A Nip in the BUD! Ordinance Bans Unregulated Deposits
In 2015, the Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill, 2015 was introduced along with a 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 the formulation of a new law to cover all the relevant aspects of ‘deposit-taking’.
 
In my earlier article titled ‘Deposits raised by unregulated entities are on the radar of the finance ministry’ written in 2017, I had highlighted the practical difficulties that entities are likely to face, pursuant to the enforcement of this bill.   
 
In 2019, this becomes 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’). Key highlights can be viewed in the article titled ‘Menace of illicit deposit schemes pinned down’.
 
Meaning of Deposit
 
A deposit has been defined to mean:
 
An amount of money received 
 
  • by way of an advance or loan or in any other form, 
 
By any deposit taker 
 
  • Means an individual, group of individuals, proprietorship concern, partnership firm, a limited liability partnership (LLP)  company, an Association of Persons (AOP), a trust (private or public), a co-operative society or any other arrangement.
  • Does not include a corporation incorporated under an act of the Parliament or a state legislature, a banking company, State Bank of India (SBI), Regional Rural Banks (RRBs), a co-operative bank or a multi-state co-operative bank as defined in the Banking Regulations Act, 1949.
 
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.
 
BUDS permit acceptance of deposits only under a regulated deposit scheme as provided in Schedule I viz. schemes regulated by the Securities Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority of India (IRDA), state/ Union government, the National Housing Bank (NHB), the Pension Fund Regulatory and Development Authority (PFRDA), the  Employees' Provident Fund Organisation (EPFO), the Ministry of Corporate Affairs (MCA), the Central Registrar and multi-state co-operative societies.
 
The litmus test can be derived from the definition itself, which has an underlying component of ‘promise to return’. ‘Promise for returns’ and ‘promise to return’ is not the same thing, returning means returning the money itself. Money itself may be returned in cash or in kind. For example, money is paid ‘for the issue of securities’ – that cannot be a case of receiving money with a ‘promise to return’.
 
Therefore, issue of securities by a special purpose vehicle (SPV) set up for securitisation or by infrastructure companies cannot be said to be made with a promise to return.
 
Exclusions from the meaning of deposit
 
  • Loans received from banks;
  • Loans/ financial assistance from private finance institutions (PFIs)  or any registered non-banking financial companies (NBFCs), regional financial institutions and insurance companies;
  • Amount received from or guaranteed by appropriate an government;
  • Amount received from a statutory authority;
  • Amounts received from foreign government, foreign banks, and foreign authorities or person resident outside India as per the provisions of the Foreign Exchange Management Act (FEMA) 1999;
  • Capital contributions by partners of a partnership firm or LLP;
  • Loans received by an individual from his relatives;
  • Loans received by a firm from relatives of partners;
  • Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable);
  • Amounts received by a registered Asset Reconstruction Company (ARC);
  • Amounts received under Section 34 or Section  29B of the Representation of the People Act, 1951;
  • Any periodic payment made by the members of self-help groups as per the ceiling prescribed by state/ Union territory government;
  • Amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business for following and which has not become refundable (including for reasons where deposit taker did not obtain the necessary permission or approval under the law for the time being in force, wherever required, to deal in the goods or properties or services for which money is taken):
 
  • Payment, advance or part payment for supply/ hire of goods / services;

 

  • Advance received in connection with and adjusted towards consideration of an immoveable property under an agreement or arrangement;

 

  • Security deposit;

 

  • Advance under long-term projects for supply of capital goods;
 
In case of companies, the meaning of ‘deposit’ shall be as per defined in Companies Act, 2013 and in case of registered NBFCs, definition of ‘deposit’ shall be as given in Section 45-I (bb) of the Reserve Bank of India Act, 1934 .
 
Impact
 
Every Ponzi scheme is followed by a new law and such reactive law-making adds to the woes of genuine entrepreneurs. The penal provisions under such law are equally scary. ‘Scheme’ means to make plans, especially in a devious way or with intent to do something illegal or wrong. The intention is to prohibit such persons from defrauding investors. However, funds raised from a third person for genuine business purpose should not be regarded as a scheme for raising deposits in view of the exclusions provided in the meaning of deposit.
 
(CS Vinita Nair is Partner at Vinod Kothari & Company)
 
 
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COMMENTS

JITENDRA BAFNA

3 weeks ago

This is difficult to interpret

Ramesh Bhatt

3 weeks ago

What About Money borrowing and lending business . Money borrowed is from friends at @ 12 % p.a

Rajan S

4 weeks ago

1. Does the inter corporate deposits of a company covered under this ordinance ?
2. What is the impact on existing deposits if any from 3rd individuals in LLP, whether this need to be repaid and any time frame for it?

abilash pnair

4 weeks ago

Whether Jewellers running saving schemes are covered under this ordinance?

REPLY

Vinita Nair

In Reply to abilash pnair 4 weeks ago

https://www.google.com/amp/s/m.economictimes.com/markets/commodities/news/pause-on-gold-savings-schemes/amp_articleshow/63179768.cms

The jewellers association as well acknowledges the same to be deposits.

Jugal Mundra

4 weeks ago

Does this ordinance cover loans such as those taken by a farmer from a moneylender (non-bank) in cash or a business taking money from an unrelated individual in cheque on high rate of interest ?

REPLY

Vinita Nair

In Reply to Jugal Mundra 4 weeks ago

Amounts taken by farmer for personal use - not regarded as deposit.

