How the Sterling Biotech Deal Could Derail Bankruptcy Law
First the good news. One must congratulate the Mumbai bench of the National Company Law Tribunal’s (NCLT) for restoring our faith in the system. NCLT refused to accept at face value the outrageous proposal by 90% of the committee of creditors (CoC) to accept a one-time settlement (OTS) offer by the Sandesara family (promoters of Sterling Biotech) to retain control over the company.
 
In fact, the NCLT bench slammed the bankers, Andhra Bank, which leads the CoC, and exposed the questionable and hasty manner in which the Bank has tried to withdraw the bankruptcy application. At the hearing on 11th March, it became clear that the CoC has not shared any details of the proposal with the NCLT or the resolution professional (RP).
 
Instead, the Bank had the temerity to tell the RP that “should the NCLT seek information about the OTS offer, including sources of funds, time frame for payment to each lender, compliance with RBI norms and whether the interest of all stakeholders/CoC members have been provided for under the OTS offer, the applicant Andhra Bank and CoC will address all such queries posed by the NCLT directly and not with the Resolution Professional” (emphasis as in the NCLT order). The judges also pointed out that the OTS proposal is from some Farhad Daruwalla, signed on behalf of the ‘Sandasera Group’ when the applicant before the NCLT is a specific legal entity– Sterling Biotech. 
 
Meanwhile, the four promoters—Nitin Sandesara, Chetankumar Sandesara, Dipti Chetan Sandesara and Hiteshkumar Patel - are absconding from India and have extradition orders issued against them by a Delhi court. The CBI (Central Bureau of Investigation) has initiated action against the all the Sandesaras as well as Rajbhushan Omprakash Dixit and Vilas Joshi, chartered accountant Hemant Hathi as well as a former director of Andhra Bank Anup Garg. The last name needs to be noted in the context of the OTS.
 
The withdrawal application merely says that 90.32% of the bankers had accepted the OTS offer with no details provided to NCLT. Fortunately, NCLT refused to accept this impertinence and has issued notices to financial regulators and investigation agencies that have been pursuing various violations by Sterling Biotech offering them an opportunity to make their representations at the next hearing on 26th March. 
 
Meanwhile, details of the deal, which were not provided to the NCLT, were leaked to various media houses. These show that banks were willing to accept an offer of just Rs5,500 crore from the Sandaseras, which entailed a haircut of a massive 65%. There is no mention of the offer from ACG Associated Capsules Pvt Ltd that was rejected by the lenders. 
 
In effect, a bunch of mainly public sector banks (PSBs), led by Andhra Bank, were brazenly willing to settle for less than half the amount due, to allow the Sandesaras to fly back to their 40,000sq ft (square feet) mansion at Vadodara in their Rs100 crore Gulfstream Jet and retain control of the company at a time when fugitive industrialists, from Vijay Mallya to Nirav Modi, are finding it difficult to live their lavish lifestyles with dignity or respectability abroad. 
 
If such a scandalous deal, with a huge hair-cut, was contemplated for one of the biggest and most scandalous defaulters like Sterling Biotech, whose promoters are absconding, one can only imagine what is going on at banks with regard to loan write-offs and settlements.
 
What is to stop these brazen banks from offering fresh loans to the company once the OTS has faded from public memory?  
 
By accepting this proposal, bankers have established that they cannot be trusted to take the right decisions to protect, either the banks’ or public interest. Moneylife has repeatedly argued that recapitalising PSBs with lakhs of crores of public money paid through the exchequer, without any effort to make top management accountable and independent of political influence only means throwing good money after bad. It sets the stage for the creation of newer bad loans, even as the earlier ones are written off, through such settlements. 
 
The NCLT order makes it imperative for the finance ministry and the Reserve Bank of India (RBI) to question the CoC and initiate action against them if ‘phone banking’ has truly come to an end, as asserted by the prime minister (PM). Otherwise, it leaves plenty of room for suspicion and drawing negative conclusions, given the disreputable antecedents of this company. 
 
