THE BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019

1. Presentation by : CA. Naveen Khariwal G Chartered Accountant No. 248, 3rd Main Road, Chamrajpet, Bangalore – 560 018. naveenkhariwalg@gmail.com Mob No : 9880683725 THE BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019 H.C.Khincha & Co

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4. PONZI SCHEMES AND HOW TO CATCH THEM SOME PONZI SCHEMES ARE BASED ON RETURNS ON INVESTMENT, OTHERS LIKE PYRAMID’S ARE BASED ON NUMBER OF RECRUITS.

6. IMA Jewels for alleged ponzi scheme Findings of SIT From the raids at the office of IMA Jewels and his third divorced wife TabassumBano. It said in a press release that it found ₹33 crore worth jewels, precious gems and documents. During the raid at IMA Jewels' showroom at Jayanagar, Bangalore. SIT seized 43 kg gold worth ₹13 crore, 5,864 carat of diamond worth ₹17.6 crore, 520 kg of silver worth ₹1.5 crore and precious gems worth ₹1.5 crore. The SIT found 1.5 kg of gold, 1.5 kg silver and ₹2.69 lakh cash from Tabassum's house in Shivajinagar. Identified 26 immovable properties, including commercial buildings, land, school property and apartments, which are said to be of Mansoor Khan.

7. IMA Jewels for alleged ponzi scheme MOTHER OF ALL PONZI SCAMS: • Rs 5,000 crore total scam.  • 2%-4% returns promised. • Rs 400 crore allegedly with MLA Roshan Baig. • 30,000 persons cheated • People not only from Bengaluru and Karnataka, but also from Hyderabad, neighbouring Tamil Nadu and New Delhi have invested in the company.

8. Meaning of Ordinance (as per Wikipedia) Ordinances are laws that are promulgated by the President of India (Indian Parliament) on the recommendation of the Union Cabinet. They can only be issued when Parliament is not in session. They enable the Indian government to take immediate legislative action. Ordinances cease to operate either if Parliament does not approve of them within six weeks of reassembly, or if disapproving resolutions are passed by both Houses. It is also compulsory for a session of Parliament to be held within six months. H.C.Khincha & Co

9. Article 123 of the Constitution of India Article 123 of the Constitution of India empowers the President of India to promulgate an Ordinance when the Parliament is not in session provided that the President is satisfied that the circumstances exist requiring him to take such immediate legislative action albeit on the basis of aid and advice of the Council of Ministers. Thus, the constitutional idea of an Ordinance is that of a legislative tool aimed at addressing any immediate requirement arising during recess of the Parliament. H.C.Khincha & Co

10. STATEMENT OF OBJECTS AND REASONS (THE BANNING OF UNREGULATED DEPOSIT SCHEMES BILL, 2018) Non-banking entities are allowed to raise deposits from the public under the provisions of various statutes enacted by the Central Government and the State Governments. However, the regulatory framework for deposit taking activity in the country is not seamless. The regulators operate in well defined areas within the financial sector by regulating particular kinds of entities or activities. For instance, Non-Banking Financial Companies are under the regulatory and supervisory jurisdiction of the Reserve Bank of India. Similarly Chit Funds, Money Circulation including multi-level marketing schemes and schemes offered by co-operative societies are under the domain of the respective State Governments. H.C.Khincha & Co

11. STATEMENT OF OBJECTS AND REASONS (THE BANNING OF UNREGULATED DEPOSIT SCHEMES BILL, 2018) In the same manner, the Collective Investment Schemes come under the purview of the Securities and Exchange Board of India. Despite such diverse regulatory framework, schemes and arrangements leading to unauthorised collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes promising high returns or other benefits, are still operating in the society. H.C.Khincha & Co

12. STATEMENT OF OBJECTS AND REASONS (THE BANNING OF UNREGULATED DEPOSIT SCHEMES BILL, 2018) 2. The Central legislations such as the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and the Chit Funds Act, 1982 and the legislations enacted by the State Governments have not been able to completely address the issue of unregulated deposit schemes run by unscrupulous elements. This regulatory gap was highlighted in the twenty first Report of the Parliamentary Related Standing Committee on Finance (Sixteenth Lok Sabha) titled as “Efficacy of Regulation of Collective Investment Schemes, Chit Funds, etc.”. The said Committee in its Report has recommended the requirement of “appropriate legislative provisions, coupled with effective administrative and enforcement measures in order to protect the hard-earned savings and investments made by millions of people”. Presently, there are considerable differences among State laws in protecting the interests of depositors, and many unregulated deposit taking schemes operate across State boundaries. H.C.Khincha & Co

