The President of India has promulgated 'The Banning of Unregulated Deposit Scheme Ordinance, 2019' on February 21, 2019. The Ordinance aims to provide comprehensive and unified mechanism to ban the unregulated deposit schemes (or Ponzi schemes or Pyramid Schemes) and to protect the interest of depositors. The Ordinance clearly defines 'Regulated Deposits' and 'Unregulated Deposits'. The Ordinance also provides list of offences and penalties thereunder. Through following FAQs you can understand the provisions of the Ordinance in a lucid manner.

Why this ordinance has been issued?

In absence of a unified and strong legal framework to tackle the menace of illegal deposit schemes, thousands of the innocent poor and the financially illiterate people have been duped of their hard earned savings in scams like Saradha Scam and Rose Valley Chit fund.

Thus, to control the unregulated deposit schemes, the Govt. introduced the bill (The Banning of Unregulated Deposit Schemes Bill, 2018) in the Parliament. The bill was passed by the Lok Sabha on February 13, 2019. However, the Bill couldn't be taken up for consideration in the Rajya Sabha as the Parliament was not in Session. As there was an immediate need for a legislature to regulate the deposit schemes, the President of India promulgated this Ordinance.

What is the scope of this Ordinance?

This Ordinance shall be applicable to every person in respect of following three offences:

1. Running an unregulated deposit scheme

2. Making a fraudulent default in repayment of deposits received under a regulated deposit scheme

3. Wrongfully inducing another person to invest in unregulated deposit schemes

The term 'deposit' has been defined as an amount of money received by way of an advance, loan, or in any other form, by a deposit taker with a promise to return it 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.

Which 'deposits' have been kept out of the ambit of this Ordinance?

Following deposits have been kept out of the ordinance:-

1. Loan received from the Banks or Public Financial Institutions

2. Amount received from the Government

3. Amount received from Foreign Govt., International Banks, etc.

4. Capital employed by partners in the Firm or LLP

5. Loan received from relatives* or relatives of partner

6. Amount received as credit by a buyer from seller on sale of movable or immovable property

7. Amount received by an Asset Re-construction Company

8. Amount accepted by a political party

9. Periodic payment made by members of self-help groups operating within laws framed by the State Govt.

10. Any other amount collected for such purpose and within such limit as is prescribed by the State Govt.

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

(a) Payment (advance or part payment) for supply or hiring of goods or services and is repayable in the event the goods or services are not, in fact, sold, hired or otherwise provided

(b) Advance received in connection with transfer of an immovable property under an agreement or arrangement if such advance is adjusted against consideration for transfer of such immovable property

(c) Security or dealership deposited for the performance of the contract for supply of goods or services

(d) An advance under the long-term project for supply of capital goods

It is to be noted that if amount received under items (a) to (d) are refundable such amount shall be deemed to be deposit on the expiry of 15 days from the date on which it becomes due for refund.

* The term 'relative' shall have the same meaning as is defined in the Companies Act, 2013. As per Section 2(77) of the Companies Act, 2013 a person shall be deemed to be the relative of another, if he or she is related to another person in the following manner:

(a) Father

(b) Mother

(c) Son and his wife

(d) Daughter and her husband

(e) Brothers and Sisters

What is Unregulated Deposit Scheme?

A deposit scheme has been defined as unregulated scheme if it is not registered with any of following nine regulators:

1. SEBI

2. RBI

3. IRDA

4. State Governments

5. National Housing Bank

6. Pension fund regulatory and development authority (PFRDA)

7. Employees Provident Fund Organisation (EPFO)

8. Central Registrar Multi-state Co-operative Societies

9. Ministry of Corporate Affairs (MCA)

The Ordinance outrightly bans the unregulated deposit schemes and prohibits any person from inducing another person to invest in or become member or participate in any unregulated deposit scheme by making any false, deceptive or misleading statement.

The word 'any person' has been used instead of 'deposit taker' which means that celebrities doing advertisements of such unregistered schemes and brand ambassadors of such schemes would also be covered under the law.

What are regulated deposit Schemes?

