THE BANNING OF UNREGULATED DEPOSIT SCHEMES ACT, 2019 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

Introduction

Many a investor has been cheated by many of the ponzi schemes.  The Government had constituted an inter-ministerial group to address gaps in existing legislation. The recommendations include a new central law to tackle unregulated deposit schemes. The Government enacted ‘The Banning of unregulated deposit schemes, 2019’ (‘Act’ for short).  The Act is part of the government’s effort to bring back money looted by some high and mighty people. This Act would save gullible investors from ponzi schemes.  This Act provides for a mechanism to ban the unregulated deposits, other than deposits taken in the ordinary course of business. The legislation has adequate provisions for punishment and disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.  This Act is having over ride effect on any other laws for the time being in force.  Further the provisions of the Act are in addition to but not in derogation of the existing provisions of the law time being in force.

This Act amends-

• Section 45-I of RBI Act;
• Section 1, 28A of SEBI Act;
• Section 67 of the Multi States Co-operative Societies Act, 2002;

Objective

The objective of Act is to-

• provide for a comprehensive mechanism to ban the unregulated deposit schemes, other than deposits taken in ordinary course of business; and
• protect the interest of depositors; and
• for matters connected therewith and incidental thereto.

Applicability

The provisions of this Act are applicable to the whole of India except Jammu & Kashmir.  This Act shall not be applicable to deposits taken in the ordinary course of business.

Date of effect

The Act shall be deemed to have come into force with effect from 21.02.2019.

Deposit

The meaning of the term ‘deposit’ is having wide range covering most of the aspects. The term ‘deposit’ is defined under Section 2(4) of the Act as an amount of money received by way of 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.  The definition does not include the following in the meaning of the term ‘deposit’-

• amounts received as a loan from a scheduled bank or a  co-operative bank or any other banking company;
• amounts received as loan or financial assistance from public financial institutions as notified by the Central Government or NBFCs registered with RBI;
• amounts received from the appropriate Government, or any other source whose repayment is guaranteed by the appropriate Government or from a Statutory Authority constituted under an Act of Parliament or State Legislature;
• amounts received from-

• foreign Governments;
• foreign or international banks;
• multilateral financial institutions;
• foreign Government owned Development Financial Institutions;
• foreign export credit collaborators;
• foreign body corporate;
• foreign citizens;
• foreign authorities; or
• persons resident outside India

subject to the provisions of FEMA and rules made there under;

• amounts received by way of contributions towards the capital by partners of any partnership firm or LLP;
• amounts received by an individual by way of loan from his relatives or any firm from the relatives of the partners;
• amounts received as a credit by a buyer from a seller on the sale of any movable or immovable property;
• accounts received by an Asset Reconstruction Company;
• any deposit made under section 34 or an amount accepted by a political party under section 29B of Representation of People Act, 1951;
• any periodic payment made by the members of self-help groups operating within such ceilings as may be prescribed by the State Government or Union Territory;
• any other amount collected for such purpose and within such ceilings as may be prescribed by the State Government;
• an amount received in the course of, or for the purpose of, business and bearing a genuine connection to each such business including-

• payment, advance or part payment for the supply of 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;
• advance received in connection with the consideration of an immovable property under an agreement or arrangement subject to the condition that such advance is adjusted against such immovable property as specified in terms of agreement or arrangement;
• security or dealership deposited for the performance of the contract for supply of goods or provision of services; or
• an advance for the long term projects for supply of capital goods;

Regulated deposits

The following are the regulators and the regulated deposit schemes, as enumerated in First Schedule-

• SEBI –

• Under section 11AA of SEBI Act;
• Any scheme or arrangement under SEBI (Alternative Investment Funds) Regulations, 2012;
• Any scheme or arrangement managed by the Portfolio Managers under SEBI (Portfolio Managers) Regulations, 1993;
• Any scheme or arrangement under SEBI (Share Based Employees Benefits) Regulations, 2014 or employees benefits under the Companies Act, 2013;
• Any other scheme or arrangement registered with SEBI Act or the regulations made thereunder;
• Any amount received as subscriptions for a Mutual Fund;

• RBI-

• Any deposits accepted by NBFCs;
• Any scheme or arrangements under which funds are accepted by individuals entities engaged as business correspondents and facilitators by banks subject to the guidelines and circulars issued by RBI from time to time;
• Any scheme or arrangement under the Payments and Settlement Systems Act, 2007;
• Any other schemes regulated by RBI Act or the guidelines or circulars by RBI;

