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Compiled by CS Vanshree Modi 

BANNING OF UNREGULATED DEPOSIT ORDINANCE

Background

1. Acceptance of deposits by unincorporated bodies was always prohibited under


Chapter IIIC of the RBI Act, 1934. In 2015 the Banning of Unregulated Deposit Schemes
and Protection of Depositors' Interests Bill, 2015 was introduced along with Report of
the Inter-Ministerial Group (IMG) for identifying gaps in the existing regulatory
framework for deposit-taking activities and to suggest administrative/ legislative
measures including formulation of a new law to cover all relevant aspects of 'deposit-
taking'.

In 2019, it has turned into a reality with the President promulgating the Banning of
Unregulated Deposit Schemes Ordinance, 2019 w.e.f. February 21, 2019 (hereinafter
referred to as 'BUDS Ordinance'). 70th Standing Committee on Finance (2018-19) also
submitted its report in January, 2019.

The BUDS Ordinance has been enforced against need to regulate raising of money from
public and ensuring that the same is allowed in a responsible, accountable and
transparent manner and addressing the violations swiftly. Currently, several regulators
monitor acceptance of public deposits, viz., RBI, NHB, Companies Act, etc. With the
BUDS Ordinance in force, no person can accept deposits unless the same are either
excluded from the meaning of deposits or fall under Regulated Deposit Scheme.

2. Definition of a Deposit & Exclusion from the meaning of a Deposit

In case of companies, the exclusions from the meaning of deposit shall comprise of those
provided under Rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules, 2014.

In case of non-banking financial company registered under the Reserve Bank of India
Act, 1934, the expression "deposit" shall have the same meaning as is assigned to it in
clause (bb) of section 45-I of the said Act.

While it is not specifically provided, exclusions provided by various regulators under


respective guidelines, viz., by the RBI under Master Directions for Acceptance of Public
Deposits (Reserve Bank) Directions, 2013 and by NHB under Housing Finance
Companies (NHB) Directions, 2010 from the meaning of public deposit will hold good
for respective entities.

However, in case of partnership firms, LLPs, proprietorship concerns, trusts, individuals


or group of individuals, co-operative societies there is no definition of deposit or a
specific exclusion list provided under any law. Accordingly, the definition and the
exclusion list provided under the BUDS Ordinance will be applicable.
 
Compiled by CS Vanshree Modi 

What is covered in the exclusion Analysis


list
Loans from Banks, loans and financial Loans from HFCs registered with NBC should also
assistance from PFIs, registered NBFCs be regarded as exempted.
or regional financial institutions or
insurance companies.
Amounts received or guaranteed by
appropriate Government or from a
statutory authority.
Amounts received for foreign party/
person resident outside India under
provisions of FEMA Act, 1999 and rules
and regulations made thereunder
Amounts received as contribution
towards capital by partners by firm or
an LLP
Loan received by a firm from relatives Loan from partners is not covered.
of partners.
Loans from companies are also not covered.

Meaning of relative is as per the Companies Act,


2013 and not as provided in the RBI Act. The list
under the RBI Act is wider.

Loan received by an individual from Loan from friends or any person other than relative
relatives. not covered.
Amount received as credit by a buyer In case of credit, there is no money given and,
from a seller of any moveable or therefore, the question of accepting deposit does not
immoveable property. arise.
Amounts received by an Asset Amounts raised by Trusts/SPVs under ARC do not
Reconstruction Company registered seem to get covered.
under the SARFAESI Act, 2002
Amounts accepted by political parties
under Section 29B of the
Representation of the People Act, 1951
Period payment by members of self
help groups within the ceilings
prescribed by the State/Union Territory
Government
Amount received in the course of, or for The list provided thereafter is an inclusive list.
the purpose of, business and bearing a
genuine connection to such business Amounts not specifically covered anywhere else may
including be excluded under this clause only if the amounts
have been received for business and the requirement
 
Compiled by CS Vanshree Modi 

bears genuine connection to such business.