The Ordinance has specified that deposit schemes specified below shall be deemed as regulated deposit schemes:

SEBI

1. Collective Investment Scheme

2. Alternative Investment Funds

3. Mutual funds

4. Schemes managed under following regulations:

SEBI (Portfolio Managers) Regulations

SEBI ( Share Bases Employee Benefits) Regulations

5. Any other scheme registered with SEBI

RBI

1. Deposits accepted by NBFCs

2. Scheme or arrangement under which funds accepted by individuals, business correspondents or facilitators as per RBI guidelines

3. Funds received by authorised system provider operating under Payment and Settlement Systems Act, 2007

4. Any other scheme or arrangement regulated by RBI

IRDA Contract of Insurance

State Governments

1. Scheme or arrangement by registered Co-operative society

2. Chit funds business sanctioned by State Govt.

3. Any scheme or arrangement as per Money Lending laws regulated by State Govt.

4. Price Chit or Money Circulation Schemes which are not banned as per Prize Chits and Money Circulation Schemes (Banking) Act, 1978

National Housing Bank Any Scheme or arrangement for acceptance of deposits registered under National Housing Bank Act, 1987

PFRDA Any scheme or arrangement under Pension Fund Regulatory and Development Authority

EPFO Any scheme, pension scheme or Insurance scheme under Employees' provident fund and miscellaneous Provisions Act, 1952

Central Registrar Multi-state Co-operative Societies Deposits taken from voting members by Multi-State Co-operative Society

MCA

1. Deposits permitted under Companies Act, 2013

2. Deposits accepted by Nidhi Company or Mutual Benefit Society under Section 406 of Companies Act, 2013

This Ordinance shall be applicable if deposit taker commits any fraudulent default in repayment of return of such deposits on maturity or in rendering any specified services as promised against such deposits.

Whether amount received by an Individual as a loan from his friends or relative is covered under this Ordinance?

This Ordinance is applicable in case of unregulated deposit schemes. Any acceptance of deposit or advance from friends, whether for personal or business purposes, are out of the ambit of this Ordinance. In a series of tweets, the Department of Financial Services has also clarified that this Ordinance exempts Individual, Firm, companies & LLP etc. from taking any loan and deposit for their course of business.

Whether chit funds are banned as per this ordinance?

Chit funds which are not sanctioned in accordance with Chit Fund Act, 1982 shall be deemed as unregulated deposits. Thus, kitty parties, committees, etc., shall be prohibited under the Ordinance.

What are the offences and punishment under the Ordinance?

The offences, and punishment for the same have been explained in following table.

Offences Imprisonment Fine (in Rs.)

Solicit deposits under Unregulated Deposit Schemes 1 year – 5 years 2 lakhs to 10 lakhs

Accept deposits under Unregulated Deposit Schemes 2 years – 7 years 3 lakhs to 10 lakhs

Fraud in repayment of deposits accepted under Unregulated Deposit Schemes 3 years – 10 years 5 lakhs to 200% of aggregate funds collected

Fraud in repayment of regulated deposits Up to 7 years 5 lakhs to higher of 25 crore or 3 times the amount of profit made out of such fraud

Failure to render service promised against regulated deposits Up to 7 years 5 lakhs to higher of 25 crores or 3 times the amount of profit made out of such fraud

Wrongful inducements in relation to Unregulated Deposit Schemes 1 year – 5 years Up to 10 lakhs

Repeated offenders 5 years – 10 years 10 lakhs – 50 crores

Failure to file intimation by deposit taker about its business, or to furnish statements, information or particulars to the competent authority - Up to 5 lakhs

The offences covered under this ordinance shall be cognizable and non-bailable, except for the following offences:

(1) Fraud in repayment of deposit accepted in accordance of Regulated deposit scheme

(2) Failure to intimate about business or to furnish the statement, information, etc., required by competent authority.

Who is the competent authority under the scheme?

The Ordinance provides for the appointment of one or more officers not below the rank of the Secretary to the State or Central Government as the Competent Authority. Police officers receiving information about offences committed under the Ordinance shall have to report it to the Competent Authority. Further, police officers (not below the rank of an officer-in-charge of a police station) may enter into, search and seize any property believed to be connected with an offence, with or without a warrant.

What are the powers of the Competent Authority?

The Competent Authority will have powers similar to those vested in a Civil Court, which shall be as under:

1. Provisionally attach the property of the deposit taker as well as all deposits received

2. Summon and examine any person it deems necessary for the purpose of obtaining evidence

3. Order the production of records and evidence.

Whether deposit takers are required to intimate the Govt. about its activities?

Every deposit taker who commences or carries on its business on or after the issuance of this ordinance shall intimate to the competent authority about its business. Further, the Central Government shall create, maintain and operate an online database for information on eligible deposit takers operating in India.

Whether an offence committed under this ordinance be referred to CBI?

An offence committed under this ordinance can be referred to CBI if:

(1) The depositors, deposit takers or properties involved are located in more than one State or Union territory in India or outside India; and

(2) The total value of the amount involved is of such magnitude which can significantly affect the public interest.

Does Ordinance have an overriding effect over State or UT laws?

The provisions of the Ordinance shall have an overriding effect notwithstanding anything contained in any other law for time being in force, including any laws made by any State or Union Territory. However, it is to be noted that provision of this ordinance does not bar application of any other laws.


Source : taxmann.com


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