[PPT] - THE BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019 (BUDS PowerPoint Presentation

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THE BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019 (BUDS 2019)

V.L.JAIN & CO.

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Disc sclaimer aimer

The following presentation is given for

general informational purposes only and meant for private circulation only.

You

should

btain

your

wn

independent advice on the Interpretation

utlined in this Presentation.

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Al Almanac anac of

f ev

events ents

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Referred to Standing Committee Aug 10, 2018 Passed in Lok Sabha Feb 13, 2019 Standing Committee Report Jan 3, 2019 Introduced in Lok Sabha July 18, 2018

President promulgated the Ordinance on Feb 21, 2019

Effective tive from m Feb 21, , 2019 19

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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

ne 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President till its expiry or till it is repealed or till it is approved by the legislature.

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Or Ordi dinance nance (P (Pow

wer

er of

f 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
rdinance 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May be withdrawn at any time by the President.

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Sc Scop

pe
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.

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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.

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Bac ackg kground round of

f 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

f international reply coupons for postage stamps, but he soon

began diverting new investors' money to make payments to earlier investors and to himself.

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Sa Sarad radha ha Gr Grou

up

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.

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Re Regulation gulation of

f money
ney 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

f the State List , Schedule VII to the Constitution
f India: “Money-lending and money-lenders; relief
f agricultural indebtedness.”
The

he Bo Bombay mbay Money

ney 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.

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Meaning Meaning of

f busine

business ss of

f 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) ]

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Me Mean aning ing of

f De

Depo posit sit – Sec ec 2 (4 2 (4)

An

An am amount

unt of
f money
ney 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

mise 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.

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Anal nalysis ysis of

f th

the wor e words ds in de n defi finiti nition

n of
f

Dep epos

sit

t Se Sec – 2 (4 (4)

Anal

nalysi ysis of

f 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

ther similar institutions will not be covered.
Ana

nalysi ysis of

f the

he word

rd “Return”

By ‘returns’ of course we mean the promise to pay more than what was contributed initially.

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Exc Exclus usions ions fr from

m th

the mea e meani ning ng of

f 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

f pa

partnersh rtnership firm rm or

r LL

LLP; (On (Only ly by by way way of

f

capi pital tal, Not by by way of

f 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

f 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

n the

the sa sale le of

f any

any prope roperty rty (whet (whethe her mo movabl ble or

r imm

mmovable) le);

Amounts received by a registered ARC under RBI and SARFAESI;

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Exclusion usions s fro rom m the he mea eaning ning of

f Dep

eposit

sit - Se

Sec 2 2 (4) …Cont

ntd.

d.

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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

urse

rse of,

f, or
r for

for the the pur purpos

se of,
f, bu

busin siness ess and and bearing earing a genuine genuine con

nnect

nection ion to to such ch business iness for

r fol
llowi

lowing ng and and whi hich ch has not

t becom
me refund

undable able including luding :

Payment,

yment, adv dvance nce or

r part

rt paym yment ent for

r supply/

pply/ hire re of

f goods
ods / service

rvices;

Ad

Advanc vance re received eived in in connecti connection

n wi

with th an and adj adjust usted to towards wards consi consider erati ation

n of
f an

an imm mmov

veabl

eable prop

perty

rty under der an an agreem eement ent or

r arrangeme

angement nt;

Securit

curity depo eposit sit;

Adv

dvance ance under der lon

ng-term

term proj

ject

ects for

r supply

pply of

f capi

pital tal goods

ods;

Provided that if the above amounts received become refundable, such amounts shall be deemed to be deposits on th the expi piry ry of

f fi

fifte fteen en days days from the date on which they become due for refund.

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An Analys alysis is – “In the the cou course rse of

f / purpo

purpose of

f / bearing

bearing a ge genu nuine ine con

nnectio

nection to to business”

Se

Sec 2 (4)( )(l)

“An amount received” is subject to two conditions,

viz: In the course of business; or For the purpose of business; and Bearing a genuine connection to such business.

The amount so received may or may not be used

for the purpose of the business. Such an amount must bear a genuine connection to such business.