• IRDA-

• A contract or insurance pursuant to a certificate of registration obtained in accordance with the Insurance Act, 1912;

• State Government/Union Territory-

• Any scheme or arrangement offered by a Co-operative society;
• Any Scheme or arrangement under the Chit Funds Act, 1982;
• Any scheme or arrangement under any enactment relating to  money lending;
• Any scheme or arrangement by a Prize Chit or Money Circulation Schemes (Banning) Act, 1978;

• National Housing Bank-

• Any scheme or arrangement for acceptance of deposit under the National Housing Bank Act, 1987;

• The Pension Fund Regulatory and Development Authority-

• Any scheme or arrangement under the Pension Fund Regulatory and Development Authority Act, 2013;

• EPFO-

• Any scheme, pension scheme or insurance scheme under Employees Provident Fund and Miscellaneous Provisions Act, 1952;

• The Central Registrar, Multi Co-operative Societies-           

• Any scheme or arrangement for accepting deposits from voting members by a Multi-State Co-Operative .

• MCA-

• Deposits accepted or permitted under Chapter V of the Companies Act, 2013;
• Any deposit accepted by a Nidhi Company and a Mutual Benefit Society.

The Central Government is having power to amend this First Schedule to add or omit any items by means of notification.

Unregulated deposit scheme

Section 2(17) defines the expression ‘Unregulated deposit scheme’ as 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.

Deposit taker

Section 2(6) defines the expression ‘deposit taker’ as-

• any individual or group of individuals;
• a proprietary concern;
• a partnership firm, whether registered or not;
• an LLP;
• a company;
• an association of persons;
• a trust;
• a co-operative society or a multi co-operative society;
• any other arrangement of whatsoever nature, receiving or soliciting deposits but does not include-

• a  Corporation incorporated under an Act of Parliament or State Legislature;
• a banking company, a corresponding new bank, SBI, a subsidiary bank, a regional rural bank, a co-operative bank or a multi-State Co-Operative bank as defined in Banking Regulation Act, 1949.

Information on deposit takers

Chapter IV of the Act provides obligation on the part of the competent authority to have a data share on the details of the deposit takers and also make it an obligation to provide information to the competent authority about their business in the required forms and in the required manner.    The authority, if it believes, that any person is involved in soliciting or accepting the unregulated deposit, may call for the information, obtain statements from such person.

The authority is also to share the said information with the other regulators who require the said information.   The said information is also to be share with CBI.  Likewise any Government, any regulator, income tax authorities or any other investigating agencies, having any information or documents shall share the information to the police who investigated the offence under this Act or CBI.  If the principal officer of the bank of any type is having reasons to believe that any client, who is a deposit taker, is contravention of this Act shall inform the same to the competent authority.

Banning of unregulated deposit schemes

A prize Chit or money circulation scheme banned under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an unregulated deposit scheme under this Act.

Section 3 provides that on and from the date of commencement of this Act, the unregulated deposits are banned.  No deposit taker shall directly or indirectly promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an unregulated deposit scheme.

Fraudulent default

Section 4 provides that no deposit taker, while accepting a deposit, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.

Wrongful inducement

Section 5 provides that no person shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material fact to induce another person to invest in, or become a member or participant of any unregulated deposit scheme.

Authorities

The appropriate Government shall, by notification appoint one or more officers not below the rank of Secretary to the Government, as the competent Authority.   Some more officers shall be appointed to assist the competent authority.

Powers of Authorities

The competent authorities shall have the same powers as that of Civil Court while conducting investigation or inquiry in the following-

• discovery of inspection;
• enforcing the attendance of any person, including any officer of a reporting entity and examining him on oath;
• compelling the production of records;
• receiving evidence on affidavits;
• issuing commissions for examination of witnesses and documents; and
• any other matter which may be prescribed.

The competent Authority is having power to summon any person to give evidence or produce any document during the course of investigation or inquiry.  Such person shall attend before the Authority either by himself or through the authorized representative and shall tell the truth upon any subject of inquiry or produce documents or records, or give evidence.

Impounding of records

The authorized officer may impound and retain under his custody any records produced before him for such period as he thinks fit.  The said officer is to record reasons for impounding such records.  The maximum period for which the said officer can retain the record is three months.  Beyond this period he is to get the previous approval of the competent authority.