13. STATEMENT OF OBJECTS AND REASONS (THE BANNING OF UNREGULATED DEPOSIT SCHEMES BILL, 2018) 3. In view of the above, it becomes necessary to have a Central legislation to ensure a comprehensive ban on unregulated deposit taking activity and for its effective enforcement. The proposed Bill, namely, the Banning of Unregulated Deposit Schemes Bill, 2018, aims to prevent such unregulated deposit schemes or arrangements at their inception and at the same time makes soliciting, inviting or accepting deposits pursuant to an unregulated deposit scheme as a punishable offence. The Bill seeks to put in place a mechanism by which the depositors can be repaid without delay by attaching the assets of the defaulting establishments. H.C.Khincha & Co

14. Events leading to promulgation of ordinance Referred to Standing Committee Aug, 10, 2018 Introduced in Loksabha July 18, 2018 Standing Committee Report Jan 3, 2019 President promulgated the Ordinance on Feb 21, 2019 Passed in Loksabha Feb 13, 2019 H.C.Khincha & Co

15. The need of UDS Rising instances of people being defrauded by illicit deposit taking schemes in the various parts of the country. As per the details provided by Secretary, Department of Financial Services to the members of the Standing Committee on 26th September 2018. H.C.Khincha & Co

16. Present Regulatory Structure The Indian non-banking financial sector is large, diverse and complex. Non-banking entities are allowed to raise deposits from the public under the provisions of various statutes enacted by the Central Government and the State Governments. For instance – H.C.Khincha & Co

17. Why Ordinance route? The Twenty-First Report of the Parliamentary Related Standing Committee on Finance (Sixteenth Lok Sabha) titled as Efficacy of Regulation of Collective Investment Schemes, Chit Funds, etc. highlighted the regulatory gap. The said Committee in its Report has recommended the above-referred requirement of appropriate legislative provisions, coupled with effective administrative and enforcement measures in order to protect the hard-earned savings and investments made by millions of people. In line with these recommendations, our Hon'ble Finance Minister in his Budget Speech 2017 mentioned that bill to curtail the menace of illicit deposits will be introduced. He also acknowledged the urgent need to protect the poor and gullible investors from set of dubious schemes, operated by unscrupulous entities who exploit the regulatory gaps. Post this; the UDS Bill was introduced in Lok Sabha on 18th July 2018. It was referred to the Standing Committee of Finance on 10th August 2018 and the Standing Committee gave its report on 3rd January 2019 and was finally passed in Lok Sabha on 13th February 2019. It could not be passed in the Rajya Sabha as the house is not in session; it has been introduced as an Ordinance by honourable President of India on Feb 21, 2019. H.C.Khincha & Co

18. Application of Mischief Rule of Interpretation The Ordinance operates in a limited sphere and has to be interpreted in accordance with the Mischief Rule of Interpretation of Statutes. The Mischief Rule of Interpretation requires that the statute be interpreted keeping in mind the mischief that it aims at punishing. This Rule of Interpretation would be employed when the Statute in question is introduced as a gap-filler i.e. to address what the laws already enacted on similar subjects failed to capture. That the Deposit Ordinance is required to be interpreted in accordance with the Mischief Rule is also clear by the way Statement of Objects and Reasons drafted. H.C.Khincha & Co

19. It is noteworthy that the Lower House of the Parliament, on February 13, 2019, had passed The Banning of Unregulated Deposit Schemes Bill, 2018 ("the Deposit Bill“). However, the same could not be taken up for consideration of the Upper House and therefore the Bill could not be enacted as a law. The Statement of Objects and Reasons as contained in the Deposit Bill provides an insight at the mischief that it attempts to punish. Following is the relevant portion of the Statement of Object and Reasons: "Non-banking entities are allowed to raise deposits from the public under the provisions of various statutes enacted by the Central Government and the State Governments. However, the regulatory framework for deposit taking activity in the country is not seamless………………… Despite such diverse regulatory framework, schemes and arrangements leading to unauthorised collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes promising high returns or other benefits, are still operating in the society……….. H.C.Khincha & Co