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Me Mean aning ing of

f Dep

Depos

sit

it Ta Take ker r - Sec ec 2 (6 2 (6)

“Deposit taker” means any individual or group
f individuals; a proprietorship concern; a

partnership firm; an LLP; a company; an association of persons; a trust; a co-operative society or a multi-State cooperative society; or any other arrangement of whatsoever nature, receiving or soliciting deposits,

but does not include— as specified

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Relative- Meaning Members of Hindu Undivided Family Daughter Daughter’s Husband Mother (Includes step Mother)

Son (Include ludes s Step ep Son)

Son’s wife Father (Includes step Father) Sister & Brother (Includes step Sister & Brother) Husband / Wife

Meaning of Relative – Sec 2 (4) (Expln V)

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Analysis of the meaning Relative

The definition of relative doesn’t include grandfather

and grandmother; and doesn’t specifically mention about step daughter, hence advance from them is not exempt under this ordinance.

Nothing specifically has been mentioned about the

lineal ascendants and descendants other than the relatives mentioned. Hence, any loans/deposits from them are prohibited.

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Un Unre regulated gulated De Depo posit sit Sc Scheme heme – Se Sec c 2 (1 2 (17) 7)

“Unregulated Depo Deposit sit Scheme” means means a Sche cheme me or

r an

an ar arrangement rangement un unde der wh whic ich

deposits are accepted or solicited by any

deposit taker

by way of business and
which is not a Regulated Deposit

Scheme

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Regul gulate ated d De Depo posit sit Sc Sche heme me (RDS DS) ) (First rst Sc Sched hedule ule)

RDS means the schemes/arrangements listed below by:

SEBI: Collective Investment Scheme, Alternative Investment Funds, Funds managed by a

portfolio manager, ESOP, Mutual Funds etc

RBI: Deposits accepted by NBFCs; authorized payment system under the Payment and

Settlement Systems Act , 2007

IRDA: Contract of Insurance
National Housing Bank Deposits
State Government or Union Territory Government: Prize chit or money circulation scheme

under the Prize Chits and Money Circulation Scheme (Banning) Act,1978

Pension Fund Regulatory and Development Authority
Employee Provident Fund Organization
Central Registrar, Multi-State Co- operative Societies
MCA, Government of India

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An Anal alysis ysis – By y wa way of y of Bus usiness iness

Does

es busi

usines ness in inclu ludes des Pr Prof

fess

ession? ion? Question arises whether the word “business” includes a “profession”.

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Ba Bann nning ng of

f U

Unr nregu egula lated ted De Depo posit t Sc Sche hemes mes – Se Sec 3

On and from the date of commencement of this

Ordinance (21st Feb 2019), (a) the Unregulated Deposit Schemes shall be banned; and (b) 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.

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Fraudulent default in Regulated Deposit Schemes – Sec 4

No deposit taker, under such scheme, should commit

any fraudulent default: (a) in the repayment or return of deposit on maturity; (b) in rendering any specified service promised against such deposit. Not only the ordinance bans Unregulated Deposit Schemes but also makes it an offence to do a fraudulent default in Regulated Deposit schemes.

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Explanation – Fraudulent Default

As per Explanation (i) to Section 21 of the

Ordinance, the expression “fraudulently” shall have the same meaning as assigned to it in section 25 of the Indian Penal Code.

As per Section 25 of the Indian Penal Code, a

person is said to do a thing “fraudulently” if he does that thing with intent to defraud but not

therwise.

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Wr Wron

ng

g Ind Induc ucement ement in re in rela latio tion n to to UDS UDS – Se Sec c 5

No person should knowingly make any

misleading statement, or promise or forecast which is false or deceptive, misleading in material facts or deliberately conceal any material facts, to induce any other person to invest in, or become a member or participant

f any UDS.

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Un Unregulat regulated ed De Depo posit sit Sc Sche heme me - Sec

ec 6

Deemed to be Unregulated Deposit Scheme:

(a)Prize chit money; and (b)Money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act,

1978. (Also Subject to Section

Section 11 11 of the aforesaid act as per Schedule I of BUDS 2019)

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Prize Prize Chits Chits and and Mone Money Circulat Circulation ion Sch chem eme (B (Ban anni ning) ng) Ac Act, 1978 1978.

