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Lecture meeting at Bombay Chartered Accountants’ Society
28th March 2019
CA Sandeep Shah
The Banning of Unregulated Deposit Schemes
Ordinance, 2019
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2
Abbreviations
Abbreviation Full Form
ARC Asset Reconstruction Companies
CIS Collective Investment Schemes
EPFO Employees' Provident Fund Organisation
FEMA Foreign Exchange Management Act
IRDA Insurance Regulatory and Development Authority of India
LLP Limited Liability Partnership
MCA Ministry of Corporate Affairs
MPID Maharashtra Protection of Interest of Depositors
NBFC Non Banking Financial Companies
NHB National Housing Bank
PFRDA Pension Fund Regulatory and Development Authority
RBI Reserve Bank of India
RDS Regulated Deposit Schemes
SARFAESI Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest
SEBI Securities and Exchange Board of India
UDS Unregulated Deposit Schemes
Genesis
Salient features
Key definitions
Applicability & Exemptions
Challenges & Confusions
Administration
Penalties
Auditor’s Role
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Coverage
4
Scams under the schemes
5
Types of schemes
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Ponzi
A form of fraud that lures
investors and pays profits to
earlier investors with funds
received from more recent
investors. E.g. Prize Chit
Pyramid
A business model that
recruits members via a
promise of payments or
services for enrolling others
into the scheme. E.g. Multi-
level marketing
Background
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• Accepting money from public involves huge responsibility and therefore it needs to be highly
regulated.
• RBI regulates deposits accepted by NBFC’s, SEBI regulates mutual funds, State and Union Territory
Governments regulates chit funds, MCA oversees deposit taking companies other than the NBFC’s
and NHB regulates Housing Finance Companies.
• Despite this, non-compliant companies and dubious individuals have defrauded, predominantly the
poor and illiterate through illicit deposit taking schemes.
Reserve Bank of India Act, 1934
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SECTION 45I Carrying on business of
45I(a) Business of a non-banking
financial institution’’45I (c) Financial institution 45I (f) Non Banking
Financial Company
means Non banking institution carries on as its business or
part of its business
Financing..
acquisition of shares..
letting or delivering of any goods to a hirer ..
of insurance business
managing, conducting ..chits, kurries
collecting, for any purpose or under any scheme or
arrangement
Means- Company
Corporation
Co.op society
a financial institution which is a company;
a NBI which is a company & has as its
principal business the receiving of
deposits, under any scheme or
arrangement or lending
Such other NBI as specified..
Maharashtra Protection of Interests of Depositors (in
Financial Establishments) Act, 1999
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• Section 2 (c) "deposit" includes and shall be deemed always to have included any receipt of
money or acceptance of any valuable commodity by any Financial Establishment to be
returned 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
• Section 2 (d)"Financial Establishment" means any person accepting deposit under
any scheme or arrangement or in any other manner but does not include a
corporation or a co-operative society owned or controlled by any State Government
or the Central Government or a banking company as defined under clause (c) of
section 5 of the Banking Regulation Act, 1949 (10 of 1949)
Background
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• The Standing Committee in its Seventieth report cited more than 1,000 cases of defrauding through
illicit deposit schemes in the past 4 years itself. The main cause for this is regulatory gaps and lack of
strict administrative measures.
• This bill was first introduced in Lok Sabha on 18th July, 2018. Subsequently, “The Banning of
Unregulated Deposit Schemes Bill, 2019” was passed by the Lok Sabha on 13th February, 2019 but
could not be passed by the Rajya Sabha. Since the Parliament was not in session, “The Banning of
Unregulated Deposit Schemes Ordinance, 2019” has been issued by the President of India vide
notification dated 21st February, 2019.
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Salient features
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• The Ordinance was expected to over-ride existing State Laws and all prospective violations to be
covered under the Central Law. However, this ordinance is in addition to other laws (clause 35)
• It covers three types of offences and provides for severe punishment and heavy pecuniary fines.
• It enables creation of an online central database for collection and sharing of information on deposit
taking activities in the country.