Designated Court

Section 8 provides that the appropriate Government shall constitute one or more Courts as Designated Courts with the concurrence of the Chief Justice of the respective High Court for such area or areas or such case or cases as may be specified in the notification.  The Court shall be presided over by a Judge not below the rank of Sessions and District Judge or Additional District and Sessions Judge.

No Court other than the designated court shall have jurisdiction in respect of any matter under this Act.  While trying an offence under this Act, the Designated Court may also try an offence, other than an offence under this Act, with which the accused may, under the Code of Criminal Procedure, 1973 be charged for the same trial.

Priority in claim

Save as provided in SARFAESI Act or IBC, any amount due to the depositors from a deposit taker shall be paid in priority over all other debts and all Revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority.

Provisional attachment

If the authorized officer is of the opinion based on the information and particulars that the deposit taker is soliciting deposits in contravention of this Act,  he may, by an order in writing,  provisionally attached the 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 in such manner as may be prescribed in the Rules.

The order of provisional attachment shall have precedence and priority, to the extent of the claims of the depositors, over any other attachment by any authority competent to attach the property for repayment of any debts, revenues, taxes, cesses and other rates payable to the appropriate Government.

The provisional attachment shall continue until an order is passed by the Designated Court.   All the attached money or property of the deposit taker shall vest in the competent authority and shall remain so vested till further order of the Designated Court.

The competent authority shall open an account in a scheduled bank for the purpose of crediting and dealing with any money realized, which shall not be utilized except under the instructions of the Designated Court.  Likewise the property attached shall not be disposed except under the instructions of the Designated Court.  The competent authority may order the immediate sale of the perishable items or assets and the  proceeds of the sale shall be utilized in the same manner as provided for other property.

Confirmation of attachment

The competent authority shall file an application before the Designated Court within 30 days from the date of the order of provisional attachment, for making the provisional attachment absolute and also for permission to sale the property by auction or private sale.  The application may be filed after 30 days and up to 60 days after the competent authority recorded reasons in writing. 

The Designated Court on receipt of application from the competent authority shall issue notice to the deposit taker and any person whose property is attached.  After hearing the case, the Designated Court shall pass an order-

• making the order of provisional attachment absolute; or
• varying it by releasing a portion of the property from attachment; or
• cancelling the provisional order of attachment.

The Designated Court may also direct the competent authority to sell the attached property by public auction or by private sale and realize the sale proceeds.

The Designated Court shall not, in varying or cancelling the order of provisional attachment, release any property unless it is satisfied that-

• the deposit taker or concerned person has interest in such property; and
• there shall remain an amount or property sufficient for repayment to the depositors of such deposit taker.

The Designated Court shall pass order or issue directions for the equitable distribution among the depositors of the money attached or realized out of the sale.

The Designated Court shall try to complete the above said proceedings within 180 days from the date of receipt of the application of the competent authority.

Powers of Designated Court

The Designated Court shall have the following powers-

• power to approve the statement of dues of the deposit taker due from various debtors;
• power to assess the value of the assets of the deposit taker and finalize the list of the depositors and their respective dues;
• power to direct the competent authority to take possession of any assets belonging to or in the control of the deposit taker and to sell, transfer or realize the attached assets, either by public auction or by private sales as it deems fit depending upon the nature of the assets and credit the sale proceeds thereof to its bank account;
• power to approve the expenditure incurred by the competent authority for taking possession and realization of the assets of the deposit taker;
• power to pass an order for full payment to the depositors by the competent authority or an order for proportionate payment  to the depositors in the event, the money so realized is not sufficient to meet the entire deposit liability;
• power to direct any person, who has made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act, to disgorge an amount equal to the wrongful gain made or loss averted by such contravention; and
• power to pass any order which the Designated Court deems fit for realization of the assets of the deposit taker  and payment of the same to the depositors of such deposit taker or on  any other matter or issue incidental thereto.

Attachment of property for mala fide transfers

Section 16 of the Act provides that if the deposit taker has transferred any property otherwise than in good faith and not for commensurate consideration, the Designated Court may require such person to appear before the Court and show cause why so much of the transferee’s property as is equivalent to the proper value of transferred, should not be attached.

If the Designated Court is satisfied that the transfer of the property to the said transferee was not a bona fide transfer and not commensurate consideration, it shall order the attachment of so much of the said transferee’s property as in its opinion is equivalent to the proper value of the property transferred.