Background of Sterling Biotech’s Promoters 
To understand why this attempt to let Sterling Biotech back into his business is so scandalous, here is a quick rundown on actions against it. Apart from defaulting on loans to the tune of Rs8,100 crore, the promoters have been accused of fraud, which is being investigated by CBI. The enforcement directorate (ED) and the serious frauds investigation office (SFIO) are probing various charges, including money laundering, and have attached assets worth Rs4,700 crore, say media reports. 
 
We further learn that the tax authorities are looking at the suspiciously low price at which a bungalow was sold by them to a leading Mumbai politician. Their closeness to the former CBI special director Rakesh Asthana had been making news while the top two officials of the investigation agency squabbled and traded charges against each other. 
 
While an OTS proposal has been made in the case of Sterling Biotech, this is not the only group company in a financial mess or under investigation. Sterling SEZ and Infrastructure Ltd also faces bankruptcy proceedings and money laundering charges by the ED. 
 
Implications for Other Deals
We need to watch what happens on 26th March and how the regulators and investigators respond; but, if a company with the antecedents of Sterling Biotech gets away by paying 45% of what it owes banks, then ArcelorMittal that has paid over Rs8,000 crore (to settle Uttam Galva’s debt, among others), merely to have the right to bid for Essar Steel, can kiss its money goodbye. 
 
After all, how can banks justify accepting its Rs42,000-crore bid when the promoters of Essar Steel (who have already filed an appeal before the appellate tribunal) have offered a 100% repayment totalling Rs53,000 crore, including money owed to operational creditors, such as Standard Chartered Bank, who are also in court. 
 
Bhushan Power and Steel could also demand a generous OTS, doesn't matter that both these groups have already availed multiple bailouts by PSBs over the past decades. Similarly, if the Sandaseras’ source of funds is not questioned, then why question Essar’s or Bhushan’s?
 
Nitpickers would argue that Essar Steel’s case is different because the CoC in that case has already accepted the Arcelor Mittal bid. But that would make it even worse. If the quality of the bidders and the colour of their money doesn’t matter, then PSBs that are surviving on money gouged from customers and frequent bailouts by the exchequer ought to be held accountable for failing to recover Rs11,000 crore extra that the Ruia family is offering. Put in perspective, this extra is significantly more that the full outstanding loan of Sterling Biotech. 
 
Bad Loan Cycle Continues
One of the biggest concerns over the past five years, as banks teetered under the weight of bad loans (mostly inherited pre-2014), is that banks have been allowed to write off bad loans furiously and are being re-capitalised by the exchequer even as there is no move to improve management accountability. 
 
While PM Narendra Modi is correct in poking fun at the ‘phone banking’ culture that prevailed in the past decades, he has little to show about making PSBs independent or accountable. 
 
The Sterling Biotech deal, as well as State Bank of India’s attempt to sell off the Essar Steel loans to an asset reconstruction company when it is close to a resolution, are both indicators that little has changed on the ground. 
 
The same machinations, pressures and collusion that have given us over Rs12 lakh crore of bad loans, remain. The bankruptcy process may lead to a temporary clean–up; but the furious pace of creating fresh bad loans that require a government bailout will continue. Meanwhile, nothing has also been done to make regulators like RBI or the National Housing Bank (NHB) accountable. 
 
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    COMMENTS

    Veeresh Malik

    5 months ago

    Whilst it appears that the offer such as it is has been hugely reduced, the whole exercise appears to be an effort to waste time till the election results emerge, so.

    "In another revelation on Tuesday, the Committee of Creditors` lawyers said that the promoters have revised the settlement offer and instead of clearing the full OTS by March 31, they will now pay a token Rs 179 crore and the rest, estimated around Rs 3,100 crore, in June."

    https://www.zeebiz.com/companies/news-can-seize-sterling-biotechs-ots-amount-enforcement-directorate-to-banks-91762

    Gupta

    5 months ago

    Its indeed a shame that this Govt hasn't openly acknowledged the corruption deeply embedded in the banking system and done something to systematically fix it (I'll acknowledge its tough and there isn't an easy implementable solution for it either). But its also true that they have put a number of bankers in jail and many CEOs have lost their jobs for malfeasance, which was unheard of in India in the past. The way Mallya and Modi are being pursued in UK where they are being made to run from pillar to post or shift houses every week to run is also evidence of the new approach in pursuing crooks. Kudos to them to make that beginning for people at high levels to realize that their powerful seats aren't forever. Change will happen, it has begun.... and with the rotten and deeply corrupt institutions we have, it will take a long time to fix everything. These guys in the current govt are far from perfect, but they are different. Let's give them the chance to continue this change... to let it bloom into something bigger over a period.. they certainly aren't worse off, if not better.

