THE BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019 (BUDS 2019) V.L.JAIN & CO. 1
Disc sclaimer aimer • The following presentation is given for general informational purposes only and meant for private circulation only. • You should obtain your own independent advice on the Interpretation outlined in this Presentation. V.L.JAIN & CO. 2
Almanac Al anac of of ev events ents Introduced Referred to Standing in Lok Standing Committee Sabha Committee Report July 18, 2018 Aug 10, 2018 Jan 3, 2019 President Effective tive Passed in Lok promulgated the from m Sabha Ordinance on Feb 13, 2019 Feb 21, , 2019 19 Feb 21, 2019 V.L.JAIN & CO. 3
Ac Act Vs t Vs Or Ordi dinanc nance • An act is a ‘Law’ which is passed by parliament and has also received the assent of President. • An ordinance is also a ‘Law’ but without being subject to the discussion and deliberation in both or one of the houses of the Parliament. • Ordinance is temporary law passed by the President till its expiry or till it is repealed or till it is approved by the legislature. V.L.JAIN & CO. 4
Or Ordi dinance nance (P (Pow ower er of of President resident an and Pa d Parliament rliament) • If the ordinance is not approved by both the houses of Parliament? • As per Article 123 of the Constitution of India the ordinance shall cease to operate at the expiration of six weeks from the reassembly of Parliament, or, of before the expiration of that period resolutions disapproving it are passed by both Houses. • May be withdrawn at any time by the President. V.L.JAIN & CO. 5
Sc Scop ope • Extends to whole of India except the state of Jammu and Kashmir. • It shall come in force at once : Immediate Repercussion - Anything which falls under the definition of deposit and which is unregulated is banned with immediate effect. • The ban is not only on acceptance but also on solicitation. V.L.JAIN & CO. 6
Wh What at is is a Pon a Ponzi i sch schem eme? e? • A Ponz Ponzi sc sche heme me is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own. V.L.JAIN & CO. 7
Bac ackg kground round of of Pon Ponzi i Sch chem eme • The scheme is named after Charl harles es Ponzi Ponzi who became notorious for using the technique in the 1920 1920s. • The idea had already been carried out by Sar Sarah ah Howe Howe in Boston in the 1880s through the "Ladies Deposit". • Ponzi carried out this scheme and became well known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting new investors' money to make payments to earlier investors and to himself. V.L.JAIN & CO. 8
Sa Sarad radha ha Gr Grou oup p fi fina nanci ncial al sc scan anda dal • The Saradha Group financial scandal was a major financial scam and alleged political scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over 200 private companies that was believed to be running collective investment schemes popularly but incorrectly referred to as chit funds in Eastern India. • The group collected around Rs. 200 to Rs. 300 billion from over 1.7 million depositors before it collapsed in April 2013. The State government also set up a fund of Rs. 5 billion to ensure that low- income investors were not bankrupted. • The key people involved were Sudipto Sen and Debjani Mukherjee. V.L.JAIN & CO. 9
Re Regulation gulation of of money oney le lending nding busi usine ness ss • The power to regulate the business of money lending is delegated to the States under entry no. 30 of the State List , Schedule VII to the Constitution of India: “Money -lending and money-lenders; relief of agricultural indebtedness. ” • The he Bo Bombay mbay Money oney Len Lenders ders Act Act 194 946 in in Ma Maharashtra harashtra: It is compulsory to get a License if any person engages in the business of money lending. V.L.JAIN & CO. 10
Meaning Meaning of of busine business ss of of money money lendi lending ng as as per per th the Bombay Bombay Money Money Lender Lenders Ac Act,1946 1946 • “Business of money-lending" means the business of advancing loans whether in cash or kind whether or not in connection with or in addition to any other business. [ Sec 2 (2) ] • “Loan" means an advance at interest whether of money or in kind, but does not include deposits/loans as prescribed. [ Sec 2 (9) ] V.L.JAIN & CO. 11
Me Mean aning ing of of De Depo posit sit – Sec ec 2 (4 2 (4) • An An am amount ount of of money oney re received eived • by way of an advance or loan or in any other form, • by by an any de deposit posit ta take ker • with th a pr promise omise to to re retu turn rn • 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. V.L.JAIN & CO. 12
Anal nalysis ysis of of th the wor e words ds in de n defi finiti nition on of of Dep epos osit t Se Sec – 2 (4 (4) • Anal nalysi ysis of of the he wo word rd “Promise to to return urn ” The definitions provide a condition as to promise to return, hence donation to trusts or other similar institutions will not be covered. • Ana nalysi ysis of of the he word ord “Return” By ‘returns’ of course we mean the promise to pay more than what was contributed initially. V.L.JAIN & Co. 13
Exc Exclus usions ions fr from om th the mea e meani ning ng of of De Depos posit it - Se Sec 2 (4) • Loans/ financial assistance from banks, PFIs or any registered NBFCs, Regional Financial Institutions and Insurance companies; • Amount received from or guaranteed by appropriate Government or statutory authority (Govt Securities, REC NHAI Bonds etc); • Amounts received from foreign government, foreign banks, foreign authorities etc or person resident outside India as per provisions of FEMA Act, 1999; • Cap Capital tal co cont ntrib ribut utio ions ns by by par partne tners rs of of pa partnersh rtnership firm rm or or LL LLP; (On (Only ly by by way way of of capi pital tal, Not by by way of of loan) • Loans ns re recei eived ved by by an an individual ual fro rom his re relatives ves; • Loans ns re recei eived ved by by a firm rm fro rom re relati tives ves of of part rtners ners; (Firm rm doesn’t include ude LLP LLP ) • Any ny cred credit it gi given ven by by a se seller ller to to a buy uyer on on the the sa sale le of of any any prope roperty rty (whet (whethe her mo movabl ble or or imm mmovable) le); • Amounts received by a registered ARC under RBI and SARFAESI; V.L.JAIN & CO. 14
Exclusion usions s fro rom m the he mea eaning ning of of Dep eposit osit - Se Sec 2 2 (4) … Cont ontd. d. • Amounts received by a political party under the Representation of the People Act, 1951; • Any periodic payment made by the members of the self-help groups as per the ceiling prescribed by State/ Union Territory Government; • Amou Amount nt rece receive ived in in the the cou ourse rse of, of, or or for for the the pur purpos ose of, of, bu busin siness ess and and bearing earing a genuine genuine con onnect nection ion to to such ch business iness for or fol ollowi lowing ng and and whi hich ch has not ot becom ome refund undable able including luding : • Payment, yment, adv dvance nce or or part rt paym yment ent for or supply/ pply/ hire re of of goods oods / service rvices; • Ad Advanc vance re received eived in in connecti connection on wi with th an and adj adjust usted to towards wards consi consider erati ation on of of an an imm mmov oveabl eable prop operty rty under der an an agreem eement ent or or arrangeme angement nt; • Securit curity depo eposit sit; • Adv dvance ance under der lon ong-term term proj oject ects for or supply pply of of capi pital tal goods oods; Provided that if the above amounts received become refundable, such amounts shall be deemed to be deposits on th the expi piry ry of of fi fifte fteen en days days from the date on which they become due for refund. V.L.JAIN & CO. 15
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