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Soon, online database of deposit takers

Anish Shah, Partner
M&A Tax and Regulatory

05 March 2019

The government took another step towards investor's protection by issuing the ordinance to ban the Unregulated Deposit Schemes, more commonly known as Ponzi schemes. The intent of this Ordinance is to check illicit deposit activities in the country.

There are operators who take money from small investors and lure them with higher interest rates with an intention to defraud them. The introduction of this ordinance will act as a roadblock for these operators.

As per the ordinance, Unregulated Deposit Schemes are schemes or arrangements under which deposits in the form of money received by way of an advance or loan or in any other form are accepted or solicited by any deposit taker by way of business and are not regulated by any regulator.

No deposit taker shall now be allowed to directly or indirectly promote, operate, issue any advertisement soliciting participation or acceptance of deposits in pursuance of an Unregulated Deposit Scheme. Deposit takers include all possible entities (including individuals) except banks and certain specific entities.

Who is exempt

Individuals are now prevented from taking any deposit or loan from any person other than their relatives. Partnership firms can now take deposits or loans only from relatives of their partners.

Issuance of this ordinance raised concerns amongst small businesses in terms of genuine transactions. These were later clarified by the Ministry of Finance - exempting loans/advances availed by individuals, firms, companies & LLP, etc. in the course of business as per Section 2(4) E, F, I and other provisions.

Further, individuals taking loans or money from relatives or friends for marriage, medical emergency, business needs or any other personal reasons are also not covered within the ambit of the said ordinance.

The ordinance is also not applicable to Regulated Schemes, which are governed by specific regulators, for example, deposits accepted as per provisions of Companies Act or as per various Securities and Exchange Board of India regulations or deposits governed by Reserve Bank of India or National Housing Bank or Insurance and Regulatory Development Authority of India, etc, are exempted from this.

Online repository for information on deposit takers

While the government is yet to appoint a competent authority, the ordinance provides for creation of an online central repository for collating information on deposit takers operating in the country.

Every deposit taker who commences its business on and after the commencement of this ordinance is required to intimate the prescribed authority about its business. The said authority shall maintain an online database containing information on the business of the deposit takers in such form and manner as may be prescribed. This also covers the deposit takers who are already carrying on such business before the introduction of this ordinance.

Small investors who have already invested in such deposits should at least ensure that the deposit taker should intimate its business to the prescribed authority in the manner prescribed.

Penalty, punishment

The Ordinance also provides for punishment ranging from one to 10 years of imprisonment, along with a fine ranging from Rs 2 lakh to 50 crore, to act as a deterrent from committing any offence. Further, it also provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors.

The ban on Unregulated Deposits will encourage people to move to formal systems like banks, non-banking finance companies etc. and it will benefit in the long run, by transforming a part of the existing unorganised activity into an organised one.