The Banning of Unregulated Deposit Schemes Ordinance, 2019 (“Ordinance”) has been promulgated by the Hon’ble President of India on 21st February 2019. The Ordinance comes as a substantial step to tackle unregulated and fraudulent deposit schemes in the country that have been able to abuse the Indian “mindset” of savings and their weakness for investment opportunities that sound too good to be true.
This article sets out the law and practice under the BUDS Ordinance to elucidate the legal framework behind it.
Deposit schemes and chit funds are not foreign or new concepts in India. Presently, there is a wide spectrum of deposit schemes, based around the basic premise of public deposit/ investment hinged on a promise of a supernormal return, in most cases. The depositor, countenanced by the proposed shiny investment opportunity, invests in good faith, sums that may even extend to his life savings. Yet, an overwhelming number of these “investment opportunities” promising supernormal profits result in supernormal losses and frauds. The Eastern States like West Bengal have been most affected by such schemes.
Indian history is replete with innumerable instances of malfeasance in raising funds in such a manner. These fraudulent deposit schemes have resulted in mounting losses to bona fide depositors, the majority of whom are poor and uneducated. Their hope and faith are preyed upon by conniving deposit takers and their agents, looking to make a quick buck, however unlawful the gain. The investments made by the depositors are made on the basis of false and fraudulent representation by the deposit takers. This practice of fraud has fostered in both regulated and un-regulated deposit schemes,
Regulators like the SEBI, RBI, MCA, IRDA, State Governments, etc. govern various aspects of the regulatory regime relating to deposits, each with its own flavour of provisions against them. The present regime for the regulation of deposit schemes suffers from both overlap and lacunae that have allowed these firms to grow in dark crevices of the financial markets. With repeated instances of large-scale deposit and investment frauds in the country like the Sanchayita Chit Fund Scam, Sharda Scam, Sahara’s Ponzi scheme, PACL scam, etc., and the nearly negligible recoveries made from them even after they were deemed illegal is indicative of a clear regulatory failure.
The Ordinance had materialized in pursuance of the Twenty-first Report of the Parliamentary Related Standing Committee on Finance (Sixteenth Lok Sabha) (“titled as “Efficacy of Regulation of Collective Investment Schemes, Chit Funds, etc.”). The Committee considered the inputs of various stakeholders like the Securities and Exchange Board of India (“SEBI”), the Reserve Bank of India (“RBI”), the Ministry of Corporate Affairs (“MCA”) along with the All India Association of Chit Funds, in arriving at its conclusions in the report.
The Act, at the outset, defines certain key concepts. These are:
1. Deposit: A Deposit has been defined as an amount of money received by way of an advance or loan or in any other form, by any 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. Further, amounts received from banks, public financial institutions, relatives, in the form of a loan, among various others from the definition of a deposit.
2. Deposit Taker: The term “deposit taker” has been defined by casting a wide net. Individuals, companies, trusts, etc but also includes “any other arrangement of whatsoever nature”. Strategic exceptions have been made in the case of scheduled banks and companies created by legislation.
II. Offences under the Ordinance
1. Unregulated Deposit Schemes:
An Unregulated Deposit Scheme (“UDS”) is 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. Section 3 of the Ordinance sets out a blanket ban on UDS along with a prohibition on Deposit Takers to directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of a UDS. Further, the appropriate government has been vested with the power to print retractions, free-of-cost, in cases where any newspaper contains any information, statement or advertisement towards promoting, soliciting or inducing any persons to join the UDS as a member.
2. Fraudulent Default in Regulated Deposit Schemes
A Registered Deposit Scheme (“RDS”), are those schemes specified under the Schedule I to the Ordinance which includes various deposit schemes that are registered with regulators like the RBI, SEBI, MCA, IRDA, etc. The Ordinance, under Section 4, prohibits any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposits accepted pursuant to an RDS. Here, the intent to defraud is the key element behind the offence.
It would be expedient to note that the provisions of Section 4 of the Ordinance do not apply in cases where the deposit taker is a company. The Ordinance does not seek to impinge upon the regulatory authority of various regulators which govern their respective forms of deposits scheme under their own framework. Failure to ensure such restraint would have further muddled the regulatory mechanism against fraudulent deposits.
3. Wrongful Inducement in Relation to UDS
Section 5 of the Ordinance prohibits the making of any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, to induce another person to invest in, or become a member or participant of any Unregulated Deposit Scheme. By way of this Section, advertisers, promoters, brand ambassadors are made personally liable both for their acts with regard to deposits and put to notice to choose their projects diligently and with due weight to its intent and repercussions.
