Banning of Unregulated Deposit Schemes Ordinance, 2019

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Banning of Unregulated Deposit Schemes Ordinance, 2019 applicable even if unsecured loan is taken by businessmen? Let’s see:-

The Banning of Unregulated Deposit Schemes Ordinance, 2019 has been passed on 21-02-2019 with immediate effect. Also deposit takers have been prohibited from promoting, operating, advertising such Schemes. A confusion & question raised by many people is whether all sorts of loans and deposits are covered by the regulations or not?

Whether business loans are also banned?

Any amount taken as loans shall also be taken back? 

 In my opinion, the context of the Ordinance is clear with respect to Unregulated Deposit Schemes only which has been defined as a Scheme or an arrangement under which deposits are accepted or solicited by a deposit taker by way of business and which is not a Regulated Deposit Scheme. Mere loans extended to companies or individuals are not necessarily under any Scheme or an arrangement. Moreover “by way of business” would mean during the course of a business of taking deposits and investing the same to give returns or a money lending business. In my view, it is clear that this Ordinance does not prohibit all sorts of loans and advances. It is purely “Unregulated Deposit Ordinance” and not “Deposit Ordinance”.

Let’s have a look what was published in ET on 26-02-2019:-

“There is no ban on any amount received in the course of, or for the purpose of, business,” the finance ministry said, citing Section 2(4)(I) of the ordinance promulgated last week by the President. 

The government said individuals borrowing or taking loans or money from relatives or friends for marriage or medical emergency or business needs or any other personal reasons have nothing to fear from the law. Such transactions are not unregulated deposit schemes as defined in section 2(17). Further, any amount received by an individual by way of a loan from his relatives has been entirely exempted under section 2(4)(f). 

Small businesses, proprietorship, partnerships, LLPs and SMEs that take unsecured loans from unrelated parties and enterprises are also exempt under Section 2(4)(I) of the law. 

This exemption covers “advance payment for hire or supply of goods and covers genuine business needs and trade advances among others so that those who depend on small short-term credit or deposits for various needs do not face any problems”. In the case of charitable institutions, they accept donations and not deposits. Section 2(4) of the Act defines ‘deposit’ and does not include donations. 

Also, there is no ban on any individual taking a quick loan to tide over a crisis from relatives as prescribed under Section 2(4)(f). 

In the case of real estate, there were apprehensions that the sector may be hit as deposit can only be accepted for a designated transaction and can be adjusted against future sale consideration. 

The government has clarified that such transactions are exempted under Section 2(4)(g) and (l). 

Further the deposits for normal business purposes have been specifically excluded from the definition of the term “deposit” in the Ordinance itself. The relevant part of the same is as under:

“(4) “deposit” means 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, but does not include—

(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 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 the agreement or arrangement;

(iii) security or dealership deposited for the performance of the 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):

Important : It is mentionable here that the above clause (I) of the definition of deposit is “inclusive” i.e., it does not excludes only items mentioned in sub clauses (i) to (iv) but also excludes each and every type of amount received in the course of or for the purpose of normal trading etc. business.

Further the Ordinance is applicable to the “Unregulated Deposit Schemes”. The definition of “Unregulated Deposit Scheme” has been given in clause (17) of the Ordinance. The same is as under:

(17) “Unregulated Deposit Scheme” means 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, as specified under column (3) of the First Schedule.

As per the above definition only those deposits are covered by the Ordinance which has been accepted by way of business.

“Which deposits will be said to have been accepted by way of business” has not been clarified in the Ordinance or otherwise. However, logically it can be said that it is applicable to the business of taking deposits i.e., where collecting deposit is the prime / substantial activity. In cases of normal trading, manufacturing etc. businesses, the trading / manufacturing etc. remains the prime business activities and not the acceptance of deposits. The acceptance of deposits remains only supportive activity.

So finally in my view it is clarified that :-

  1. The Loans Etc. Taken For Personal Needs are not banned by the Ordinance as the ban is applicable only on “Unregulated Deposit Scheme”. As per the definition of “Unregulated Deposit Scheme” as given in sub clause (17) of clause (2), only those deposits are covered which have been accepted by way of business. The loans taken for personal need are not covered by the above definition as they are not accepted by way of business.
  1. By consolidated reading of definition of “Deposit”, ‘Unregulated Deposit Scheme”, Section 45S and 45-I of the Reserve Bank of India Act, 1934, it can be said that the deposit etc. accepted by Individuals etc. from other than relatives etc. for money lending business is not permissible. In such cases the deposit may be “by way of business”. Therefore, the Ordinance will be applicable. Further, as per Section 45-S read with Section 45-I of the Reserve Bank Of India Act, acceptance of deposits etc. from non relatives for financing activities is not permissible.
  1. From the consolidated reading of sub clause (e), (f) and (I) it can be said that for normal trading etc. business / personal needs the amounts can be obtained from non relatives etc. also. But where the amount is being taken “by way of business” i.e., for money lending / financial activities it can be taken only from the partners, relatives etc.
  1. Thus, there are enough reasons / basis from which it may be logically concluded that the above ban is not applicable to the normal business

Note: - The possibility of other interpretation and contrary view cannot be denied. It will be better if finance ministry comes out with a detailed press release outlining the intended scope of the new ordinance. Let us hope that the issue gets settled with the probable coming press release

Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author do not owns any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.