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The Banning Of Unregulated Deposit Scheme Act 2019 – Certain Issues

Banning Unregulated deposits

CAs Dr. Raj K. Agarwal and Somil Agarwal have studied the provisions of The Banning of Unregulated Deposit Scheme Act 2019 and pointed out that there is widespread confusion as to whether the taking of all deposits and loans is banned. The authors have dealt with the issue and provided a clear-cut explanation with reference to the statutory provisions

Ordinance issued by the Central Government as on 21.02.2019 titled as ‘The Banning of Unregulated Deposit Scheme Ordinance, 2019’ (No. 7 of 2019)has been substituted by passing the Act by parliament. It provides a comprehensive mechanism to ban the unregulated deposit scheme and to protect the interest of depositors and for matters connected therewith or incidental thereto.

Nature of deposits banned under the Act

As per the language of the Ordinance, there was a widespread confusion regarding the nature of deposits or loans which have been banned to be accepted. Contradictory opinions were expressed in different quarters in this regard. It was expected that while passing the Act, such concerns would be appropriately addressed but the Ordinance has been enacted having almost the same provisions and language except introduction of section 41 in the Act stating that the provisions of this Act shall not apply to deposits taken in the ordinary course of business.

Generally, a common man is concerned as to whether under the Act following kind of deposits/loans are permitted to be accepted or not?

(i)      A loan/deposit taken by an individual from his friend for personal need or for his business purpose.

(ii)     A loan or deposit taken by a partnership firm/LLP from some other person/entity for its business need.

The primary reason of confusion in this regard is that the Act has defined‘deposits’ and  ‘unregulated deposit scheme’ thus giving impression as if all deposits/loans falling within definition of ‘deposit’ as given in the Act are not permitted to be accepted.

As per section 2(4) of the Act, ‘deposit’ has been defined as under –

‘deposit’ means an amount of money received by way of an advance or loan or in any other form by any other deposit taker with a promise to return whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form but does not include –

(a)     Amounts received as loan from a scheduled bank.
(b)     …………………..
(c)     …………………..
(d)     …………………..
(e)     Amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership.
(f)      Amounts received by an individual by way of loan from his relatives or amounts received by any firm by way of loan from the relatives of any of its partners.
(g)     Amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable)
(h)     …………………….
(i)      …………………….
(j)      ……………………
(k)     ……………………..
(l)      An amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business including –
(i)      Payment, advance or part payment for the supply or hire of goods or provision of services and is repayable in the event the goods or services are not in fact sold, hired or otherwise provided;
(ii)     Advance received in connection with consideration of an immovable property under an agreement or arrangement subject to the condition that such advance is adjusted against such immovable property as specified in terms of the agreement or arrangement;

(iii)    Security or dealership deposited for the performance of the contract for supply of goods or provision of services; or
(iv)    An advance under the long-term projects for supply of capital goods except those specified in item (ii).

Provided that if the amounts received under items (i) to (iv) become refundable, such amounts shall be deemed to be deposits on the expiry of fifteen days from the date on which they become due for refund.

From the above definition of ‘deposit’, it is clear that a personal loan taken by an individual from his friend (not from the relative) for personal or any kind of business need is covered within the scope of the term ‘deposit’. Similarly, an unsecured loan taken by a partnership firm or LLP from some other individual or entity for its business need is covered within the scope of the term ‘deposit’. It is for this reason that an impression goes that such deposits/loans of personal nature taken by an individual or firm are banned to be accepted by the deposit taker.

Going further, ‘Unregulated deposit scheme’ has been defined as per section 2(17) of the Act as under –

“Unregulated deposit scheme means 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, as specified under column (3) of the first schedule.”

All deposits not banned under the Act

It is significant to note from the above that all deposits are not banned to be accepted as per the provisions of the Act. Only those deposits which are in the nature of and fall within the scope of ‘unregulated deposit scheme’ as defined under section 2(17) of the Act, have been banned to be accepted.

Scope of Unregulated Deposit Scheme

When we look to the definition of ‘unregulated deposit scheme’ closely, it can be said that for a deposit to be falling under‘unregulated deposit scheme’, the following ingredients, inter alia should exist –

(a)     The deposits are accepted or solicited by any deposit taker under a scheme or an arrangement.
(b)     The deposits are accepted or solicited by any deposit taker under a scheme or an arrangement by way of business.

The term ‘scheme or an arrangement’has not been defined under the Act.