20. The Central legislations such as the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and the Chit Funds Act, 1982 and the legislations enacted by the State Governments have not been able to completely address the issue of unregulated deposit schemes run by unscrupulous elements. This regulatory gap was highlighted……………………………………………. In view of the above, it becomes necessary to have a Central legislation to ensure a comprehensive ban on unregulated deposit taking activity and for its effective enforcement." Thus the Deposit Ordinance only aims to address what is left to be addressed by various laws already enacted on the subject of deposits by Central and State Legislatures. Application of Mischief Rule would thus be directly attracted and would require that the Deposit Ordinance be interpreted narrowly and strictly. H.C.Khincha & Co

21. Preamble to the Ordinancestates as follows: "An Ordinance to provide for a comprehensive mechanism to ban the unregulated deposit schemes and to protect the interest of depositors and for matters connected therewith or incidental thereto“ H.C.Khincha & Co

22. Press release / tweet posts issued by the Government: According to press release and Tweets posts issued by the Government : (a)The Ordinance does not stop any entity from seeking funds for its business or an individual raising a loan from relatives to tide over a crisis. Similarly, the Ordinance, 2019 does not ban small and medium enterprises (SMEs) from receiving loans in the course of, or for the purpose of, business. (b)"There is no ban on any amount received in the course of, or for the purpose of, business and bearing a genuine connection to such business" the finance ministry said, citing Section 2(4)(l) of the Ordinance. H.C.Khincha & Co

23. c) 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 Ordinance. 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). d) Small businesses, proprietorship, partnership firms: "Banning of Unregulated Deposit Ordinance-2019, exempts Individual, Firm, Companies & LLP etc. for taking any loan and deposit for their course of business as per section 2(4) (e) /(f)/ (l) and other provisions." H.C.Khincha & Co

24. e. "The Advance payment for hire or supply of goods and covers genuine business needs and trade advances among others are permitted so that those who depend on small short-term credit or deposits for various needs do not face any problems". f. 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. g. 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). On the issue of no monetary thresholds in the law, the Government said this was to prevent illegal operators from running such schemes by taking money from the poor in small amounts to escape the provisions. H.C.Khincha & Co

25. The Banning of Unregulated Deposit Schemes Ordinance, 2019 8 Chapters 42 Sections 2 Schedules H.C.Khincha & Co

26. Prescribed Offences The Ordinance broadly prescribes three different types of offences and prescribes severe punishment and heavy pecuniary fines for the same. The offences are – • Running of Unregulated Deposit Schemes; • Wrongful inducement in relation to Unregulated Deposit Schemes; and • Fraudulent default in Regulated Deposit Schemes. H.C.Khincha & Co

27. CHAPTER I PRELIMINARY Short title, extent and commencement 1. (1) This Ordinance may be called the Banning of Unregulated Deposit Schemes Ordinance, 2019. (2) It extends to the whole of India except the State of Jammu and Kashmir. (3) It shall come into force at once. H.C.Khincha & Co

28. Some important definitions Unregulated Deposit Scheme As per section 2(17) of the Ordinance, the term 'Unregulated Deposit Scheme' means: 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. H.C.Khincha & Co

29. Scheme or an Arrangement To qualify as UDS, it should first be a Scheme or an Arrangement. Since these are not defined in the Ordinance, let us have a look at its definition in the Oxford's Dictionary. Scheme Large-scale systematic plan or arrangement for attaining some particular object or putting a particular idea into effect. Arrangement A plan or preparation for a future event. So can a one-off transaction be considered as UDS? H.C.Khincha & Co

30. Under which deposits are accepted or solicited It must be a 'Deposit' : The amount accepted / solicited must qualify to be a 'deposit' within the definition prescribed under section 2(4) of the Ordinance. H.C.Khincha & Co

31. By any deposit taker As per Section 2(6) deposit taker means (i) any individual or group of individuals; (ii) a proprietorship concern; (iii) a partnership firm (whether registered or not); (iv) a limited liability partnership registered under the Limited Liability Partnership Act, 2008; (v) a company; (vi) an association of persons; H.C.Khincha & Co

32. (vii) a trust (being a private trust governed under the provisions of the Indian Trusts Act, 1882 or a public trust, whether registered or not); (viii) a co- operative society or a multi-State cooperative society ; or (ix) any other arrangement of whatsoever nature, receiving or soliciting deposits, but does not include— (i) a Corporation incorporated under an Act of Parliament or a State Legislature; (ii) a banking company, a corresponding new bank, the State Bank of India, a subsidiary bank, a regional rural bank, a co-operative bank or a multi- State co-operative bank as defined in the Banking Regulation Act,1949; H.C.Khincha & Co

