Banning of Unregulated Deposit Schemes Act, 2019: Explained

The Banning of Unregulated Deposit Schemes Act was promulgated by the President of India as an Ordinance and it  was  later  replaced by the Banning of Unregulated Deposit Schemes Act,2019 on the 31^st of July 2019.

By Victor Chongtham

Q1. What is the aim and objective of the act?

Ans. The aim and objective of the BUDS Act is to provide a complete and thoroughly detailed mechanism to ban the Unregulated Deposit Schemes, excluding the deposits that are taken in the ordinary course of business, and to protect the interests of the depositors and for the matters related to the same.

With the commencement of this act, all the unregulated deposits schemes would be banned, and no deposit taker can directly or indirectly, promote, regulate or issue any announcements that solicit participation or accept any such deposits under the specific scheme.

Q2. What the term deposit means?

Ans. As per clause 4 of Section- 2 of the Act, deposit means the amount of money received by way of an advance or loan or in any other form, by any deposit taker with the promise to return whether after a specific period or otherwise, either in cash or in-kind or in the form of the specific service, with or without any benefit in the form of interest, bonus, profit or in any form.

Q3. What is excluded from the list of deposits?

Ans. The following kinds of amounts are considered an exception to the definition of deposits under this Act:

1. amounts obtained as a loan from a scheduled bank or co-operative bank

or any bank or banking company included and defined under section-5 of the Banking Regulation Act, 1949.

1. amounts received as loans or financial assistance from the Public Financial Institutions, notified by the Central Government after deliberations with the Reserve Bank of India,

or any non-banking financial company defined under clause f of Section- 45-I of the Reserve Bank of India Act, 1934, and is registered with the RBI or RFI or insurance companies.

1. amounts received from the “appropriate government” or as understood as the recognized Government authorities under clause 1 of section 2,

or any source which is guaranteed by the “appropriate government”,

or any statutory authority constituted under the Act of Parliament or a State Legislature,

1. Foreign Governments, foreign or international banks, multilateral financial institutions, foreign government-owned financial institutions or a person resident outside India

Subject to the foreign exchange management act,1999, and the regulation therein contained.

1. Contributions towards the capital by partners of any partnership firm or limited liability partnership
2. Individual loan by way of relatives, or amounts received by any firm by way of loan from the relatives of any partners
3. Credits by a buyer from a seller on the sale of any property could be movable or immovable
4. An assets re-construction company which is registered with the Reserve Bank Of India under section 3 of the Securitization and Reconstruction of  the Financial Assets and Enforcement of the Security Interest Act, 2002

1. Deposits made under section 34 of the same act,

Or the amount accepted by a political party under section29B of the Representation of the People Act, 1951

1. Periodic payment made by the members of self-help groups operating within ceilings prescribed by the governments of the State and Union Territories,
2. any other amounts collected for such purpose and such ceilings under the State Government regulations

1. in the purpose of business and bearing genuine connections to-

• payment, advanced or a part payment, for the supply or hire of goods and services and is repayable,
• advance received in the connection of immovable property under any agreement or arrangement and its specific terms
• security and dealership deposited for the performance of a contract of supply of goods and services
• advance for a long term project for supply of capital goods in the specified terms with specific exceptions provided under the act

Q4. Who is a depositor?

Ans. Under the act, a depositor is:

1. Individual or group of individuals,
2. Proprietorship concern,
3. Partnership firm (registered or unregistered)
4. Limited liability partnership under the Limited Liability Partnership Act, 2008
5. Company
6. Association of persons
7. Trust, private trust governed under the Indian Trusts Acts, 1882, or public trust, registered or unregistered
8. a co-operative society or a multi-state co-operative society

1. any other arrangements, receiving or soliciting deposits

Q5. Are there any exclusions for depositors?

Ans. There are two exclusions from the list of persons that can make deposits, a corporation incorporated in the Parliament or State Legislature Act and a banking company, corresponding a new bank or any banking institution defined under the Banking Regulation Act, 1949, namely.

Q6. What are unregulated deposit schemes?

Ans. The act under clause 17 of section-2 states them as schemes or arrangements under which the deposits are accepted or solicited by any deposit taker in the way of business and is not managed by any sectoral ministry or administrative authority and is not given under the first schedule of the act.

Q7. Which authorities are considered competent and what are their roles?

Ans. Section-7 of the Banning of Unregulated Deposit Schemes Act authorizes the Government to appoint one or more officers above the rank of secretary to the Government, as the competent authority for the purposes related to this act. The government may also appoint other officers as they think fit to assist in discharging their duties for the function of the Act.

Under this act, the Competent Authority has the following roles-

a.Based on information and particulars provided by this act that any deposit taker is soliciting deposits in contradiction to the Section 3, the competent authority may order, in writing, to provisionally attach the deposits of the deposit taker and the money or property acquired by them, in their name or any other person name on behalf of theirs as prescribed.

1. The competent authority may be given the same powers as vested under the Code of Civil Procedure, 1908 to the civil court in the matters related to conducting investigations and inquiries in particular,

• discovery and inspection,
• enforcing the attendance of persons related,
• compelling the production of records,
• receiving evidence on affidavits,
• issuing commissions for examinations of documents and witnesses
• any other in the relation matters, as prescribed

1. The competent authority has the power to summon any person who he considers necessary for the proceedings and that person shall be bound to attend in person or through assigned agents as directed.
2. The competent authorities’ proceedings shall be deemed as judicial proceedings as under section 193 and section 228 of the Indian Penal Code, 1860.
3. The officer assigned by the competent authority may impound and retain any person concerning the matters in custody for a period he thinks fit, but not exceeding 3 months or without the approval of the Competent Authority.
4. In case the competent authority has reason to believe of any default, it may direct the deposit taker to furnish the particulars or statements related or connected to the deposits received.
5. The competent authority shall share all the information it receives under section 29, with the Central Bureau of Investigation and the designated authority under section- 9 of the act.
6. As per clause 1 of section-13 of the act, the competent authority shall attach the provisional claims of the depositor over the repayment of any debts, taxes, revenues, and cesses as payable to the appropriate government or local authority.

