The President of India had promulgated the Banning of Unregulated Deposit Schemes Ordinance on 21 February 2019 (Ref: No. 7 of 2019) (Ordinance) which was replaced by the Banning of Unregulated Deposit Schemes Act 2019 on 31 July 2019 (Ref: Act No. 21 of 2019) (Act). In our Ergo dated 7 March 2019 (which can be accessed here) we had provided an overview of the Ordinance and its key highlights. To recap, the Ordinance (and subsequently the Act), amongst other things, bans solicitation and receipt of unregulated deposits, creates a framework for reporting and monitoring of deposit schemes, and sets out a prosecution and penalty mechanism for its enforcement. An ‘Unregulated Deposit Scheme’ means a scheme or arrangement under which deposits are accepted or solicited by a deposit taker by way of a business (and notably not for purposes of business), and such deposit is not regulated by any sectoral regulator or ministry.
As noted in our previous Ergo, while the Ordinance (and subsequently the Act) envisages a robust mechanism to crackdown on Unregulated Deposits Schemes, a significant portion of the implementation of the Act has been delegated to the Central and State Governments, including the designation of relevant authorities, and constitution of courts. The Ministry of Finance, on 12 February 2020 notified the Banning of Unregulated Deposit Schemes Rules 2020 (Rules).
The Rules have come into force with effect from 12 February 2020, and provide for the following:
➢ Information and other particulars to be taken into consideration by officers designated by the appropriate government (Competent Authority) before issuing an order of provisional attachment of the properties of deposit takers who contravene the Act, the manner of making such provisional attachment, and the manner of seeking confirmation of such provisional attachment.
➢ Procedure to be followed by courts constituted to enforce the provisions of the Act (Designated Courts) while determining whether the order of provisional attachment should be made absolute.
➢ Information regarding deposit takers operating in India to be maintained by the central online repository (i.e., an authority appointed by the Central Government) (Repository Authority) in an online database.
➢ Intimation to be made by every deposit taker to the Repository Authority regarding its business.
➢ Retraction of newspaper advertisements that relate to Unregulated Deposit Schemes.
Key Highlights of the Rules
➢ Provisional attachment of property
• Under the Act, the Competent Authority has the power to provisionally attach properties of the deposit taker, or the person soliciting deposits on behalf of the deposit taker. In relation to such attachment of properties, the Competent Authority will have all powers of a civil court under the Code of Civil Procedure of 1908, including summoning witnesses and calling for evidence.
• The Rules set out the information and particulars that the Competent Authority is required to consider before provisionally attaching the property of deposit takers who promote, operate, issue any advertisement soliciting participation or enrolment in, or accept deposits in pursuance of an Unregulated Deposit Scheme. The information to be considered includes:
▪ Any complaint made in relation to the promotion or operation of an Unregulated Deposit Scheme by any person (whether by a depositor or otherwise).
▪ Any information received in relation to the promotion or operation of an Unregulated Deposit Scheme from any government (central, state, or union territory), or any law enforcement agency or agency or body under the charge of such government.
▪ Any information or advertisement (in print or other electronic media) inducing a person to invest in, or become a member or participate in an Unregulated Deposit Scheme.
▪ Any other information regarding the solicitation or acceptance of deposits in contravention of the Act.
• The Competent Authority’s order of provisional attachment is required to (a) be served on (i) the owner of the property, or (ii) any person who claims to be in possession of the property, or (iii) any other person who has an interest in the said property; and (b) published in a leading newspaper (both in the vernacular and in English) having wide circulation in the area or jurisdiction in which the deposit taker is located. Interestingly, the Rules provide that if the Competent Authority is unable to serve the order in accordance with (a) above, publication of the order in a newspaper will be deemed sufficient service. This could potentially lead to Competent Authorities choosing to simply publish the order in a newspaper rather than attempt to serve the order in person.
• The Competent Authority can take possession of (a) immovable property by affixing the order of attachment in a conspicuous place of such immovable property; and (b) movable property by taking actual physical possession and retaining it in his / his assisting officers’ custody. The Competent Authority must maintain a record of the property attached, including details of any expenditure or costs of management incurred and of any income received from the property. Keeping in mind the best interest of the depositors, the Competent Authority is permitted to sell any property which he has taken possession of, and is of perishable nature.
• To make the provisional attachment absolute, the Competent Authority must apply to the Designated Court along with the following details:
▪ Complete list of the property, money or deposits attached.
▪ In case of immoveable property, the name or names and particulars of the owner of the property, any person who claims to be in possession of the property, and any other person who has an interest in the said property.
▪ Record maintained by the Competent Authority in relation to the provisionally attached property.
▪ List of depositors from whom the deposit taker has accepted or collected deposits.
▪ List of dues owed to depositors including amounts that may be realised from sale of any attached property of the deposit taker.
• The Designated Court (which may regulate its own procedure, guided by principles of natural justice and the procedure set out in the Code of Civil Procedure 1908) may confirm, vary or cancel a provisional attachment order of the Competent Authority after following due process and taking into account responses to the show cause notice issued to the owner of the property and the deposit taker in question, and other relevant material placed before the Designated Court.
➢ Central database and intimation to Repository Authority
• The Repository Authority is required to maintain and operate an online portal accessible by the public. The portal shall contain a database which shall provide (a) list of deposit takers operating in India, the extent and areas of their operation; (b) any action taken under any law for the time being in force against any deposit taker for collection of deposits; and (c) updates regarding proceedings for restitution of depositors.
• Every deposit taker is mandated to intimate the Repository Authority, in the Form annexed to the Rules, about its business within 30 days from commencing the business or continuing the business of a deposit taker. The reporting requirements apply to all deposit takers, including those accepting a deposit under a regulated deposit scheme. Companies accepting deposits under the Companies Act 2013 are also required to comply with the reporting requirement.
• The details to be intimated are (a) name and registered address of the deposit taker; (b) address of branches (if any) of the deposit taker; (c) unique identification number of registration / incorporation; (d) authority to carry on a deposit taking business; (e) name and address of persons responsible for the management of the deposit taker (CEO and directors/ partners, proprietors / board); and (f) permanent account number (PAN) of the deposit taker.
• The Central Government is yet to notify the designation of a Repository Authority.
➢ Retraction of advertisement
• Newspapers or publications (print or electronic) which have published advertisements or statements promoting or inducing deposits as part of an Unregulated Deposit Scheme may be directed by the appropriate government to publish a full, fair, and unequivocal retraction, free of cost, within two days from the date of the appropriate government’s direction. The retraction is required to be as prominent as the original advertisement, statement or information and in such a format and font that immediately catches the attention of any reader.
• The appropriate government may direct the re-publication of the retraction if it is of the view that the retraction has not sufficiently engaged the attention of the readers.
➢ Other provisions
• The Rules prescribe for the authorisation of police officers to search for, and seize information, records, and documents that relate to an ongoing investigation in connection with Unregulated Deposit Schemes.
• The Rules also prescribe guidelines for impounding and retention of records produced before the Competent Authority, including in relation to the time period for retention (usually three months), manner of making copies or extracts of the records impounded, and the process for a person to object to the impounding of records by the Competent Authority.
The menace of fraudulent and dodgy deposit schemes and arrangements has impacted millions of Indians in the past. While it has taken the Central Government almost seven months to frame and notify the Rules, with the Rules now being in force, and various States having notified their Competent Authorities and Designated Courts (or in the process thereof), the implementation of the Act will see the light of day.