By Sudish Sharma and Vishakha Singh
Indian economy in the recent times has witnessed a plethora of fraudulent corporate malpractices. The issue of illegal deposit-taking activities has been a concerning one, causing various financial frauds in forms of ‘ponzi’ schemes, ‘chit funds’ scams etc. There has been a dire need to counter such illicit practices, and to initiate another deterrent action against the black money generated out of such illicit-deposit taking activities. Therefore, in order to address the illegal deposit taking activities, subsequent issues arising therefrom, and to regulate them, the Government of India introduced, ‘Banning of Unregulated Deposits Schemes Bill, 2018’ (“Bill”) in the Parliament. However, the Bill could not be passed in Rajya Sabha of the Parliament. Subsequently, the Government of India promulgated, “Banning of Unregulated Deposits Schemes Ordinance, 2019” on February 21, 2019 (“Ordinance”). From the date of its promulgation, the Ordinance completely bans all the ‘unregulated deposits schemes’.
Aimed at protecting the unwary investors from fraudulent ‘chit-funds’ schemes or ‘ponzi’ schemes, and to safeguard interest of the stakeholders, the Ordinance not only bans and regulates the illicit deposit taking practices but also penalizes the defaulters.
The Ordinance provides for punishment involving both fine and imprisonment for the offences involving (i) soliciting deposits under the unregulated deposit schemes, (ii) acceptance of deposits under the unregulated deposit schemes, (iii) fraudulent default in registered deposit schemes and (iv) wrongful inducement in relation to unregulated deposit schemes.
The Ordinance defines the term ‘unregulated deposits schemes’ to mean “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…”. Regulated deposits schemes, on the other hand, are defined as the schemes which are operated by the government-controlled authorities such as SEBI, RBI, IRDA, and statutory authorities under any state government.
Section 3 of the Ordinance puts a complete ban on the unregulated deposits scheme. Therefore, any scheme or arrangement, not being a regulated deposit scheme, whereby the deposits are accepted or solicited by the deposit taker by way of business, will be ‘unregulated deposit scheme’, and shall stand banned after the promulgation of the Ordinance.
Section 2(4) of the Ordinance, inter alia, 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 takes with a promise to return either in cash or in kind in the form of a specified service and which does not include amount received by an individual by way of loan from the relatives of any of its partners.
Under Section 2(77) of the Companies Act, 2013, Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014, the term ‘relative’ is defined to include family members and blood relatives. It is to be noted here that the term, ‘relative’ under the Companies Act, 2013, does not include friend and other acquittances. Given that the intention of the Ordinance is to ban the illicit deposit taking activities and ponzi schemes only, the individuals taking loans from friends for any personal work or business should not have adverse implications.
In relation to companies, partnership firms, proprietorship or other small businesses, another concern which may be raised, is taking of unsecured loan from the unrelated sources. In terms of Section 2(4)(l) of the Ordinance, it can be implied that the unsecured loan can be taken from any unrelated entity. Therefore, taking of unsecured loan from the unrelated sources by such small businesses may fall outside the scope of this Ordinance.
The Ordinance is, undoubtedly, aimed and intended to prohibit the acceptance of illicit deposits by deceitful and unscrupulous sources. However, in light of raising issues pertaining to the funds, ambiguities in the interpretation and in absences of official clarifications, the speculations are needed to be addressed promptly in order to protect interests of the stakeholders.
[The authors are Executive Partner and Associate, respectively in Corporate practice, Lakshmikumaran & Sridharan, New Delhi]