1. As per clause 3 of section-13 of the act, the competent authority shall attach all information related and connected in the matters to the Designated Court.

1. The competent authority shall open a bank account in a scheduled bank for purposes related to financial matters.

Q8. Which court is allocated or appointed to hear on matters related to the provisions of this act?

Ans. The government of India in consultation with the chief justice of the concerned High Court may constitute or create a court known as “Designated Court” for such areas or cases. The court will be presided over by a Judge, not below the rank of a District or Sessions Judge or an Additional District or Sessions Judge. The jurisdiction concerning the matters relating to it will lie solely with the Designated Court.

Q9. What are the roles of the Designated Courts under this act?

1. The Designated Court shall issue a notice of show cause under section -14 of the act, to the deposit taker and any person whose property is attached under the same, within thirty days from the date of issue.
2. The Designated Court shall issue a notice to all persons represented to it as having any likely claim to the interest or title in the property attached.
3. The Designated Court shall prescribe an order, which makes the provisional order absolute or releasing a portion of it from the attachment or canceling the provisional order on the attachment and order directions to the competent authority to sell the property in a private or public sale.
4. In case of malafide transferees by the deposit taker, the Designated Court by notice summons the person in question to appear on a given date to specify in a notice of show cause the information relating to a property.

Q10. What are the powers of the Designated Court?

1. The Designated Court has the power to approve the statements and particulars of the dues of the deposit taker from the debtors.
2. The Designated Court is empowered to assess the value of the assets of the deposit taker and create a list of the dues.
3. The Designated Court has the power to pass an order for full payment to the depositors by the competent authority or order for proportionate payment in case the fund is insufficient.
4. The Designated Court is empowered to direct any person who has made a profit or averted loss by indulging in any transaction or activity related to the contradiction of the act, to give out an amount for the wrongful gain made in the same.

Q11.  What are the punishments laid down by the action  in cases of default?

Ans. The cognizance of the following offences is taken by the Designated Court or the Regulator of such deposit schemes. The punishments for the offenses are as follows:

1. In case of default under section-3 of the act,

• the deposit taker that solicits the deposits shall be punished with imprisonment for a term not less than one year and not more than five years, with a fine not less than 2 lakh rupees and can extend up to 10 lakh rupees.
• the deposit taker that accepts such deposits, shall be punished with imprisonment for a term not less than 2 years extending up to 7 years, with a fine not exceeding 10 lakh rupees but not less than three lakh rupees.
• The deposit taker who fraudulently defaults in repayment shall be punished with imprisonment for a term not exceedingly more than 10 years and minimum for 3 years, with a fine of minimum 5 lakh but may extent to double of the aggregate funds collected in the Unregulated Deposit Schemes.

1. In case of contradiction of section-4 of the act, the deposit taker is punished with imprisonment for a term extending to 7  years and a fine, not less than 5  lakh rupees but may exceed to 25 crore rupees or three times of the profit made out by the fraudulent act, or with both.
2. In case of default under section-5 of the act, the deposit taker shall be punished with imprisonment for a term not less than a year but can extend up to 5 years and with a fine extending to 10  lakh rupees.
3. In case of a repeat offender under this act, the person shall be convicted with an imprisonment term not less than 5  years but may extend to 10  years and is accompanied with a fine up to 50  crore rupees and not less than 10 lakh rupees.
4. Punishment for the offenders other than individuals, who at the time of the commission of the offence was in charge, or responsible in the conduct of the business, as well as the deposit taker shall be deemed guilty and punished per the section 25 of the act.
5. In case of default under section 10 of the act, whoever fails to provide details, statements, and information required shall be punished with a fine extending up to five lakh rupees.

Q12. What is the nature of the offences under this act?

Ans. The offenses under the Banning of Unregulated Deposit Schemes are non-bailable and cognizable. The police officer shall inform the competent authorities of the default under this act.

Q13. When does the Central Bureau of Investigation inquire and investigate in the cases related?

Ans. The CBI is called for investigation and inquiry for the matters related and connected to the act when the competent authority believes that:

• The deposit taker, depositors or the properties involved are located in more than one state or UT in India or outside, and
• The total value of the amount is of such magnitude that it may significantly affect the public interest.

Q14. What if there is a publication of the advertisement of Unregulated Deposit Scheme?

Ans. In such cases, under section-33 of the act, the Designated court may order such publication or newspaper to retract such information free of cost, if it is promoting or soliciting deposits for inducing any person to become a member of such a scheme.

Q15. Do the Government at Centre and State levels have powers to make rules for this act?

Ans. Yes, the Central Government is empowered to make rules under section- 37 of the act, by the way of notifications for the protection of actions taken in good faith by the competent authorities and members of the same. Under section-40, the Central Government is empowered to amend the first schedule if it considers necessary by the way of notifications and lay it before the two Houses of the Parliament.

Similarly, section-38 empowers the State Legislatures to make rules in consultation with the Central Government for carrying out the functions of the act.

(Victor Chongtham is a lawyer based in Imphal)