    Mahesh S Bhatt

    5 months ago

    Put this rascals behind bars in violation of Fiduciary contracts for 7 years asap to get ease of doing business Bunch of Illegal hawks hawking Justice Law Banks n systems Mahesh Bhatt

    shivkumar

    5 months ago

    More the things change, more they remain same. Loot of PSU banks continues
    unabated in connivance with the bank officials.
    Thanks to Sucheta she keeps on throwing light on shady deals
    from time to time by people in position and power.
    Keep it up Sucheta and Debashis.

    Meenal Mamdani

    5 months ago

    Is it possible that this ex-Andhra Bank employee Anup Garg has made this offer without consulting the other banks' officers?
    Should this Anup Garg not be in prison while this strange offer is being investigated?

    If bank officials are found to have acted in bad faith they should face a financial penalty as well as time behind bars.

    I am worried that if Modi too is reluctant to hold bankers to account then how can we expect anything more strict from the Congress pols if they win the general election; the same pols about whom Mukesh Ambani said "Congress to apni dukan hai."

    Ramesh Poapt

    5 months ago

    superb!!!

    Ravindra Shetye

    5 months ago

    I think you are not right in mixing this case with Essar Steel. Essar's offer in the first place came too late after the NCLT due process was over. They could have made the offer during the process and I believe in the timeline if they would have offered to meet complete 54000 crores liabilities they mostly would have got to run the plant. However Ruia tendency of stretching has come in their way.
    In Sterling case again Andhra Bank name has shined. Maybe there are many more skeletans lying in Andhra Bank.

    REPLY

    Sucheta Dalal

    In Reply to Ravindra Shetye 5 months ago

    well , the bottom line is Rs10,000 crore of public money. If Sterling is allowed to keep the company despite dubious antecedents - do you as a citizen condone letting go of Rs10,000 crore extra when banks are frequently recapitalised using public money? The poorest Indian also pays the bad loans of dubious industrialists when the money goes straight from the exchequer to bailout banks.

    Gupta

    In Reply to Sucheta Dalal 5 months ago

    Well, in the short term, we can save 10000 crore by throwing Essar back in the hands of the most reputed defaulters of India. Clearly, they don't have 54000 crore and only way to pay would be to take another loan of a similar amount from friendly bankers with a nice cut paid back. And then 10 years later it would have grown to 540000 crore with a string of gold plated expansions and then we will write off 270000 crore if not more. I would rather lose the 10000 crore today and throw these thugs in Cayman or Solomon or British Virgin Islands if that's where they want to go. Good riddance... we should rather do a one time settlement, pay all these thugs of India some money so that they can buy some other passport with it and drive these criminals out of this country and never allow them in ever again.

    And Arcelor has already been forced to repay other bad loans of 8000 crore. So effectively the banking system has been saved of 50000 crore, not 42000 crore, despite all its own internal corruption. I would rather wish good luck to Arcelor who have been brave enough to step in where no one else would... they are walking on fire and the reputed goons will ensure they will fine enough land mines even if they are successful to regret this buyout for a long time. But anyway, that's Arcelor's business decision and good for us.

    kiran

    5 months ago

    SBI is also going in for a fresh disaster in Jet airline in the bank's own tried,tested and proven Kingfisher way. No sensible person would agree that Jet can be saved by SBI. They are talking of total loans of Rs 8100 Cr but when all outstanding unpaid liabilities like fuel charges to PSU oil Co's, interest,lease rentals,TDS, taxes, Airport authority charges,PF, salaries arrears,others (all items unpaid) are added,the total over dues come to Rs 25000 Cr. God save PSU banks as no political party in power has ever got the political will to do so. The late venerable banker Mr Narsimhan who recommended to loosen Govt control in PSU banks in late 90's must be swerving in his grave and no-nonsense banker P J Nayak virtually crying day in and day out. Despite this reality, our business channels and analysts exhort investors all 24 hours to buy PSU banks showing rosy targets. Is it only for entertainment ?