(i) payment, advance or part payment Provided the amounts have not becomes refundable.
for the supply or hire of goods or If the amounts become refundable, it will be deemed
provision of services
as deposits within 15 days from the date on which
(ii) advance received in connection with they become due for refund.
and adjusted against consideration of
an immovable property under an Where the reason for amounts becoming refundable
agreement or arrangement is deposit taker not obtaining necessary permission/
(iii) Security deposit for performance of approval to deal in goods or properties or services
contract for which money is taken, such amounts shall be
(iv) Advance for long-term projects for deemed to be deposits.
supply of capital goods
3. Who will benefit from BUDS Ordinance?

(a) Poor and gullible people who are being duped by illicit deposit schemes
launched by rapacious operators. The Bill will protect them by altogether
banning unregulated deposit taking schemes.
(b) Deposit raising entities which are regulated by and accountable to the
Government or Regulators established by the Government, by increasing public
faith in them.
4. Who will be worst hit by virtue of BUDS Ordinance?

(a) All those carrying on unorganized lending;


(b) All jewelers carrying on savings scheme (not in the nature of advance for buying
the gold);
(c) All partnership firms, LLPs who raise funds from companies (Non-NBFCs),
individuals, partners, etc.
5. Highlights of BUDS Ordinance

(a) complete prohibition of unregulated deposit taking activity;


(b) deterrent punishment for promoting or operating an unregulated deposit taking
scheme;
(c) stringent punishment for fraudulent default in repayment to depositors;
(d) designation of a Competent Authority by the State Government to ensure
repayment of deposits in the event of default by a deposit taking establishment;
(e) powers and functions of the competent authority including the power to attach
assets of a defaulting establishment;
(f) Designation of Courts to oversee repayment of depositors and to try offences
under the Act; and
(g) listing of Regulated Deposit Schemes in the Bill, with a clause enabling the
Central Government to expand or prune the list.
6. Regulated Deposit Schemes

6.1 Regulated by SEBI

♦ SEBI (Collective Investment Scheme) Regulations, 1999


 
Compiled by CS Vanshree Modi 

♦ SEBI (Alternative Investment Funds) Regulations, 2012


♦ SEBI (Portfolio Managers) Regulations, 1993
♦ SEBI (Share Based Employee Benefits) Regulations, 2014
♦ SEBI (Mutual Funds) Regulations, 1996
♦ Any other scheme or arrangement registered under the SEBI Act, 1992.
6.2 Regulated by the RBI

♦ Accepted by NBFCs registered with the RBI


• Those not registered will not be covered.
♦ Accepted by Business Correspondents, Facilitators by banks as per RBI
Guidelines and Circulars.
♦ Accepted by a system provider operating as an authorised payment system
under the Payment Settlement Systems Act, 2007
♦ Accepted under any other scheme or arrangement registered under the RBI Act,
1934.
6.3 Regulated by IRDA

♦ Contract of insurance pursuant to certificate of registrartion.


6.4 Regulated by the State Government or the Union territory Government

♦ Any scheme or an arrangement made or offered by a registered co-operative


society.
♦ Accepted by Chit funds with previous sanction of the State Government under
Chit Funds Act, 1982.
♦ Accepted under the money lending laws in force in any State or Union Territory.
♦ prize chit or money circulation scheme under section 11 of the Prize Chits and
Money Circulation Scheme (Banning) Act, 1978.
6.5 Regulated by NHB

♦ By HFCs registered with the NHB


6.6 Regulated by PFRDA

♦ Scheme or arrangement under the Pension Fund Regulatory and Development


Authority Act, 2013.
6.7 Regulated by EPFO

♦ Any scheme, Pension Scheme or Insurance Scheme framed under the


Employees' Provident Fund and Miscellaneous Provisions Act, 1952.
6.8 Regulated by the Central Registrar, Multi-State Co- operative Societies

♦ Any scheme or an arrangement for acceptance of deposits from voting members


by a registered Multi-State Co-operative Society.
6.9 Regulated by MCA

♦ Deposits under Chapter V of the Companies Act, 2013


♦ Accepted by the Nidhi Company or Mutual Benefit Society under section 406 of
 
Compiled by CS Vanshree Modi 

the Companies Act, 2013.