• Adequate provisions for disgorgement or repayment of deposits have been provided in cases where
such UDS manage to raise deposits illegally.
Salient features (Continued)
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• Provides for attachment of properties / assets by the Competent Authority and subsequent
realization of assets for repayment to depositors.
• It also provides for investigation, search and seizure of any property connected with the offence with
or without warrant.
• Clear-cut time lines have been provided for attachment of property and restitution to depositors.
• Considering the nature of the law, it is applicable with immediate effect with no transition provision /
relief.
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What is a deposit?
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• Definition as per section 2(4):
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 specified services, with or without any benefit in the form of
interest, bonus, profit or in any other form.
• In case of Companies and NBFC’s, the definition of deposit is as per the Companies Act, 2013 and
the Reserve Bank of India Act, 1934 respectively.
Key receipts which are not considered as deposit
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Receipts which are not returnable
Capital contributed by partners
Loans received by an individual from relatives
Loans received by firm [excluding LLP] from relatives of partners
Receipts in the course of / for the purpose of business and having a genuine connection with it
Key receipts which are not considered as deposit
(Continued)
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Loans received from banks, financial institutions and NBFC’s
Amounts received from Governments
Amounts received in accordance with the FEMA,1999
Amounts received by registered ARC under the SARFAESI Act, 2002
Amounts received as credit by a buyer from a seller on sale of any property.
Key receipts which are not considered as deposit
(Continued)
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Amounts received and repayable when goods / services are not sold, hired or otherwise
Advances for immovable property which are adjustable as per the agreement / arrangement
Security deposit for performance of the contract
Advances under long term contracts for supply of capital goods
Note: If the aforesaid amounts become refundable and is not refunded within 15 days of it becoming
refundable, the said amounts would be considered as deposits.
Who is a deposit taker? Section 2(6)
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Individual or group
of individuals
Proprietorship
concernPartnership firm
LLP CompanyAssociation of
person
Trust
Cooperative Society
or a Multi-State Co-
operative Society
Any other
arrangement
Receiving or soliciting deposits by
Note: Though HUF is not specifically mentioned, in our view it would get covered under any other arrangement.
Deposit taker does not include
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Corporation incorporated under
the Act of Parliament or State
Legislature
Banking Company as per Banking
Regulation Act, 1949
What is Unregulated Deposit Scheme? Section 2(17)
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A scheme or an
arrangement of
soliciting /
accepting of
deposit by way
of business
Which is not a
RDSUDS
Analysis of definition of UDS
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It is a residual definition
to cover in its ambit any
scheme that is not
specifically regulated.
A ‘Scheme’ is a
systematic arrangement
or plan and will involve a
proposal for several
persons.
An ‘Arrangement’ can be
between two or more
parties not necessarily
involving multiple
persons.
Acceptance of deposit -
whether solicited or not
Solicitation of deposit -
whether received or not
What are Regulated Deposit Schemes? (as per the first Schedule)
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• Schemes or arrangements of the following regulators are termed as RDS.
SEBI RBI IRDA
State or Union
Territory
Government
NHB PFRDA
EPFO
Central Registrar,
Multi – state Co-
operative societies
MCA
Regulated Deposit Schemes - as per the first Schedule
(Continued)
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Regulated Deposit Schemes - as per the first Schedule
(Continued)
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Regulated Deposit Schemes - as per the first Schedule
(Continued)
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Regulated Deposit Schemes - as per the first Schedule
(Continued)
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Offences covered by the Ordinance
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Soliciting or
Accepting
deposits under
any UDS
(Section 3)
Fraudulent default
in RDS
(Section 4)
Wrongful
inducement in
relation to UDS
(Section 5)
Is there any threshold for offence by UDS?
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All UDS irrespective of whatever
rate of return they may advertise
to lure gullible people should be
banned.
No scope should be left for
misuse of any threshold so that
schemes can be designed and
disguised.
Why is inducement an offence?
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Inducement is a grave offence as
actual collection and should be
treated at par with running of
UDS.