    REPLY

    Gupta

    In Reply to kiran 5 months ago

    So true... the government should sell out all these rotten banks... Privatisation is not going to solve all ills, but it certainly will substantially shrink the deep rooted corruption at all levels in Banking. That is the direct result. The indirect result of a cleaner banking is far more powerful. Once we cut the money tap for crooked businessman, the lopsided competition that clean businessman face today wherein their competition doesn't have to repay loans will be gone. The crooks will not have the money to bribe all and sundry and will be out of business. The best way to give clean businessman access to money and opportunity is to stop the money flow to the corrupt... Sell the banking system out from govt hands and let the change begin.

    Sucheta Dalal

    In Reply to kiran 5 months ago

    Completely agree!

    Vikramjeet Singh

    In Reply to Sucheta Dalal 5 months ago

    The Sandesara source of funds can very easily be traced. They made their money in Nigeria, initially by a stroke of luck and then via financial engineering. Even there they are involved in massive frauds and are way behind their tax and royalty payments. In India the model was to take loans and siphon off the funds, in Nigeria the model is over-invoicing and get the same approved from the corrupt government officials. Indian investigative agencies, if they want to, can trace the source of funds in less than 24 hours. Its public information in Nigeria how they function and the manner in which the money is routed to Dubai. These guys were a much easier catch than a Vijay Mallya or a Nirva Modi. Agencies should have acted faster on these guys

    Sterling Biotech: NCLT Slams Andhra Bank for Submitting OTS Proposal
    The National Company Law Tribunal (NCLT) has not accepted the attempt of bankers to let of the Sandesara group of Sterling Biotech by accepting a sharp haircut and a one time settlement (OTS). Instead, the Mumbai division bench of the NCLT  slammed Andhra Bank and other lenders for not sharing details of the proposal with the resolution professional (RP), or the source of funds, time frame for payment to each lender, compliance with Reserve Bank norms and whether interests of all stakeholders /creditors had been provided for.
     
    Further, it has issued notices to the government and all regulators in case they would like to make any representations in the matter, which has now been posted for hearing on 26 March 2019. 
     
    In a strongly-worded order, the Mumbai bench of VP Singh and Ravikumar Duraisamy says, "...OTS proposal is from Mr Farhad Daruwalla, who has signed on behalf of Sandesara group. It is not mentioned in the OTS proposal whether Farhad Daruwalla has been authorised by the corporate debtor to submit OTS proposal. It is also important to point out that the corporate debtor is Sterling Biotech and no proceedings under Insolvency and Bankruptcy Code (IBC) has been initiated against Sandesara group. How the proposal submitted by Sandesara group is accepted by the financial creditors creates suspicion when the promoter and director is absconder and Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) is searching them."
     
    "In this background, before passing any further order, we would like to issue notice to the central government through regional director of ministry of corporate affairs (MCA), Enforcement Directorate, Income Tax Department, CBI, Securities & Exchange Board of India and RBI, so that if they want to make any representation, they can make the same before passing any further order on the miscellaneous application for withdrawal," it added.
     
    The OTS proposal was widely publicised in newspapers with Business Standard stating that lenders have agreed for a 65% haircut. Quoting bankers, the report said, “The promoters, bankers said, have made an offer that entails a haircut of close to 65% for the lenders. The promoter has already deposited 5 per cent of the OTS offer to banks”
     
    In a regulatory filing, Sterling Biotech had stated, “The committee of creditors has approved the withdrawal of the Corporate Insolvency Resolution Process- CIRP of the company with requisite majority.” 
     
    According to the order, the resolution professional (RP) appointed in this matter, put up a resolution before the committee of creditors (CoC) for liquidation of Sterling Biotech after resolutions for withdrawal of corporate insolvency resolution process (CIRP) and approval of resolution plan from ACG Associated Capsules Pvt Ltd (ACG) failed. However, the CoC rejected the resolution submitted by the RP.
     