33. Who is a deposit taker? Section2(6) Individual or group of individuals Proprietorship concern Partnershipfirm LLP Company Association of person Receiving or soliciting deposits by Cooperative Society or a Multi-State Co- operative Society Trust Any other arrangement Note: Though HUF is not specifically mentioned, in my view it would get covered under any otherarrangement. H.C.Khincha & Co

34. Definitions of 'by way of' and 'business' as per Oxford's Dictionary are reproduced below – By Way Of So as to pass through or across; Constituting; By means of Business A person's regular occupation, profession, or trade; Commercial Activity H.C.Khincha & Co

35. By way of business Deposits are accepted or solicited by any deposit taker by way of business. The necessary inference of this language is that only when the acceptance or solicitation of Deposits by anyone is done by way of business, does it become a UDS. Thus, by implication, it can be seen that, taking deposits or soliciting them has to be the sole business goal of the Deposit Taker and that deposit taking or soliciting them should be the primary business function of the deposit taker. Thus, only the deposits accepted or solicited by such deposit takers whose business in itself is to earn out of receiving deposits in the form of an arbitrage of interest rates are the only ones within the sweep of the ban under the Ordinance. Thus, any deposit taker who accepts deposits either for personal purposes or for the purpose of his (non-deposit taking) business would not be a subject matter of ban imposed under this Ordinance. H.C.Khincha & Co

36. Which is not a Regulated Deposit Scheme (RDS) as specified under column (3) of the First Schedule. Any Scheme which is a "Regulated Deposit Scheme" ("the RDS") as per Column (3) Of First Schedule to the Ordinance is not UDS. The Ordinance, in its First Schedule seeks to classify many such Deposit Schemes which are all regulated by various laws and authorities in India and therefore they are all RDS and thus not a subject matter of ban under the Ordinance. H.C.Khincha & Co

37. Regulated Deposit Schemes As per section 2(14) of the Ordinance, the term 'Regulated Deposit Scheme' means the Schemes specified under column (3) of the First Schedule, which are – • Schemes regulated by Securities and Exchange Board of India (i) Collective Investment Schemes (ii) Alternative Investment Funds (iii) Funds are managed by a portfolio manager (iv) Schemes under Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (v) Amount received as subscriptions to a mutual fund (vi) Any other scheme or an arrangement registered under SEBI Act, 1992 H.C.Khincha & Co

38. Schemes regulated by the Reserve Bank of India (i) Scheme under which deposits are accepted by NBFCs (ii) Scheme or an arrangement under which funds are accepted by Business Correspondents and Facilitators of banks (iii) Scheme or an arrangement under Payment and Settlement Systems Act, 2007 (51 of 2007). (iv) Any other scheme or an arrangement regulated under the Reserve Bank of India Act, 1934 • Schemes under the Insurance Regulatory and Development Authority of India. • A contract of insurance H.C.Khincha & Co

39. Schemes of State Government or Union territory Government (i) Scheme or an arrangement made by a co-operative society (ii) Scheme or an arrangement conducted as a chit business with the previous sanction of the State Government. (iii) Scheme or an arrangement regulated by any enactment relating to money lending which is for the time being in force in any State or Union territory. (iv) Scheme or an arrangement by a prize chit or money circulation scheme under section 11 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 H.C.Khincha & Co

40. Scheme of National Housing Bank Scheme or an arrangement for acceptance of deposits registered under the National Housing Bank Act, 1987 Scheme of Pension Fund Regulatory and Development Authority • Any scheme or an arrangement under the Pension Fund Regulatory and Development Authority Act, 2013 • Scheme of Employees' Provident Fund Organisation Employees' Provident Fund and Miscellaneous Provisions Act Any scheme, Pension Scheme or Insurance Scheme framed under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 • Scheme of Multi-State Co-operative Societies Any scheme or an arrangement for acceptance of deposits under the Multi-State Co-operative Societies Act, 2002 (39 of 2002) H.C.Khincha & Co

41. Schemes of Ministry of Corporate Affairs, Government of India (i)Deposits accepted or permitted under the Companies Act, 2013 (ii)Deposits accepted by a company declared as a Nidhi or a Mutual Benefit Society under section 406 of the Companies Act, 2013 • Scheme by any regulatory body Deposits accepted under any scheme or an arrangement registered with any regulatory body in India constituted or established under a statute; and • Scheme of Central Government Any other scheme as may be notified by the Central Government under this Ordinance. H.C.Khincha & Co

