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Regulatory Alert: The Banning of Unregulated Deposit Schemes Ordinance, 2019

26 February 2019

Based on the recommendations and report of the Inter-Ministerial Group (“IMG”) for identifying the gaps in the existing regulatory framework for deposit-taking activities and administrative/ legislative measures, including formulation of a new law to cover all relevant aspects of ‘deposit-taking’, the Government of India had come up with Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bills in 2015 and 2016.

On 21 February 2019, the President of India has promulgated The Banning of Unregulated Deposit Schemes Ordinance, 2019 (“Ordinance”). It has been brought with the intention to prohibit the illicit deposit schemes / ponzi schemes etc. and aims to protect the depositors from being defrauded.

This Alert provides an overview on the provisions of the Ordinance.

Key Highlights of the Ordinance:

  • The Ordinance provides a list of Regulated Deposit Schemes, as a result, clearly distinguishing Unregulated Deposit Schemes. It provides that, on and from the date of commencement of the Ordinance –
    • the Unregulated Deposit Scheme shall be banned; and
    • 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.
  • The Ordinance lays down that:
    • the deposit taker shall not commit any fraud in relation to the Regulated Deposit Schemes
    • no person shall induce any other person to invest in, or become member or participate in the Unregulated Deposit Schemes
  • The Ordinance provides for stringent punishment for dealing in Unregulated Deposit Schemes, fraudulent activities and making default in repayment to the depositors in case of Regulated Deposit Scheme.
  • The Ordinance categorizes prize chit or money circulation scheme banned under the provision of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 as Unregulated Deposit Schemes.  
  • The Ordinance provides for establishment of Competent Authorities for enforcing provision of the Ordinance and establishment of Designated Court to trial an offence under the Ordinance.  The Competent Authorities shall have the same powers as vested to a Civil court under the Civil Procedure Code 1908 and the Designated Court may also trial an offence, other than an offence under this Ordinance.

BDO Comments:

  • This Amendment Rules shall come into force w.e.f. 21 February 2019.
  • Initiative by the Government for protecting the money of the investors or depositors and ensuring stringent provisions in case of defaults and aims to address the grievances of the investors or depositors in a meticulous and legal manner.
  • Classification of certain transactions to be exempted as deposits is still awaited.
  • Clarity on the term “way of business”, used in the definition of Unregulated Deposit Schemes should be provided at the earliest to avoid unnecessary confusion.