This provision applies not only to the deposit takers of the UDS but also to all persons making the above mentioned wrongful inducement. It is similar to Section 36 of the Companies Act, 2013 which penalizes fraudulent inducement of persons to invest in the shares and debentures of a company.
4. Prize Chits and Money Circulation Schemes
Section 6 of the Ordinance, deems UDS all prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, thus, coming within the ambit of Section 3 of the Act.
III. Punishment for Offences
The Ordinance provides stringent punishment for various offences under the Ordinance, these are as follows:
|S. 21(1)||Solicitation of UDS in violation of Section 3 of the Ordinance||Imprisonment between 1 to 5 years
a fine between Rs. 2 to 10 lakhs
|S. 21(2)||Acceptance of deposits under the UDS in violation of Section 3 of the Ordinance||Imprisonment between 2 to 7 years
a fine between Rs. 3 to 10 Lakhs
|S. 21(3)||Acceptance of deposits under the UDS and fraudulent default in repayment of such deposits or in rendering any specified service in violation of Section 3 of the Ordinance||Imprisonment between 3 to 10 years
a fine, not less than Rs. 5 Lakhs but which may extend to twice the amount of aggregate collection under the UDS.
|S. 22||Fraudulent default in the case of an RDS in violation of Section 4 of the Ordinance||Imprisonment up to 7 years
a fine between Rs. 5 Lakhs to Rs. 25 Crores or 3 times the profits made out of the fraudulent default
|S. 23||Wrongful inducement in relation to a UDSin violation of Section 5 of the Ordinance||Imprisonment between 1 to 5 years
a fine up to Rs. 10 Lakhs
|S. 24||Repeated Offences under the Ordinance||Imprisonment between 5 to 10 years
a fine between Rs. 10 Lakhs to Rs. 50 Crores
|S. 26||Failure of Deposit Takers to intimate their business to the central database or to furnish the requisite information when called upon by the central database authority to do so, in violation of Section 10 of the Ordinance||A fine up to Rs. 5 Lakhs|
Offences under the Ordinance except for Section 22 & 26 would be cognizable and non-bailable.
IV. Authorities and Powers
The Ordinance creates certain authorities for the purpose of carrying out the objects and functions therein, these are:
1. Competent Authority
The Competent Authority under Section 7 of the Ordinance amounts to one or more officers, not below the rank of Secretary to the appointing government. The primary function of the Competent Authority is to make provisional attachment of the impugned proceeds of deposits. The same would be discussed under IV (1), hereunder.
The Competent Authority, in the discharge of its functions, has been vested with substantial powers under the Act, which includes, inter alia, the same powers as vested in a civil court under the Code of Civil Procedure, 1908 while conducting investigation or inquiry under the Act. Furthermore, it is also vested with the power of summoning requisite persons and documents.
2. Designated Court
A Designated Court under Section 8 of the Ordinance is the quasi-judicial authority created for the enforcement of the mandate under the Ordinance. The Court, contrariwise to the Central Authority, would be established as a criminal forum for deciding the fate of the provisional attachment and the adjudication of the guilt of the accused deposit takers for offences under the Act.
Section 18of the Ordinance lays out the powers of the Designated Court regarding valuation of assets, possession, compensation, disgorgement, etc. It must be noted that Section 18(1)(e) of the Ordinance empowers this Court to direct the Competent Authority to pay to the Depositors, the deficit between the entire deposit exposure and the realized value from the proceeds of the deposit. This provision intends to ensure that the depositors do not suffer because of the depletion of the deposit proceeds by the deposit takers, as is the usual practice. This provision comprehends of an egalitarian approach aimed at upholding the interests of the depositors, even if the same is met out by the exchequer.
3. Central Database for Information on Deposit Takers in India
Section 9of the Ordinance provides for the creation of a central database for the maintenance of an online database for information on deposit takers operating in India. To this effect, the Central Governments has been tasked with designating the authority for the creation, maintenance and operation of the central database. Further, the chosen authority may require any Regulator or the Competent Authority to share such information on deposit takers, as may be prescribed.
Coming to the primary function of the central database, Section 10 of the Ordinance requires every deposit taker which commences or carries on its business as such on or after the commencement of the Ordinance shall intimate the authority charged with maintaining the central database about its business. Explanation to this Section clarifies that the scope of this requirement extends even to companies accepting deposits under Chapter V of the Companies Act, 2013.
