New Rules To Regulate Deposits

Indian investors have been victims   of many notorious deposit / collective schemes for the last three decades. PAN card scheme, City Limousine, Plantation scheme many more schemes have duped millions of investors at large. Many times we have experienced that certain collective schemes were neither under the ambit of SEBI nor RBI. In order to remove the regulatory void government had introduced a bill banning of unregulated deposits scheme bill 2018. It was passed by Loksabha but it couldn’t clear Rajyasbha; hence an ordinance was recently promulgated to counter these activities.

The focus of the law is on the following three areas:

1. Running of totally unregulated deposit schemes.

2.Fraudulent default in any regulated deposit schemes.

3.Wrongful inducement in relation to unregulated deposit schemes.

The main purpose of the ordinance is to exercise control over illegal deposit schemes that intends to dupe millions of gullible investors. However this Ordinance exempts the amounts received by way of contributions by partners towards capital of  partnership firm or a limited liability partnership. Also any contribution received by an individual by way of loan from his relatives or by an entity by way of loans from relatives does not fall within the ambit of deposits.

Some of the Salient Features from “The Banning Of Unregulated Deposit Schemes Ordinance, 2018 “promulgated on 21/02/2019 are listed below:

(1) The term Deposit would  not  include (i)loan from scheduled banks or Co- operative Banks;(ii)loan from Public Financial Institutions ;(iii) loan from Government;(iv)Loans  from foreign Banks or foreign Governments (v)Capital of Partners (vi) Amount received in ordinary course of business viz Loans taken during the course of business .

(2). The rules will  apply only with prospective effect and that too in respect of deposits taken under the Unregulated Deposit Schemes either by way of advertisement or otherwise..

 (3)The Government shall appoint an authority n a Designated Court.

(4)The details of deposits taken would be required to be furnished to the Court .

(5)The Court shall be competent to attach the properties acquired through such Unregulated Deposit.

(6) Any violation may attract imprisonment for a term of 1 to 10 years with fine. ranging from Rs 2 lakh to Rs 50 crore .

Other vital aspects are discussed in detail.

A. Publisher’s Responsibility: One significant feature of this ordinance is that it makes it incumbent on the part of newspapers to verify the advertisements placed with them to ensure that the advertisement is for unregulated deposit schemes. If an advertisement is placed for such a scheme, then the government can direct the newspaper to place a “full and fair retraction” in the same position, without any cost. It contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. As per the clarification provided by the government, Banning of Unregulated Deposit Schemes Ordinance, 2019 does not ban small and medium enterprises (SMEs) from receiving loans in the course of, or for the purpose of, business.

B .Non-boilable offence: The most deterrent aspect of this ordinance is that notwithstanding anything contained in the Code of Criminal Procedure, 1973, every offence punishable under this Ordinance, except the offence under section 22 and section 26, is cognizable and non-bailable.  The ordinance prescribes for attachment of properties or assets and subsequent realisation of assets for repayment to depositors. These provisions are similar to at the provisions of Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999.

C .Attachment of properties: When the Designated Court is satisfied that there is a reasonable cause to believe that the deposit taker has transferred any property otherwise than in good faith and which does not commensurate consideration, it may, by notice, require any transferee of such property, and show cause why so much of the transferee’s property as is equivalent to the proper value of the property transferred should not be attached. On being satisfied that the transfer of the property to the said transferee was not a bonafide transfer and not for commensurate consideration, it can infer that the transferee’s property as in its opinion is equivalent to the proper value of the property transferred. This provides huge protection to the investors.

D .Central Database: This ordinance enables creation of an online central database for collection and sharing of information on deposit-taking activities in the country.

The ordinance makes an attempt to adopt best practices from state laws, and entrusting the primary responsibility of implementing the provisions of the legislation to the state governments. This is probably another move after demonetization, GST, RERA and IBC.


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