    When the RP asked the CoC for further directions, during the 14th meeting, it was revealed that Andhra Bank on 5 March 2019 had submitted a fresh proposal for withdrawal of CIRP of Sterling Biotech. When asked to share details of its proposal, a representative of Andhra Bank asked the RP to refer to the documents submitted to NCLT on 26 February 2019.
     
    "A representative of Andhra Bank further informed the RP that should the NCLT seek information pertaining to the OTS offer including sources of funds, timeframe for payments to each lender, compliance with RBI norms and whether the interest of all stakeholders and CoC members have been provided for under the OTS offer, the applicant Andhra Bank and CoC will address all such queries posed by the NCLT directly and not with the RP," the NCLT bench observed. 
     
    NCLT said, "It is pertinent to mention that the promoters of Sterling Biotech are absconder and we often get the news from the newspaper that various government agencies like ED, CBI and other agencies are unable to trach the promoters of Sterling Biotech."
     
    The next hearing in this case is scheduled on 26 March 2019.
     
    Last year in October, the ED had filed a charge sheet under the anti-money laundering law against Sandesara brothers and their Gujarat-based pharmaceuticals company Sterling Biotech in the fraudulent Rs8,100-crore loan from domestic as well as offshore branches of Indian banks during 2004-2012.
     
    The ED had named 191 accused and 184 companies of the Sterling Biotech group in the charge sheet filed in a special court. The group includes Sterling Biotech, PMT Machines Ltd, Sterling SEZ and Infra Ltd, Sterling Port Ltd, Sterling Oil Resources Ltd and 179 shell companies. 
     
    Some individuals named in the charge sheet include the main promoters of Sterling Biotech group—Chetan Jayantilal Sandesara and Nitin Jayantilal Sandesara—Dipti Sandesara, Rajbhushan Dixit, Hitesh Patel, their chartered accountant Hemant Hathi and middleman Gagan Dhawan. 
     
    The agency had stated that the investigation in this case is still on as Sandesara brothers are learnt to be abroad. 
     
    Investigations by ED revealed that Sandesara brothers and others hatched a criminal conspiracy for cheating banks by manipulating figures in the balance sheets of their flagship companies and induced banks to sanction higher loans. 
     
    "After obtaining loans, the accused diverted the loan funds to non-mandated purposes through a web of shell companies. Thus, the loan funds were diverted, layered and laundered by the promoters for their personal purposes. Total amount of loan fraud as on date is Rs 8,100 crore. The loan fraud pertains to domestic as well as offshore branches of Indian banks," the ED had said in statement.
     
    Loans worth Rs5,700 crore was disbursed by various banks during the years 2004-2012 and look out circulars were issued against the accused in August 2017, said the statement. 
     
    "To fulfil their criminal motive of defrauding banks, the promoters devised a multi layered strategy of cheating. They not only cheated banks but also revenue department as well as the share-holders. Their strategy included incorporation of shell companies, conducting circular transactions to artificially inflate turnover of flagship companies, claiming higher depreciations on non-existing machinery, artificial share trading with the use shell companies, layering and laundering of proceeds of crime within India and abroad through the web of shell companies."
     
    The promoters used their employees' names and got incorporated 249 shell companies, said the ED, adding the ill gotten money was knowingly rotated, layered and finally integrated into the financial system and projected as untainted.
     
    "The amount was further invested in the form of immovable properties. The loan funds were diverted for non-mandated purposes to shell companies and were withdrawn as cash. An amount of Rs140 crore was withdrawn from shell companies and were used for the personal purposes of the promoters which also includes bribing of public officials," said the statement.
     
    The ED said the promoters created a web of corporate and accounting structure abroad and they incorporated more than 100 entities in various countries including United Arab Emirates, the US, the UK, British Virgin Island, Mauritius, Barbados and Nigeria. 
     
    "Their main entities outside India includes Richmond Overseas, Sunshine Trust Corporation, SEEPCO BVI, SEEPCO Nigeria and Atlantic Blue Water Services Pvt Ltd. It is revealed during investigation that the funds were rotated through various structures and ultimately carried to Nigeria to finance their oil business," said the ED.
     