V. Attachments under the Ordinance
Attachment of impugned deposits is one of the primary means by which the Ordinance seeks to correct any violation of the Ordinance by deposit takers. All-together, the substantial provisions relating to attachment are as follows:
1. Provisional Attachment
A provisional attachment extends to deposits held by the deposit taker and the money or other property acquired either in the name of the deposit taker or in the name of any other person on behalf of the deposit taker from the date of the order.
As part of the mandate of the Competent Authority, Section 7(1) of the Ordinance stipulates that where the Competent Authority has reason to believe that the deposit taker is soliciting Unregulated Deposits in violation of Section 3 of the Act, he may provisionally attach the deposits held by the deposit taker and the money or other property acquired either in the name or on behalf of the deposit taker.
A provisional attachment shall continue until a final order making absolute, varying or vacating the provisional attachment or for the equitable distribution of deposits to depositors is made by the Designated Court.
While in the course of the provisional attachment, the attached property or deposit shall vest with the Competent Authority, the same cannot be alienated except where expediency demands otherwise.
2. Confirmation of Provisional Attachment
Within a period of 30 or 60 days from the date of the order for provisional attachment, the Central Authority is obligated to apply to the Designated court to make the provisional attachment absolute and thereupon, to make the sale of the attached properties by way of an auction.
Section 15 of the Ordinance lays out the detailed procedure regarding confirmation of the attachment by the Designated Court. At this juncture, the Designated Court has the following options:
i. Making the provisional attachment absolute,
ii. Varying the terms of the attachment by releasing a portion of the property from attachment,
iii. Cancelling the provisional attachment of the property.
In instances of situations (i) and (ii), mentioned above, the Court shall direct the Competent Authority to realize the sale proceeds of such property by way of a public or private auction.
Where the Designated Court orders for the variation or cancellation of the provisional attachment, it can only release of the attached property where the deposit taker or the person whose property is attached has interest in such property and where the court is satisfied that the property remaining would be sufficient for repayment to the deposit takers.
Distribution of the sale proceeds or money attached shall be on an equitable basis between the depositors and the proceedings before the Designated Court would be endeavoured to be concluded within a period of 180 days from the date of application of confirmation, in furtherance of the depositor’s interest.
3. Attachment of Property of Malafide Transferees
In the past, rattling the deposit taker by initiating provisional measures or prosecution has led to the rampant offloading of properties in an attempt to evade the due process of law and for what can only amount to laughable consideration. To tackle this malfeasance, Section 16 of the Ordinance empowers the Designated Court to issue a Show Cause Notice to the recipient of the impugned alienated property who had procured the property in a malafide manner and without commensurate consideration, to show cause as to why the requisite attachment of the property should not be made. Properties received both directly and indirectly from the impugned deposits comes within this ambit. The legislative approach behind this provision presumes the guilt of the transferee.
Where the transferor is unable to satisfy the Court as to the requisite merit of the transaction, the Designated court may attach impugned property to the extent that it opines to be commensurate with the proper value of the property.
4. Provision for Payment in Lieu of Attachment
While the Ordinance, on the whole, plays hard cop against deposit takers, Section 17 therein allows the impugned deposit takers, persons whose property has been attached or the transferee of the malafide transfer of the impugned property, to apply to the Court to make payment in lieu of the attached property. However, this option is only open before the confirmation of the attachment.
VI. Investigations under the Ordinance
Chapter VII of the Ordinance provides the law relating to the investigation, search and seizure for the purposes of the Act. Firstly, where information is received by a police officer of an offence under the Act, the same is to be notified to the Competent Authority. Secondly, the investigation of the offences under the Ordinance may be done by the CBI in cases where either, the scope of the depositors, deposits or properties extend to more than one state or where the offence is of such a magnitude as to significantly affect public interest. Thirdly, varied power of search and seizure have been provided in the course of the investigation to the Investigating Officer. Fourthly, the law of procedure stipulated under the Code of Criminal Procedure, 1973 is to arrests and proceedings under the Ordinance, save as otherwise provided under Section 31.
1. The Ordinance comprehends of a non-obstante clause ensuring certainty of process for the Act, necessary for its effective implementation.