Payment in lieu of attachment

Section 17 of the Act provides that any deposit taker or a person whose property is about to be attached or provisionally attached , may, at any time before the confirmation of the attachment,  apply to the Designated Court for permission to deposit the fair value of the property in lieu of attachment.  While allowing such request the Designated Court may order to pay the cost as may be applicable.

Application of interested person before Designated Court

The Designated Court may, on an application received from an interested person in any property attached and vested in competent authority, after giving a reasonable opportunity of being heard to the competent authority, pass such order as it considers just and reasonable for-

• providing from such property such sums as may be reasonably necessary for the maintenance of the applicant and of his family and for expenses connected with the defence of the applicant where the criminal proceedings have been initiated against the applicant in the Designated Court; or
• safeguarding the interest of the business affected by the attachment, so far as may be practicable.

Appeal to High Court

Section 19 provides that any person, including the competent authority, aggrieved against the order passed by the Designated Court may file appeal before the High Court within a period of 60 days from the date of such order.  The High Court may entertain the appeal after the period of 60 days, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal in time.

Power of Supreme Court

Section 20 provides that the Supreme Court may, by order, direct that any particular case can be transferred from Designated Court to another Designated Court, on an application filed by the competent authority or any interested party with supporting affidavit.  If the Supreme Court is satisfied that such application is frivolous, it may order the applicant to pay compensation not exceeding ₹ 50,000/- as it may consider appropriate.

Punishment

• Section 21 – contravention of section 3-

• Soliciting deposits – imprisonment for 1 year to 5 years and fine ₹ 2 lakhs to ₹ 10 lakhs;
• Accepting deposits – imprisonment for 2 years to 7 years and fine ₹ 3 lakhs to ₹ 10 lakhs;
• Fraudulent default in repayment of deposits – imprisonment 3 years to 10 years and fine ₹ 5 lakhs but which may extend to twice the amount of aggregate funds collected from the subscribers.

• Section 22 – contravention of section 4 – imprisonment up to 7 years or with fine ₹ 5 lakhs to ₹ 25 crores or thrice the amount of profits made out of the fraudulent whichever is higher or both.
• Section 23 – contravention of section 5 – imprisonment 1 year to 5 years and with fine up to ₹ 10 lakhs.
• Section 25 – offences by deposit takers other than individuals – every person who is in charge of the affairs and responsible to the deposit taker for the conduct of its business, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.  If he proves that he has exercised due diligence to prevent the commitment of such offences or the said offence has been committed without his knowledge then he is not liable.
• Section 26 – contravention of section 10 – fine up to ₹ 5 lakhs;
• Section 24 – subsequent offence – except the offence under section 26, if the offence is subsequently done, imprisonment 5 years to 10 years with fine ₹ 10 lakhs to ₹ 50 crores.

Cognizable offences

Every offence punishable under this Act except under section 22 and section 26 shall be cognizable and non bailable.  The police office, who records information on the commission of an offence under this Act, shall inform to the competent authority.

CBI investigation

On receipt of the information from the police office about the offence under this Act committed by a deposit taker, the competent authority, if it considers that the deposit takers or properties are involved in more than two States and the amount involved in such offence is of such magnitude as to significantly affect the interest of the public, may refer the case to CBI for further investigation.

Power of police officers

The Police Officer in charge of a police station, with the written permission of the Superintendent of Police and after recording in writing for the search to be made, may authorize an officer subordinate to him-

• to enter and search any building, conveyance or place, between sunrise and sunset any object that is used for contravention of this Act;
• in case of resistance, break open the door and remove any obstacle to such entry, if necessary by  force, with such assistance as he considers necessary for the purpose of search;
• to seize any  record or property found as a result of the search in the building, conveyance or place, which are intended to be used for the contravention of the provisions of this Act;
• to detain the said records into his custody and produce before the Designated Court any such person whom he has reasons to believe to have committed any offence under this Act.

Freezing of accounts

Where it is not possible to seize the record or property, the authorized officer may freeze such property, account, deposits or valuable securities maintained by any deposit taker.   No bank or financial institution shall not freeze the accounts for a period of not more than 30 days unless the same is authorized by the Designated Court.  If at any time it is practicable to seize the frozen property, the authorized officer may seize it.

Publication in newspapers

Where any newspaper or any other publication of any nature, contains any statement, information or advertisement promoting, soliciting deposits for, or inducing any person to become a member of any unregulated deposit scheme, the appropriate Government may direct such newspaper or publication to publish full and fair retraction, free of cost, in the same manner and in the same position in such newspaper or publication as may be prescribed.