    The banks have also found that the sanctioned loans were not used for the laid down purposes but were diverted for non-mandated purposes. 
     
    The ED said the banks have also declared the loans to the tune of Rs8,100 crore as fraud, including domestic loans of Rs3,675 crore and foreign loans of Rs4,425 crore.
     
    Last month, according to reports, promoters of Sterling Biotech—Chetan, Chetan’s wife and Nitin Sandesara as well as Hiteshkumar Patel moved a Delhi court seeking cancellation of open-ended non-bailable warrants issued against them. The matter will be heard on 2 April 2019.
     
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    COMMENTS

    Kirit Arvind Dave

    5 months ago

    I know many ways how they have used this money out of India in oil exploration business. Even group of bankers have visited places in Africa as far back as 20010 and 2011. That means this is a collective fraud plan of public sector banks to give loans and that too without proper security and later on to declare it as bad, NPAs. We can help ED and SFO to get more details.

    RAMANI N .V.

    5 months ago

    Loot of Public money by fugitive promoters.(IN) CREDIBLE INDIA?

    Meenal Mamdani

    5 months ago

    This is confusing to me.
    Is Andhra Bank hand-in-glove with the promoters? Is that why it is taking a very large haircut? Which official of the Andhra Bank has OKd this? Has this been approved by the entire Andhra Bank board?

    Ramesh Bajaj

    5 months ago

    Is it so easy to loot? Whether it be a bank, public or private sector,?
    This definitely seems to be Criminal and law enforcement departments must take action.

    REPLY

    AAR

    In Reply to Ramesh Bajaj 5 months ago

    In India, Yes.

    Ramesh Poapt

    5 months ago

    one of the above promoters is chartard accountant!

    REPLY

    AAR

    In Reply to Ramesh Poapt 5 months ago

    They are one who usually layout the ways and means to swindle.
    Don't confuse accounting skills with ethical character.

    R Balakrishnan

    5 months ago

    A fit case for the entire family to be sent to jail for life. Our legal system, however, will let them enjoy the fruits of theft.

    REPLY

    Madhukar

    In Reply to R Balakrishnan 5 months ago

    Banking is a cruel joke on the honest tax payers who sweat, work and keep their hard earned income as fixed and savings deposits in them. CoC or the Committee of Creditors are to be condemned severely for accepting the proposal to revive a Company under investigation back to its old ways.

    Ordinance Bans Unregulated Deposit Schemes Offered by Builders, Jewellers
    With an aim to further fortify the deposits-taking activities, the President, on 21 February 2019, promulgated the Banning of Unregulated Deposit Scheme Ordinance, 2019 (BUDs Ordinance), which will interdict the illicit schemes that are used to dupe the financially illiterate and poor people. On the regulatory front, various steps have been taken by the Reserve Bank of India (RBI) in the past to protect the interests of depositors dealing with deposit-taking non-banking financial companies (NBFCs). Also, acceptance of deposits by unincorporated bodies is prohibited under the RBI Act, 1934. The move will not only prohibit ill-gotten deposit schemes offered by builders and jewellers but will also protect the interests of small businesses and individuals of both regulated and unregulated deposit schemes.
     
    When it comes to borrowing money for meeting various financial commitments, small businesses like partnership firms or proprietorship concerns raise fund from sources which are largely informal.
     
    With the enforcement of the Ordinance, the question arises whether money can be borrowed from either of the regulated and unregulated means and, if yes, can the raised funds be used for business purpose or for other purposes as well? The answers to these questions and the applicability of proposed prohibition as stated under the Ordinance have been discussed in this article.
     
    Deposits for Partnership Firms and Proprietorship Concerns 
    To avoid compliance obligations under the formal credit sector, the firms and individuals generally approach money-lenders, relatives, friends, etc, for availing loans and credits which are not regulated by any regulatory body like the RBI. This unorganised credit sector lacks proper lending practices and administration, failing which it leads the borrower into a debt-trap and fraudulent schemes. This concern has now been addressed with the enforcement of the BUDs Ordinance. 
     