Conventio

Conventional al Chit Chit Sec Sec 2 (a (a): means a transaction

whether called chit, chit fund, kuri or by any other name by or under which a person responsible for the conduct of the chit enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or certain quantity of grain instead) by way of periodical instalments for a definite period and that each such sub- scriber shall, in his turn, as determined by lot or by auction or by tender or in such

ther manner as may be provided for in the chit agreement, be

entitled to a prize amount.

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Pr Prize ize Chits hits and and Mon Money ey Circulatio Circulation Schem Scheme (Bannin Banning) g) Ac Act, t, 1978 1978.

Mon

Money ey Cir Circulati culation

n Sch

Scheme eme Sec Sec 2(c) (c): Means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money

r valuable thing as the consideration for a promise to

pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.

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Pr Prize ize Chits hits and and Mon Money ey Circulatio Circulation Schem Scheme (Bannin Banning) g) Ac Act, t, 1978 1978.

Pr

Prize ize Chit hit - Sec Sec 2 (e) (e): includes any transaction or

arrangement by whatever name called under which a person collects whether as a promoter, foreman, agent or in any other capacity, monies in one lump sum or in instalments by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings, mutual benefit, thrift, or any

ther scheme or arrangement by whatever name called, and utilises the

monies so collected or any part thereof or the income accruing from investment or other use of such monies for all or any of the purposes as specified in Sec 2 (e) – (i) and (ii).

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Prize ze Ch Chits ts and nd Mon

ney

ey Ci Circula ulatio tion Scheme eme (B (Bann nning) ing) Ac Act, 1978 1978 – Sec 11 11

Nothing contained in this Act shall apply to any prize chit or money circulation scheme promoted by- (a) a State Government or any officer or authority on its behalf; or (b) a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme whether it is in the nature of a conventional chit or otherwise; or (c) a banking company, or a banking institution notified by the Central Government or the State Bank of India or its subsidiary bank or a corresponding new bank constituted under of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or a Regional Rural Bank, or a cooperative bank (d) any charitable or educational institution notified in this behalf by the State Government, in consultation with the Reserve Bank.

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Tr Trans ansiti ition

n Pro

rovisions sions – Dep epos

sits

ts tak aken en bef efore

re the da

e date e of

f or
rdinance

inance

Da Date te of

f enfor

nforce ceme ment nt of

f this

this ord

rdinance

nance is is 21 21st st Fe February bruary, 2019 2019, If If “Deposit” accep accepted ted be befo fore re th the dat ate of

f Ord

rdinanc nance? e? Transition provision has not been specifically mentioned in the ordinance.

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Ap Applicability plicability in in ca case se of

f Companies
mpanies
For companies: the meaning of ‘deposit’ shall be as

defined in Companies Act, 2013;

Sec

Secti tion

n 2(31

31) of Companies Act, 2013,”deposit” includes any receipt of money by way of depositor loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank

f India.

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Ap Appl plicabili icability ty in n case se of

f NB

NBFCs Cs-

For registered NBFCs: definition of ‘deposit’

shall be as given in Section 45-I (bb) of Reserve Bank of India Act, 1934.

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Tw Twee eet t - De Depa partment rtment of

f Financial

nancial Ser ervice vices

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Au Auth thorities

rities (S

(Sec ec – 7 ) 7 )

Section 2(3) :- “Competent Authority” means an Authority

appointed by the appropriate Government under section 7.

“Appropriate Government” means in respect of matters relating

to,— (i) the Union territory without legislature, the Central Government; (ii) the Union territory of Puducherry, the Government of that Union territory; (iii) the Union territory of Delhi, the Government of that Union territory; and (iv) the State, the State Government;

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Centr entral al Da Database tabase and nd In Intimati timation

n by

by dep depos

sit

it ta taker ker (Sec ec - 9 9 )

Creation of Central database of information on

deposit takers operating in India. (Sec 9)

Information to be given if it takes deposits as per

sec 2(4) or in case of company as per the Companies Act, 2013.

All information about URDS to be shared with

CBI and other designated authority. (Sec 11)

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Int ntimation imation of

f bu

business iness by by depo eposit sit taker ker ( Se Sec 10 c 10)

Every deposit taker which commences or

carries on its business as such on or after the commencement

f

this Ordinance (21.02.2019) shall intimate the authority referred to in subsection (1) of section 9 about its business in such form and manner and within such time, as may be prescribed.