6.10 Deposited accepted under any scheme or arrangement registered with
any regulatory body in India constituted or established under a statute.

7. Types of offences and punishment under the BUDS Ordinance

(a) Soliciting deposits under the Unregulated Deposit Schemes


♦ Imprisonment: 1 year to 5 years; and
♦ Fine: INR 2 lakhs to 10 lakhs
(b) Acceptance of deposits under the Unregulated Deposit Schemes
♦ Imprisonment: 2 years to 7 years; and
♦ Fine: INR 3 lakhs to 10 lakhs
(c) Acceptance of deposits under the Unregulated Deposit Schemes an Fraudulent
default
♦ Imprisonment: 3 years to 10 years; and
♦ Fine: INR 5 lakhs to twice the amount of aggregate funds collected.
(d) Fraudulent default in Regulated Deposit Schemes.
♦ Imprisonment: upto 7 years; and
♦ Fine: INR 5 lakhs to 25 crores or three times the amount of profit made
out of fraudulent default.
♦ The provisions are different from that provided under Section 76A of
the Companies Act, 2013.
(e) Wrongful inducement in relation to Unregulated Deposit Schemes
♦ Imprisonment: 1 year to 5 years; and
♦ Fine: upto INR 10 lakhs
(f) Repeated offenders
♦ Imprisonment: 5 year to 10 years; and
♦ Fine: INR 10 lakhs to 50 crores
(g) Failure to file intimation by deposit taker about its business to the authority
♦ Fine upto 5 lakhs.
♦ Where the authority has reasons to believe that deposits are being
accepted or solicited under Unregulated Deposits Scheme, it may ask
for further information.
♦ This information pertains to details of amounts falling within the
meaning of deposits as defined in the Ordinance.
♦ Further, companies accepting deposits under Chapter V of the
Companies Act, 2013 are also required to provide the information.
Central Repository-information on deposit takers

8. The Central Government shall designate an authority for creation, maintenance and
operation of online database of information on deposit takers. The authority may require
other Regulators/ Competent Authority to share information on deposit takers.
 
Compiled by CS Vanshree Modi 

Every deposit taker shall report to the authority about its business in the prescribed
manner.

Onus on principal officer of Banks to inform about its client being a deposit
taker

9. Where the principal officer of any 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 co-operative bank has reason to believe that any client is a deposit taker and
is acting in contravention to the provisions of this Act, he shall be required to inform the
same to the Competent Authority.

10. Draconian powers under BUDS Ordinance

♦ The Competent Authority, being the State Government or Central Government,


in case of Union Territories without legislatures or Government of that Union
territory in case of Delhi and Puducherry shall have following powers:
• Power to 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
from the date of the order.
• Power to summon any person during course of investigation or
proceeding.
• Impound and retain records produced before him, in his custody.
• Save as otherwise provided in the SARFAESI Act and IBC, an order of
provisional attachment passed by the Competent Authority, shall have
precedence and priority, to the extent of the claims of the depositors,
over any other attachment by any authority.
♦ The police officer shall also have power to enter into search and seize without
warrant.
Conclusion

11. While it does not cover personal loans, amounts taken for personal use, BUDS
Ordinance will surely have a huge impact on the manner of fund raising by unregulated
entities. The punishment for any kind of offence is so serious that one would definitely
want to best avoid the same. This will definitely affect the huge network of informal/
unorganized lending prevalent in the country. While this will result in protection of
investors who get duped, it will also cause a lot of difficulty to the businesses that rely on
such kind of funding.

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