    Applicability of the BUDs Ordinance
    Whether a transaction will be prohibited under BUDs Ordinance shall be ascertained by applying the following criteria:
     
    1. Deposit 
    a. The amount received shall be a ‘deposit’ in terms of Section 2(4) of the Ordinance, i.e., amount received is ‘by way of an advance or loan or in any other form’ and with a ‘promise of return’. Therefore, not every receipt of money is prohibited but one must apply these factors to check the applicability.  
     
    b. Where the amount received is a deposit but falls under the exemption list, the BUDs Ordinance shall not apply. The said list also exempts the amount received for the purpose of 'business' and bearing a 'genuine connection to such business' implying that the scope of exemption shall be expanded by taking a liberal interpretation. Also, the onus to prove genuine connection to business shall be on the person requesting it. 
     
    2. Unregulated Deposit Scheme 
    To qualify the acceptance of a deposit by any deposit taker as an Unregulated Deposit Scheme:
    a. Firstly, it should be in the form of 'scheme or arrangement', which is generally characterised by repetition or a pattern.
     
    b. The deposits shall be taken 'by way of business' which indicates that the scheme/arrangement has the business of accepting such deposits. This requirement depicts the very intent of the Ordinance, so that the amount received in the normal course without any commercial intent is not unnecessary prohibited. 
     
    c. The scheme is not a Regulated Deposit Scheme prescribed under column (3) of the first schedule of the Ordinance.
     
    The ‘3-Yes-No Test’
     
    For a better understanding, one may refer to the table below:
     
     
    Banning Bonafide Borrowers!
    By and large, these entrepreneurs are dependent on informal financial sectors where it is easier to obtain loans with nil documentation and compliances. Given this, any amount in the course of, or for the purpose of, business can be raised irrespective of the fact that it is obtained under an unregulated scheme defined u/s 2(17). The term ‘scheme or arrangement’ and ‘by way of business’ clearly excludes the bonafide borrowers. Therefore, when it comes to borrowing money to meet other financial obligations, whether for business or personal commitments, no prohibition has been provided subject to the conditions discussed above. A similar approach is adopted under UK law wherein deposit-taking activities are prohibited only when it is carried on by way of business by an unregulated entity.
     
    Case Studies and Analysis
     
     
    In all the aforementioned prohibited cases, it is assumed that the amount is accepted under Unregulated Deposit Scheme; further, any amount received for, or in the course of business, is allowed to be accepted as deposits.
     
    Analysis and Conclusion
    While government’s attempt to prohibit the exploitation of unregulated financial sector is appreciable, the real test will be successful execution of the above proposal. Seemingly, the list of exemptions is narrow which is making the acceptance of deposit from the public more stringent. The government should come up with a clear set of exclusions to avoid the confusion of when a receipt of money is prohibited.
     
    Furthermore, it can be concluded that the 'Aam Admi' including small businessmen are not prohibited from approaching either the regulated or unregulated sector to meet their financial requirements; however, the prohibition is only on the exploitation of unregulated deposit schemes whereby the deposits are accepted by way of business and the said funds are rotated in the market to gain undue financial benefits out of it. The intention of the government seems only to prohibit those transactions that lure the public into illicit schemes and transactions which lead to drowning of investments in most of the cases. 
     
    (Shaifali Sharma is an executive at Vinod Kothari & Co
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    COMMENTS

    R shah

    5 months ago

    From point 4 is inter corporate deposits banned?
    and does this mean all illegal laundering stops X lends to Y - Same money goes to Z - Z transferred to A?

    Prakash K Pandya

    5 months ago

    The analysis in the table as to from whom it can be accepted in not correct interpretation of law. The definition of 'deposit' under the BUDs Ordinance u/s.2(4) excludes may things. One important exemption is under clause (l) which says 'an amount reeived in the course of or for the purpose of business and bearing a genuine connection to such business' is permitted. Then it gives a list of items which are only illustrations and such illustrated items are permitted category of receipt of money.

    AAR

    5 months ago

    Will this be applicable for already in progress deposit schemes?

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