It is a preventive measure to stop
such scheme from initiating.
Are agents punishable for inducement?
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The term ‘deposit taker’ has been
defined to include within its
ambit all possible entities
receiving or soliciting deposits
Becoming an agent for illegal
UDS is itself an offence and
accordingly section 5 provides
that no person should induce any
another person to invest in UDS.
Note: Inducement is an offence irrespective of the amount of commission received by the agent.
Setting a threshold would be against the objective of the Ordinance.
Are brand ambassadors, advertisers, media, etc.
punishable for inducement?
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As per section 5, no person shall
induce any another person to
invest in UDS. Accordingly, they
would be punishable if they
knew that the scheme which they
advertised was an UDS.
Section 33 provides that
Government may direct
newspapers or other publications
for full and fair retraction of
advertisements for promoting,
soliciting deposits and inducing
persons to become members of
UDS.
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Challenges – Interpretation on Applicability
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View 1
Whether the
term “by way
of business” is
restricted to
business
entities which
solicits or
accepts
deposits?
- Such an
interpretation
would cover
only financial
companies
which is against
the intent of the
Ordinance.
- The word
principle
business is not
used.
View 2
Whether the law
would preclude
entities who carries
business other than
that of deposit
taking from
accepting monies
as a loan?
- Since the entities
have accepted the
loans in the course of
and for the purpose
of business and have
a genuine
connection with
business, the same is
not covered by the
definition of deposit.
- Accordingly, the
entities can accept
loans for business
purposes.
Considering the preamble, press release and the object of the law: View 2 seems to be more
appropriate
Challenges & confusions – Case 1
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Word of caution: If the transaction is questioned, the burden of proving that the transaction is not
hit by the Ordinance shall be on the deposit taker.
Whether a single transaction
of acceptance of deposit is
considered as an offence?
- An ‘Arrangement’ can be
between two or more parties not
necessarily involving multiple
persons.
- However, having said that, any
sporadic instances of taking
deposit and repayment thereof
may not fall within the definition
of ‘by way of business’.
Challenges & confusions – Case 2
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Note: This fact has been clarified by the Ministry of Finance in its tweet on banning of UDS w.r.t
individuals, firms, companies, LLP’s etc.
Whether loans obtained
for personal purposes,
medical exigencies, etc.
is an offence?
Though loans for personal
or social commitments,
medical or educational
exigencies are not covered
by RDS, they are not
solicited / accepted ‘by
way of business’ and
therefore are not covered
under the definition of an
UDS.
Challenges & confusions – Case 3
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Word of caution: The language of exclusion of capital contribution by partners of a firm from
deposits has been picked-up from the provision of MPID Act. Therefore, the issue may involve
litigation.
Whether loans obtained
from partners is an
offence?
It can be argued that a
transaction between a firm or a
LLP and its partner cannot be
called as transaction ‘by way of
business’ because the partner is
lending to his own firm where
he has a financial stake.
Challenges & confusions – Case 4
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Word of caution: If the transaction is questioned, the burden of proving that the transaction is not
hit by the Ordinance shall be on the deposit taker.
Whether accepting inter-
firm deposits are
considered as an offence?
- The objective behind the
Ordinance is to protect the
interest of small depositors
who are not capable of
taking well informed
financial decisions.
- Since this is not the case
with a business entity [i.e.
firms], there is no question
of giving any protection.
Challenges & confusions – Case 5
40
Whether deposit schemes
with builders and jewelers
have been banned under
the law?
Deposit schemes that work
like advances against
purchase of goods at a later
date should not be
considered as UDS,
however controversial and
varying views are floating
around and one may wait
for clarification.
Other challenges
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If necessary approvals to deal in goods or services or properties are not
obtained from appropriate authorities and the advances become refundable, it
would be treated as deposit.
Advances / security amounts being considered as deposits after the expiry of 15
days on becoming refundable even in genuine cases.
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Administration
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• All deposit takers [including those accepting deposit under RDS] are required to inform the
Repository Authority [online central database created for collection and sharing of information on
deposit taking activities] about their business.