42. Deposit Section 2(4) of the Ordinance defines the term 'deposit’ 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- (a) amounts received as loan from a scheduled bank or a co-operative bank or any other banking company as defined in section 5 of the Banking Regulation Act, 1949; (b) amounts received as loan or financial assistance from the Public Financial Institutions notified by the Central Government in consultation with the Reserve Bank of India or any non-banking financial company as defined in clause (f) of section 45-1 of the Reserve Bank of India Act, 1934 and is registered with the Reserve Bank of India or any Regional Financial Institutions or insurance companies; H.C.Khincha & Co

43. (c) amounts received from the appropriate Government, or any amount received from any other source whose repayment is guaranteed by the appropriate Government, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature; (d) amounts received from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Government owned development financial institutions, foreign export credit collaborators, foreign bodies corporate, foreign citizens, foreign authorities or person resident outside India subject to the provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder; H.C.Khincha & Co

44. (e ) amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership; (f) amounts received by an individual by way of loan from his relatives or amounts received by any firm by way of loan from the relatives of any of its partners; (g) amounts received as credit by a buyer from a seller on the sale of any property (whether movable or immovable); H.C.Khincha & Co

45. (h) amounts received by an asset re-construction company which is registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (i) any deposit made under section 34 or an amount accepted by a political party under section 29B of the Representation of People Act, 1951; (j) any periodic payment made by the members of - the self-help groups operating within such ceilings as may be prescribed by the State Government or Union territory Government; H.C.Khincha & Co

46. (k) any other amount collected for such purpose and within such ceilings as may be prescribed by the State Government; (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; H.C.Khincha & Co

47. (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 ): Provided that if the amounts received under items ( i) to (iv) become refundable, such amounts shall be deemed to be deposits on the expiry of fifteen days from the date on which they become due for refund: Provided further that where the said amounts become refundable, due to the deposit taker not obtaining necessary permission or approval under the law for the time being in force, wherever required, to deal in the goods or properties or services for which money is taken, such amounts shall be deemed to be deposits. H.C.Khincha & Co

48. Explanation.— For the purposes of this clause,— (i) in respect of a company, the expression “ deposit” shall have the same meaning as assigned to it under the Companies Act, 2013; (ii) in respect of a non-banking financial company registered under the Reserve Bank of India Act, 1934, the expression “ deposit” shall have the same meaning as assigned to it in clause (bb) of the section 45-1 of the said Act; (iii) the expressions “ partner” and “ firm” shall have the same meanings as respectively assigned to them under the Indian Partnership Act, 1932; (iv) the expression “ partner” in respect of a limited liability partnership shall have the same meaning as assigned to it in clause (q) of section 2 of the Limited Liability Partnership Act, 2008; (v) the expression “ relative” shall have the same meaning as assigned to it in the Companies Act, 2013; H.C.Khincha & Co

49. Analysis of Deposit - Section 2(4) Section 2(4) of the Ordinance defines the term 'deposit'. As per the scheme of Ordinance, the definition of term 'deposit' shall have different meanings for different category of persons. Category 1 - Meaning of 'Deposit' in case of Companies – In respect of a company, the expression 'deposit' shall have the same meaning as is assigned to it under the Companies Act, 2013; Category 2 - Meaning of 'Deposit' in case of Non-Banking Financial Companies – In respect of a non-banking financial company registered under the Reserve Bank of India Act, 1934, the expression 'Deposit' shall have the same meaning as is assigned to it in clause (bb) of the section 45-I of the said Act; Category 3- Meaning of 'Deposit' in case of persons other than Companies and Non-Banking Financial Companies – In such cases a deposit means any money received as loan or advance by a deposit taker with a promise to return the same, 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. H.C.Khincha & Co

50. Analysis of Deposit – Section 2(4) An amount of money received • by way of advance or loan or in any other form • not in kind By any deposit taker • Means an individual, group of individuals, proprietorship concern, partnership firm, LLP, Company, AOP, Trust (private or public),co-operativesocietyoranyotherarrangement. • Does not include a Corporation incorporated under Act of Parliament or State Legislature, Banking company, SBI, RRBs, Co-operative bank or a Multi-state co-operative bank as defined in Banking RegulationAct, 1949. 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 H.C.Khincha & Co