be incurred by the Competent Authority for taking possession and realisation of the assets of the deposit taker;
- to pass an order for full payment to the depositors by the Competent Authority or an order for proportionate payment to the depositors in the event the money so realised is not sufficient to meet the entire deposit liability;
- to direct any person, who has made profit or averted loss by indulging in any transaction or activity in contradiction of the provisions of this Ordinance, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention; and
- to pass any other order which the Designated Court deems fit for realisation of assets of the deposit taker or on any other matter or issue incidental thereto.
What is the power of Supreme Court under the Banning of URDS Ordinance?
On an application filed by the Competent Authority or any interested party, supported by an affidavit, whenever it is made to appear to the Supreme Court that there is a default in any deposit scheme or deposit schemes of the nature referred to in Section 30 of The Banning of Unregulated Deposit Schemes Ordinance 2019, the Supreme Court may, by an order, direct that any particular case be transferred from one Designated Court to another Designated Court. Where such an application is dismissed, the Supreme Court may, if it is of the opinion that the application was frivolous or vexatious, order the applicant to pay by way of compensation to any person who has opposed the application, such sum not exceeding
fifty thousand rupees as it may consider appropriate in the circumstances of the case.
What are the offences under The Banning of Unregulated Deposit Schemes Ordinance?
The offences under this Act are
- Soliciting deposits under URDS
- Accepting deposits under URDS
- Fraudulently defaulting in repayment of deposits accepted under URDS
- Failure to render service promised against URDS
- Fraudulently defaulting in repayment or return of deposit on maturity of regulated deposits.
- Failure to render service promised against regulated deposits
- Wrongful inducements in relation to Unregulated Deposit Schemes
- Failure to file intimation by deposit taker about its business, or to furnish statements, information or particulars to the competent authority
What is the punishment for soliciting deposits under URDS?
Imprisonment for a term which shall not be less than 1 year but which may extend to 5 years and with fine
which shall not be less than 2 lakh rupees but which may extend to 10 lakh rupees.
What is the punishment for accepting deposits under URDS?
Imprisonment for a term which shall not be less than 2 years but which may extend to 7 years and with fine
which shall not be less than 3 lakh rupees but which may extend to 10 lakh rupees.
What is the punishment for fraudulently defaulting in repayment of deposits accepted under URDS
and failure to render service promised against URDS?
Imprisonment for a term which shall not be less than 3 years but which may extend to 10 years and with fine which shall not be less than 5 lakh rupees but which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in the URDS.
What is ‘freezing of property’ and ‘freezing of account’ under the Ordinance?
Freezing of account shall mean that no transaction, whether deposit or withdrawal shall be allowed in the said account.
Freezing of property shall mean that no transfer, conversion, disposition or movement of property shall be allowed.
What is the power of the State Government to make rules?
The State Government or Union territory government, as the case may be, in consultation with the Central Government, by notification make rules to provide for all or any of the following matters:
- Ceiling for self help groups under Section 2(4)(j) of The Banning of Unregulated Deposit Schemes Ordinance, 2019.
- Purpose and ceiling under Section 2(4) (k) of the Ordinance.
- The manner of provisional attachment of property by the Competent authority under Section 7(3) of the Ordinance.
- Other matters under Section 7(4)(f) of the Ordinance.
- The rules relating to impounding and custody of records under Section 7(8) of the Ordinance.
- Any other matter which is required to be, or may be, prescribed.
Who are the Regulators for the Regulated deposit schemes?
• State/UT Government
• National Housing Bank
• Pension Fund Regulatory & Development Authority
• Central Registrar, Multi State Co-operative Societies
• MCA, Government of India
What are the Regulated Deposit Schemes regulated by SEBI?
• Collective Investment Scheme;
• Alternative Investment Funds;
• Funds managed by a portfolio manager;
• Any scheme or an arrangement regulated under the SEBI (Share Based Employee Benefits) Regulations, 2014 or
providing for employee benefits as permitted under the Companies Act, 2013;
• Any other scheme or an arrangement registered under SEBI Act, 1992;
• Subscription to a Mutual fund Registered with SEBI
What are the Regulated Deposit Schemes regulated by RBI?
- Any scheme under which deposits are accepted by NBFCs registered with RBI or any other scheme or arrangement registered under RBI Act, 1934;
- Any scheme or an arrangement under which funds are accepted by individuals or entities engaged as Business Correspondents and Facilitators by banks subject to the Guidelines and Circulars issued by RBI from time to time;
- Any scheme or an arrangement under which funds are received by a system provider operating as an authorized payment system under the Payment and Settlement Systems Act, 2007;
- Any other scheme or an arrangement regulated under RBI Act, 1934, or the guidelines or circulars of the Reserve Bank of India
What will be the impact on Real Estate Sector who are taking advance from customers and providing monthly assured returns?
Advance received in connection with consideration of an immovable property under an agreement or arrangement is excluded from the purview of ‘deposit’ under The Banning of Unregulated Deposit Schemes Ordinance only on the condition that such advance is adjusted against such immovable property as specified in terms of the agreement or arrangement.
However, if the amounts so received 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 refund. Provided further that where the said
amounts become refundable, due to the deposit taker not obtaining necessary permission or approval under the law for the time being in force, wherever required, to deal in the goods or properties or services for which money is taken, such amounts shall be deemed to be deposits.
What is the role of chartered accountants under Banning of URDS Ordinance?
Currently no specific role has been prescribed for Chartered Accountants under this Ordinance.
How a chartered accountant can advise/consult a client on compliance with respect to this Ordinance?
After understanding the law, a Chartered Accountant should inform his clients / management about:
- Compliance required under Section 10 of this Ordinance
- They should not act in violation of Sections 3, 4 5 and 6 of The Banning of Unregulated Deposit Schemes Ordinance, 2019.