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Glimpse on The Banning of Unregulated Deposit Schemes Ordinance, 2019

Sahil Jain (FAFD, DISA, CA) 
on 24 February 2019

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With effect from 21st February, 2019 - Government of India has brought banned on Unregulated Deposit Schemes. This article is glimpse of provisions of this Ordinance and focuses majorly on its implications on Individuals and Small Businesses.

What is Unregulated Deposit Schemes?

As per Sec 2(17), Unregulated Deposit Schemes means Schemes or 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 under Column (3) of the First Schedule.

Therefore, this Ordinance applies only to those Deposit takers who are in business of taking or accepting deposits and which are not regulated.

In my opinion, those individual and small businesses whose business is NOT of taking or accepting deposits shall be out of purview of this Act.

What is Regulated Deposit Schemes?

Regulated deposits schemes are specified under column (3) of the First Schedule to this Ordinance.

In general, this are the schemes which are regulated by SEBI, RBI, IRDA, State Government or Union Territory government, National Housing Bank, Pension Fund Regulatory and Development Authority, EPFO, Central Registrar, Multistate Cooperative Societies, Ministry of Corporate Affairs (MCA) and such other scheme as notified by central government or registered with any regulatory body established under a statute.

What is Deposits under this Ordinance ?

As per Sec 2(4), deposits means an amount of money received by way of advance or loan or an 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 form of specified service, with or without any benefit in form of interest, bonus, profit or in any other form.

What are receipts which shall NOT be treated as Deposits ?

Sec 2(4) of this Ordinance also provides for exclusion to definition of Deposits.

Following receipts shall not be treated as Deposits :

1. Loans received from Scheduled Bank / Co-operative Banks / other Banking Company;

2. Loan / financial assistance received from Public Financial Institutions / NBFC Companies registered with RBI / Regional Financial Institutions / Insurance Companies;

3. Amount received from appropriate Government / Statutory Authorities constituted under Act of Parliament or State Legislature;

4. Amounts received from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Government owned development financial institutions, foreign export credit collaborators, foreign bodies corporate, foreign citizens, foreign authorities or persons resident outside India subject to the provisions of the FEMA, 1999;

5. Capital contributions by partners of partnership firm or a LLP;

6. Loan received by individuals from their relatives or loans received by any partnership firm or LLP from the relatives of its partners;

Relatives for the purpose of this ordinance means relatives as per Companies Act, 2013 and which are as follows :

  • Member of HUF;
  • Husband and 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)

7. Credit received by a buyer from a seller on sale of moveable or immovable property;

8. Amounts received by asset re-construction company registered with the RBI;

9. Any deposit made or amount accepted by political parties under the Representation  of the People Act, 1951;

10. Payment received from the members of self-help groups within the ceiling prescribed by State Government or Union Territory Government;

11. Amount received in course of business, or for purpose of business and bearing a genuine connection to such business, including :

  • amount received as advance or part payment for supply of goods / services and repayable if goods / services not provided;
  • advance received in connection with sale of immovable property subject to terms specified under agreement or arrangement;
  • security deposit against performance of contract of supply of goods / services;
  • advance under long - term projects for supply of capital goods

Who is Deposit Taker under this Ordinance ?

As per Sec 2(6), deposit taker means following :

  • Individual or group of individual
  • Proprietary concern
  • Partnership firm (whether registered or not)
  • LLP
  • Company
  • Association of Persons
  • Trust
  • Co-Operative Society or multi-state Co-operative Society
  • Other arrangements of whatsoever nature.

Other persons on whom this Ordinance shall apply ?

  • As per Sec 4, this ordinance shall apply to deposit taker who commit any fraudulent default while repayment or returning deposits on maturity or doesn't remit services promised against such deposit;
  • As per Sec 5, this ordinance shall apply to any person who make false statement or promise / misleads any facts and induce other person to invest in Unregulated Deposit Schemes
  • As per Sec 6, this ordinance shall apply to Prize Chit or money circulation scheme which are already banned under provisions of Prize Chits and Money Circulation Scheme (Banning) Act, 1978. 

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