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’.
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;
- Advance under long-term projects for supply of capital goods;
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)
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?
The jewellers association as well acknowledges the same to be deposits.
Amounts taken by farmer is an amount taken in the course and in connection with genuine business. Therefore, should not be regarded.