Banning of Unregulated Deposit Schemes

1. The Government of India has promulgated ‘The Banning of Unregulated Deposit Schemes Act, 2019’ (21 of 2019) and it has commenced from 21 February 2019. Further, the Department of Financial Services, Ministry of Finance, Government of India, has notified ‘The Banning of Unregulated Deposits Schemes Rules, 2020’ with effect from 12 February, 2020.

2.1 The principal aspects of the BUDS Act, 2019, inter alia, bans solicitation, invitation and acceptance of unregulated deposits, creates a framework for reporting and monitoring of regulated deposit schemes, and sets out a mechanism for recovery from defaulting establishments and for prosecution and penalty for its enforcement.

2.2 The Statement of Objects and Reasons of the BUDS Bill, notes that the regulatory framework for deposit taking activity by non-banking activities in the country is not seamless. There is a presence of multiple legislations (both by Centre and State governments) and regulators under those laws. Despite such diverse regulatory framework, schemes and arrangements leading to unauthorised collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes promising high returns or other benefits, are still operating in the society.

2.3 The Statement of Objects and Reasons of the BUDS Bill, further notes that its provisions will not apply to deposits taken in the ordinary course of business in order to ensure that various entities are able to take deposits in their ordinary course of business without any difficulty. The Bill ensures that no hardship is caused to genuine businesses, or to individuals borrowing money from their relatives or friends for personal reasons or to tide over a crisis.

3. Scope of the words and phrases “unregulated deposit scheme

Section 2(17) of the BUDS Act defines the phrase “unregulated deposit scheme” to mean a scheme or arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme as specified under the column (3) of the First Schedule of the BUDS Act.

Therefore, three (3) simultaneous / cumulative conditions must be satisfied for a deposit taking activity to be classified as unregulated deposit scheme, namely:

  • it must qualify as a scheme or arrangement
  • under which deposits are accepted or solicited by any deposit taker
  • by way of business.

and it must not fall under the term “regulated deposit scheme” under the BUDS Act.

3.1.1 The phrase Scheme or Arrangement is not defined under the BUDS Act.

3.1.2 The Black Law Dictionary, retrieved online, defines the word “Scheme” as a broad outline of how an objective can be achieved. It is not a formal plan and will not show every detail.

3.1.3 The Black Law Dictionary, retrieved online, defines the word “Arrangement” as “When a debtor and creditor make an agreement about repayment or a debt”.

3.2.1 Wide scope of the words and phrase “Deposit” under the BUDS Act.

Section 2(4) of the Act defines the word “deposit” to mean an amount of money received by way of an advance or loan or in any other form, by any deposit taker with the promise to return whether after a specified period or otherwise, either in cash or in kind or in the form of any specified service, with or without any benefit in the form of interest, bonus or profit or in any other form.

3.2.2 The Black’s Law Dictionary, defines the word, ‘loan’ means a lending; delivery by one party to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest.

3.2.3 The Black’s Law Dictionary defines the term “advance” as “a payment made in anticipation of a contingent or fixed future liability or obligation”. Ordinarily, an advance is a payment beforehand and it does not connote the idea of repayment. It is adjusted when the action, for which the money is advanced, is completed.

3.2.4 In the matter of CIT v. Raj Kumar (2009) 181 Taxmann 155 (Delhi), dealing with a matter under Section 2(22)(e) of The Income Tax Act, 1961 (“deemed dividend”) Held,

The usual attributes of a loan are that it involves positive act of lending coupled with the acceptance by the other side of the money as loan – it generally carries interest and there is an obligation of repayment. The term ‘advance’ is of wide import & has undoubtedly more than one meaning, depending on the context in which it is used. In its widest meaning, the term ‘advance’ may or may not include lending or the obligation of repayment. The Delhi High Court applied the rule of construction of noscitur a sociis – “the meaning of the word can be gathered from the context” or “by the company which it keeps.” The word ‘advance’ which appears in the company of the word ‘loan’ could only mean such ‘advance’ which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not fall within the ambit of the provisions.

3.2.5 Relevant Exclusions for SMEs from the Definition of “Deposit” –

Clause (e) – amount received by way of contribution towards the capital by partners of any partnership firm or a limited liability partnership.

Clause (f) – amount received by an individual by way of loan from his relatives or amounts received by any firm by way of loan from the relatives of any of its partners.

Clause (g) – amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immoveable).

Clause (l) – an amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business including –

(i) payment, advance or part payment for the supply or hire of goods or provision of services and is repayable in the event the goods or services are not in fact, sold, hired or otherwise provided.

(ii) advance received in connection with consideration of an immoveable property under an agreement or arrangement subject to the condition that such advance in adjusted against such immoveable property as specified in terms of the agreement or arrangement.

(iii) security or dealership deposited for the performance of a contract for supply of goods or provision of services; or

(iv) an advance under the long-term projects for supply of capital goods except those specified in item (ii).

3.2.6 The term “relative” under section 2(77) of the Companies Act, 2013 means, with reference to any person, means any one who is related to another, if-

            (a) they are members of a HUF;

            (b) they are husband and wife;

(c) Under Rule 4 of the Companies (Specification of definition details) Rules, 2014 includes Father (including step-father), Mother (including step-mother), Son (including step-son), Son’s wife, Daughter, Daughter’s husband, brother (including step-brother), sister (including step-sister).

3.3.1 The deposit taking activity to qualify as an unregulated deposit scheme must be “by way of business”.

3.3.2 The Black Law dictionary, retrieved online, defines the word business to mean “… the doing of a single act pertaining to a particular business will not be considered engaging in or carrying on the business; yet a series of such acts would be so considered.”

3.3.3 Acceptance of Loans by SMEs where funds are utilised for the purpose of business (as distinguished by “acceptance of deposits by way of business”) and by Individuals, HUFs, etc for personal purposes appears to be excluded by virtue of

(a) Section(s) 2(4)(e), 2(4)(f), 2(4)(l) and other provisions of the BUDS Act.

(b) Statement of Objects and Reasons of the BUDS Bill, 2019.

3.3.3.1 As per the definition of unregulated deposit scheme, an unorganised activity not being a scheme or arrangement for acceptance of deposit not by way of business is outside the ambit of the Ordinance.

3.3.3.2 Only those people who are engaged in the business of accepting deposits are covered under the definition of unregulated deposit scheme.

The Banning of Unregulated Deposits Act, 2019 (PDF)

The Banning of Unregulated Deposits Rules, 2020 (PDF)