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:
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)