• The Ordinance provides for the appointment of the Competent Authority by State and Union
Territory Governments. The Competent Authority will have powers similar to those vested in a civil
court.
• Police officers have powers to enter, search and seize any property believed to be connected with an
offence with or without a warrant.
• The Ordinance provides for the constitution of one or more Designated Courts.
• After provisional attachment of deposit taker’s assets, the Competent Authority needs to approach
the Designated Court within 30 days which can be extended to 60 days. The Designated Court needs
to complete the process within 180 days of being approached by the Competent Authority.
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Key penalties for contravention
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Section 3
Solicitation: 1 to 5
years
Acceptance: 2 to 7
years
Solicitation: Rs. 2 lakhs
to Rs. 10 lakhs
Acceptance: Rs. 3
lakhs to Rs. 10 lakhs
Section 4*
Upto 7 years
Rs. 5 lakhs to Rs. 25
crores or 3 times the
amount of profits
made whichever is
higher or with both
Section 5
1 to 5 years
Upto Rs. 10 lakhs
Imprisonment
Fines
Notes: All offences under the Ordinance are cognizable and non-bailable.*Same offence may be punishable under any other law.
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• The auditor should communicate the non-compliances to those charged with governance and
request them to regularize the same. [e.g. compounding of offence, refunding the amounts received,
etc.]
• If those charged with governance is involved in non-compliance, the auditor shall communicate to
next higher authority. [e.g. audit committee or supervisory board]
• The auditor should ensure that adequate provision has been made for the penalties in case of non-
compliance.
• Based on the severity of the non-compliance, the auditor should consider the following options:
o giving an Emphasis of Matter paragraph [‘EOM’]
o modifying the audit opinion
o resigning from the audit engagement
Role of auditor
SA 250-CONSIDERATION OF LAWS AND REGULATIONS IN
AN AUDIT OF FINANCIAL STATEMENTS
• Reporting Non-Compliance to Regulatory and Enforcement Authorities
– 28. If the auditor has identified or suspects non-compliance with laws and regulations, the
auditor shall determine whether the auditor has a responsibility to report the identified or
suspected non-compliance to parties outside the entity. (Ref: Para. A19-A20)
– 19. If the auditor suspects there may be non-compliance, the auditor shall discuss the matter
with management and, where appropriate, those charged with governance. If management
or, as appropriate, those charged with governance do not provide sufficient information that
supports that the entity is in compliance with laws and regulations and, in the auditor’s
judgment, the effect of the suspected non-compliance may be material to the financial
statements, the auditor shall consider the need to obtain legal advice. (Ref: Para. A15-A16)
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Non-Compliance with Laws and Regulations (NOCLAR).
• The International Ethics Standards Board for Accountants (IESBA) issued Non-
Compliance with Laws and Regulations (NOCLAR) framework which is effective 15th
July 2017. NOCLAR sets out a framework that requires professional accountants (PAs)
to take actions when they become aware of any illegal or potential illegal act.
• The NOCLAR is applicable to all PAs including
– PA in Public Practice (audit of financial statements, Other assurance services, Professional
services other than audit of financial statement e.g. Tax, Accounting, training etc)
– Professional Accountants in Business ( Employees, senior PA)
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NOCLAR- contd
• Audit services: PA becomes aware of non compliance including suspecting- inform those in
charge of governance, determine whether further action is needed & whether to disclose
the matter to appropriate authority
• Non audit services: inform those in charge of governance, Communicate the matter to the
entity’s external auditor, Consider whether further action is needed in the public interest e.g.
disclosing to authorities or withdrawing
• PA other than Senior Professional Accountants- subject to protocol inform senior/higher
ups, in exceptional circumstances disclosure to appropriate authority
• Senior PAs (directors, officers or senior employees (kmp)-address the matter,
determine course of action including reporting to authority50
The statute has the potential to
nip fraud at an early stage and
prevent widespread losses of
the type we saw in innumerable
notorious schemes
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