2. “Notwithstanding” the non-obstante clause, the Ordinance strives to form in addition to and not in derogation of law for the time being in force. Interestingly, it is seldom that law has the effect of being applied not-withstanding the provisions of any Act, yet, not lead to the derogation of other laws. While the best of both worlds is universally sought after, it seems only absurdity here.
3. The Ordinance accords primacy to the claims of the depositors and the provisional attachment made under the Ordinance over other stipulations of the same nature. Yet, the Ordinance does not seek to interfere with the mandate of the Insolvency and Bankruptcy Code, 2016 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 by carving out an express exception in their regard.
1. The consequences of deposits and their abuse are of a widespread implication. Due to a multitude of factors, the creation of an effective deposit regulation regime has yet remained a farce in India. The Committee, in the course of its proceedings, had made a substantively analyzed the reasons behind the same. These, inter alia, are:
- exclusion of large masses from formal financial systems.
- inability or inaction of financial regulators and state mechanisms to effectively chase down aberrations and offenders in the deposit mechanism. This exists partly due to the inadequacy of law and the procedural roadblocks in the regulatory, investigation and prosecution process.
- The inadequate position of financial literacy in the country
- The connivance of mala fide promoters and individuals seeking to exploit the weakness of the Indian position with regard to deposits and by extension, of the masses.
- Failure in ensuring an expeditious investigation and prosecution of offences relating to deposits leading to both destruction of merit of the prosecution allowing offenders to evade the law.
2. Before this Ordinance came to the fore, the Indian regime to deal with unregulated deposit schemes or frauds in regulated deposit schemes was completely muddled and had endemically crippled the said regime. For instance, deposits by NBFCs come under the mandate of the RBI; Chit funds, under the State Governments; CIS’, under SEBI; deposits by Non-NBFC Corporates, under the Ministry of Corporate Affairs. While this regime was multifarious, it still fell short of curbing the evil of illegal deposit schemes creating various lacunae that had yet allowed these disingenuous offenders to mushroom, through the said lacunae and around the abovementioned regulatory regime.
3. There are various provisions under the new Ordinance which would have a substantial positive impact on the Indian deposit regulation regime like providing a wide definition to key aspects of the fund-raising process, extending the scope of regime especially in the case of solicitation through advertisement, providing for stringent stipulations regarding provisional attachment of the impugned deposits or property, creation of a central database encompassing information on all deposit schemes running in the country, etc.
4. The Ordinance sets out, what seems to be, effective addition to the regulatory regime against unregulated deposit schemes and frauds upon the regulated ones. Cases like the Sahara India Real Estate & Ors. Vs. SEBI, which arguably brought SEBI to the big leagues as a regulator of eminence and authority, highlight the extent of evasion of law behind such enterprises. Even the recent PACL issue serves as an example of a colossal failure of efficacy and expediency in the present regulatory regime. This Ordinance represents an ambitious step to tackle the folly of unregistered and fraudulent deposit schemes in the country that have historically, preyed ferociously on the Indian masses, most of whom, lack the necessary knowledge, safeguards, institutional access, etc. to know better. Even more egregious and chilling is the fact that an overwhelming number of “investors” entrust theirs and their family’s future on these deposit takers, in lieu of the illusory promises that though seem promising, are only a fraudulent farce. The tool of provisional attachment allows for much-needed stringency and expediency in pursuit of the best possible recovery.
5. One of the biggest challenges to the effective implementation of any legal framework is lack of clarity. In the case of the BUDS Ordinance, some instances of lack of clarity can be seen under the definition of “deposit” under Section 2(4) of the Ordinance. It is stipulated that loans received by an individual from his relatives would not form under the definition of deposits under the Ordinance. The obvious question arises, what of loans from friends and other such non-relatives? This ambiguity created a furore among small investors. The Ministry of Law and Justice has since clarified that the borrowings from relatives and friends would not form within the ambit of “deposits” under the Ordinance. There are also other uncertain aspects which may ail borrowings relating to companies and partnership firms which have not yet been clarified.
 S. 2(4), The Banning of Unregulated Deposit Schemes Ordinance, 2019.
 Ibid, S. 2(6).
 Ibid, Proviso to S. 27.
 Ibid, S. 14(1).
 Ibid, S.29.
 Ibid, S. 30.
 Ibid, S. 31.
 Ibid, S. 32(2).
 Ibid, S.34.
 Ibid, S.35.
 Ibid, S. 12 & 13.
 Ibid, S. 12(2) & 13(2).