Dictionary meaning of ‘scheme’ is as under-

“A large-scale systematic plan or arrangement for attaining some particular object or putting a particular idea into effect.”

It would imply that scheme or an arrangement would include an organized activity of accepting or soliciting deposits from several persons or group of persons or from the persons in general.

Further, ‘unregulated deposit scheme’ covers within its scope deposits accepted or solicited as a scheme or an arrangement ‘by way of business’. It implies that the deposit taker accepts deposits as an activity which is in the nature of business activity. In other words, the activity of accepting deposits under a scheme is itself in the nature of business activity.

The term ‘by way of business’ has not been defined in the Act. In common parlance, we understand that ‘business’ means an organized activity with the intent to earn profit.

As per above definition, it is clear that  that ‘unregulated deposit scheme’ would cover within its scope a scheme or arrangement under which deposits are accepted or solicited by any deposit taker and the activity of accepting deposits is in the nature of business activity.

Only Unregulated Deposit Scheme accepted by way of business banned under the Act

It is pertinent to note that the term ‘by way of business’ used in the above definition does not mean the deposits accepted for doing business of any nature by the deposit taker. It does not cover deposits taken by the deposit taker in the course of doing its business of any nature. The term ‘by way of business’ refers to situation where the activity of accepting deposits by the deposit taker by-itself is in the nature of business activity.

From the above analysis of the definition of ‘unregulated deposit scheme’, it can be said that a deposit or loan taken by an individual from his friend or some other entity for his personal need or for his business purpose, or a loan taken by a partnership firm/LLP from some other individual or entity for its business needs is not in the nature of ‘unregulated deposit scheme’ and therefore, such deposits or loans are not banned as per the Act. This intention of the legislature has been clarified by introduction of section 41 to the Act providing that the provisions of this Act shall not apply to deposits taken in the ordinary course of business. This section did not exist earlier in the Ordinance.

A question may arise as to what is the significance of defining the term ‘deposit’ under the Act if all such deposits are not falling within the scope of ‘unregulated deposit scheme’ which have been banned by the Act.

Answer to this is that the Act has defined the term ‘deposit’ which is quite comprehensive but all deposits have not been banned by the Act.

It is only the deposits which are falling within the scope of ‘unregulated deposit scheme’ which have been banned to be accepted, by the Act.Such wide definition of ‘deposit’ might have been given in the Act by the legislature in its wisdom for any kind of regulatory or clarificatory purpose to be used in present or in future.

But, it can be said that the purpose of defining ‘deposit’ so comprehensively in the Act is not clear. Certainly, giving definition of ‘deposit’ in the Actin comprehensive way cannot lead to the interpretation that all deposits are banned to be accepted as per the Act.

On the other hand, the key words in the definition of ‘unregulated deposit scheme’ are under a scheme or arrangement and by way of business which are significant to decide what kind of ‘deposits’ are banned to be accepted. Ironically, these key words too have not been defined or clarified in the Act.

Intimation of deposits taken to the Designated Authority

Further it can be observed that section 10(1) of the Act requires deposits accepted as business to be intimated to the designated authority. Here, the requirement seems to intimate all deposits accepted as business and not only the deposits falling within the scope of ‘unregulated deposit scheme’.

It is pertinent to note that the provision regarding intimation also does not require all deposits to be intimated but only those deposits which have been accepted as business.Section 10(1) of the Act requires every deposit taker which commences or carries on its business as such on or after the commencement of the Act shall intimate the authority designated by the Central Government about its business in such form and manner and within such time as may be prescribed. The rules in this regard are yet to be framed so as to prescribe the form or manner in which intimation is to be given.

As per requirement of this section, every deposit taker which commences or carries on the business of accepting deposits is required to make intimation to the authority. It would mean that intimation is not required to be given with respect to every kind of deposits taken by the deposit taken in the ordinary course of its business. In case deposits are accepted or solicited ‘by way of business’, only then there is requirement for making intimation to the authority under this Act. It would remain a debatable issue as to what kind of deposits accepted or solicited may be said to be in the nature of ‘by way of business’.

As per section 10(2), the designated authority will decide if it has reason to believe that the deposits are being accepted pursuant to a ‘unregulated deposit scheme’ or not and to take further course of action in this regard. The language of this section is not happily worded and it may be that when rules are prescribed, the requirement of making intimation under this section gets further clarified.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org

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