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Pri Priori

rity

ty of

f Depositors’ Cl

Claim aim an and Prec Precedence edence of

f

Att ttac achm hment ent – Sec Sec – 12 12 & Sec Sec - 13 13

Sec

Sec. 12
12. any amount due to 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.

Sec

Sec. 13
13. Where an Order of provisional attachment has been passed by the

competent authority - (a) such attachment shall continue until an order is passed under sub-section (3) or sub-section (5) of section 15 by the Designated Court; (b) all the attached money or property of the deposit taker and the persons mentioned therein shall vest in the Competent Authority ; The Competent Authority shall not dispose of or alienate the property or money attached except in accordance with the order of the Designated Court under sub-section (3) or sub-section (5) of section 15.

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Applicat pplication ion for for confirmati confirmation

n
f
f

at attachm achment ent and and sal sale of

f pr

prop

perty

erty Sec Sec -14 14

(1) The Competent Authority shall, within a period of thirty days, which may extend up to sixty days, for reasons to be recorded in writing, from the date of the order of provisional attachment, file an application with such particulars as may be prescribed, before the Designated Court for making the provisional attachment absolute, and for permission to sell the property so attached by public auction or, if necessary, by private sale. (2) In case where the money or property has been attached on the permission granted by a Designated Court in another State or Union territory, the application for confirmation of such attachment shall be filed in that Court.

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Conf

nfirma

rmati tion

n of
f Att

ttac achm hment ent by by de design gnated ated cour

urt Sec

Sec - 15 15

(1) Upon receipt of an application under section 14, the Designated Court shall issue notice to— (a) the deposit taker; and (b) any person whose property is attached under section 14, to show cause, within a period of thirty days from the date of issue of notice, as to why the order of attachment should not be made absolute and the properties so attached be sold. (3) The Designated Court shall, after adopting such procedure as may be prescribed, pass an order— (a) making the provisional order of attachment absolute; or (b) varying it by releasing a portion of the property from attachment; or (c) cancelling the provisional order of attachment, (6) The Designated Court shall endeavor to complete the proceedings under this section within a period of one hundred and eighty days from the date of receipt of the application referred to in sub-section (1). V.L.JAIN & CO.

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Payme ment nt in l n lieu u of

f at

atta tachmen hment t (Sec1 c17) 7) and nd A App ppeal to to High h Cou

urt

t (Sec c 19)

Sec 17: Any deposit taker or a person referred to in sub-

section (1) of section 15, or transferee referred to in section 16 whose property is about to be attached or has been provisionally attached under this Ordinance, may, at any time before the confirmation of attachment, apply to the Designated Court for permission to deposit the fair value of the property in lieu of attachment.

Sec 19: Any person may appeal to HC within a period of

sixty days from the date of the order.

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PARTIC ICULAR LARS IMPRIS ISONM ONMENT ENT FINE Soliciting deposits under UDS 1 year to 5 years and INR 2 lakhs to 10 lakhs Acceptance of deposits under UDS 2 years to 7 years and INR 3 lakhs to 10 lakhs Acceptance of deposits under UDS and there is Fraudulent default 3 years to 10 years and INR 5 lakhs to twice the amount

f aggregate funds collected

Fraudulent default in RDS upto 7 years or INR 5 lakhs to 25 crores or three times the amount of profit made

ut of fraudulent default.

Wrongful inducement in relation to UDS 1 year to 5 years and upto INR 10 lakhs Repeated offenders 5 year to 10 years and INR 10 lakhs to 50 crores Failure to file intimation by deposit taker about its business, to the authority

upto 5 lakhs

Offences and Punishment (Sec 21 21-27) 27)

UDS : Unregulated regulated Depo posit it Sche heme me RDS: Regulat ulated ed Depo posit it Sche heme me

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SLIDE 44

Pub ublicat lication ion of

f Ad

Adve vertiseme rtisement nt ( S ( Sec ec- 33 ) 33 )

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No newspaper or other publication of any nature can

promote any soliciting of deposits or any person to become a member of any Unregulated Deposit Scheme.

If any publisher promotes such Unregulated Deposit

Scheme, the appropriate Government may direct such newspaper or publication to publish a 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.

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