Amounts taken by farmer is an amount taken in the course and in connection with genuine business. Therefore, should not be regarded.

Jugal Mundra

In Reply to Vinita Nair 4 weeks ago

Thanks ma'am. However, what about a restaurant business (just for example) taking loan from a cotton trader @ 21% rate of interest as unsecured loan?

Vinod Kothari

In Reply to Jugal Mundra 4 weeks ago

The key question that needs discussion is whether an isolated loan is intended to be hit by the Ordinance, or is it series of loans, forming part of a "scheme or arrangement". If isolated loans are indeed covered, in that case, a whole lot of what is currently happening in hundreds of thousands of small businesses is already illegal. The intent of the law was to curb people who float fund-raising schemes and vanish with savers' money; the law will end up killing financial flexibility and access to capital for small business.

Kailash Bishnoi

In Reply to Vinita Nair 4 weeks ago

Does this ordinance cover unsecured loan taken by a partnership firm or individual from other partnership firm(no partner is related) ?

CBI, ED to summon Chanda & Deepak Kochhar, and Venugopal Dhoot soon
The CBI and the ED are likely to issue summons for questioning former ICICI Bank CEO and MD Chanda Kochhar, her husband Deepak Kochhar and industrialist V.N. Dhoot in connection with the Rs 3,250-crore loan case involving the Videocon Group and ICICI Bank, CBI sources said on Friday.
 
The Central Bureau of Investigation (CBI) sources said the agency would initiate the summons as it had completed the scrutiny of documents it had seized during the January 24 raids carried out at four locations in Maharashtra. 
 
"Soon we will start issuing summons to all concerned persons in the case," said the source. He indicated that the agency will first call Deepak Kochhar and Dhoot for questioning as they were the beneficiaries of the loans disbursed by ICICI. 
 
The source also said that the agency had issued a lookout circular against Chanda Kochhar. The source said "issuance of a LOC is a routine process" which was done in cases of economic offences so that a tab was kept on their movement.
 
This is the first time a lookout circular (LOC) has been issued against Chanda Kochhar. 
 
The CBI had earlier issued LOC against Deepak Kochhar and Dhoot after it registered a preliminary enquiry in March last year to keep a tab on their travel plans at the immigration desks at the international airports. 
 
The Enforcement Directorate (ED), which had registered a case of money laundering earlier this month on the basis of the CBI FIR, is also planning to summon those named in the FIR. 
 
A senior ED official requesting anonymity said that they were studying the case files related to the transactions of the money of the companies included in the CBI FIR. 
 
"And once we identify the shady transactions, if any alleged kickbacks were paid, we will call them for questioning," he added. 
 
The official also said that they were collecting the list of assets owned by the Kochhars and Dhoot in India and abroad.
 
On January 29, the Justice B.N. Srikrishna Committee found that Chanda Kochhar violated the bank's code of conduct in dealing with conflict of interest and fiduciary duties in the case of loans to Videocon that had routed a part of the money to a company owned by her husband.
 
As part of a quid pro quo, Dhoot allegedly invested Rs 64 crore in NuPower Renewables Pvt Ltd run by Deepak Kochhar. 
 
Chanda Kochhar stepped down from the post of CEO and MD on October 4 last year after expose of the loan saga. Her tenure in the bank was to end this March.
 
Earlier, ICICI said the Board of Directors decided to treat the 'separation' of Chanda Kochhar from the bank as a 'termination for cause' under the bank's internal policies, schemes and code of conduct with all attendant consequences.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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RBI Takes Close Look at 'Standstill Agreements', Plans to Tighten Norms for Lenders, says Report
Taking a serious view of the recent cases of ‘standstill agreements’ by companies with lenders to delay selling pledged shares, the Reserve Bank of India (RBI) aims to tighten norms on such deals between promoters and lenders, says a report.
 
According to a report from Business Standard , the central bank was closely monitoring the situation and, if necessary, would tighten norms to dissuade lenders from entering into such agreements with companies. 
 
The central bank has been particularly working hard to curb all forms of ‘ever greening’ of loans, the report says.
 
Recently, Zee Group’s Subhash Chandra and Reliance Anil Dhirubhai Ambani (ADA) group’s Anil Ambani were found to be at the centre of sale of pledged shares by lenders. Both had borrowed from lenders by pledging their equity stakes in listed companies.
 
Worse, after the big fracas over the fire-sale of Reliance Power shares by Edelweiss group and L&T Finance, 90% of the lenders entered into an in-principle ‘stand still’ agreement not to sell anymore shares until September 2019. The ADA group has only nine lenders at promoter level. Some of the key lenders are -- Templeton MF, DHFL Primerica MF, Indiabulls MF, IndusInd Bank and Yes Bank.
 
A statement issued by Reliance ADA group says as per the understanding reached, 90% of its lenders will not enforce security and will not sell any of the shares pledged by the promoters till 30 September 2019, on account of lower collateral cover or reduced margin caused by recent unprecedented fall in share prices.  
 
Value of the promoter stake in Reliance Power, before the unprecedented fall in share prices, was more than Rs2,500 crore, and would clear more than 65%of the total promoter borrowings, it added. 
 
Earlier this month, ADAG had said a few non-banking finance companies (NBFCs), substantially L&T Finance and certain entities of Edelweiss Group, had invoked the pledge on listed shares of the group and made open market sales of the value of about Rs400 crore during 4th and 7 February 2019.
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