27 Feb 2019Posted By: Mudit Handa


Unregulated Deposits in the Company Now Banned

In recent years, the Government of India has taken stringent measures to ensure fair and ethical conduct in the corporate scenario. Some of the recent corporate reforms of Indian government are as follows-

  • In order to prevent illicit transactions, the Benami Transactions (Prohibition) Amendment Act was passed in 2016.

  • Similarly, the Real Estate (Regulation and Development) Act, 2016 (RERA) was passed to ensure greater transparency in the Real Estate sector.

With a view to banning the illegal deposit schemes and other fraudulent schemes, the Banning of Unregulated Deposit Schemes Ordinance, 2019 (BUDS 2019) has been finally passed by the Government of India on 21st February 2019.  BUDS 2019 has been immediately brought into effect from 21st February 2019 itself.

 

#1. What is the objective behind BUDS 2019?

The main objective behind BUDS 2019 is to save the depositors from being defrauded by the Ponzi (fraudulent) financial schemes.

  • Since the past few years, there have been many cases where people across the country have been fooled due to some illicit deposit schemes. The most infamous instance of such schemes is the Sharda Chit-fund Scam.

  • The most affected victims of such schemes were the poor and financially illiterate people who got attracted to the lucrative financial schemes. Such people are often induced to invest in uncertain schemes that promise huge returns and other such benefits.

  • Despite a detailed regulatory framework, schemes involving an unauthorised collection of money and deposits are still operating in the country.

  • There was a need for a strict law to ban such alluring financial schemes. Hence, the BUDS 2019 has been passed in the parliament.

  • Henceforth, any business entity can't take any deposit/loan from any person except relatives, and except partners or relatives in case of partnership firm.

 

#2. How did BUDS 2019 come into being?

In view of addressing the grievances of the general public, the Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill, was proposed in 2015.

  • The main objective behind it was the identification of loopholes in the existing regulatory framework for deposit-taking activities and to propose administrative actions to control them.

  • This had emphasized on the formulation of a new law for controlling of all the key aspects of ‘deposit-taking’.

  • Finally, on 21st February 2019, the Banning of Unregulated Deposit Schemes Ordinance 2019 was brought into effect.

 

#3. How does BUDS 2019 check illicit transactions?

The Banning of Unregulated Deposit Schemes Ordinance 2019 is a one-stop solution to prevent unauthorised financial schemes.

  • It will ensure a strict ban on unregulated deposit-taking activities.

  • It aims at prevention of all unregulated deposit schemes.

  • Besides, as per this ordinance, soliciting, inviting or accepting deposits with respect to the unregulated deposit scheme is henceforth a punishable offence.

  • Under BUDS 2019, there is a mechanism wherein the depositors can now be refunded without delay. Now, there will be no need for attaching the assets of the defaulting party.

Under the BUDS 2019, the definition of “deposits” has been reframed, which is explained below for a better understanding of the general public.

 

#4. What is the definition of deposits as per BUDS 2019?

According to BUDS 2019, deposit means an amount of money received-

  • As an advance or loan or in any other form,

  • By any deposit taker

Here the deposit taker can be an-

  • Individual,

  • Group of individuals,

  • Sole proprietorship firm,

  • Partnership firm,

  • LLP,

  • A private limited company,

  • An Association of Persons (AOP),

  • A co-operative society or any other entity.

However, this does not include a statutory corporation, a nationalized bank, a co-operative bank or a multi-state cooperative bank as per the Banking Regulations Act, 1949.

Besides, Deposit is an amount received with a promise to return

  • After a specific term or otherwise,

  • In cash or in kind or

  • In the form of any sort of specified service

With/without any benefit such as interest, bonus, profit etc.

 

#5. What is excluded from the definition of deposits?

The BUDS 2019 deposits exclude normal business deposits from the definition of the term “deposit”. These may include-

  • Loans received from the banks;
  • Loans/ financial assistance availed from the finance institutions (PFIs) or NBFC,
  • Financial institutions and insurance companies;
  • Money received from the government;
  • Amount received from a statutory body;

 

#6. What is the penalty under BUDS 2019?

The penal provisions under BUDS 2019 are really strict.

  • As per Section 21 of BUDS 2019, anyone who seeks a deposit in relation with an unregulated scheme shall be imprisoned for 1-5 years and will face a heavy penalty of ₹2-10 lacs.
  • Likewise, anyone who accepts such a deposit shall also face imprisoned for 2-7 years along with a heavy penalty of ₹3-10 lacs
  • Similarly, anyone who accepts such unauthorized deposits and then fails to repay the depositor shall be imprisoned for 3-10 years and will have to pay a heavy penalty of not less than ₹5 lakh, which could be extended to twice the value of deposits collected from the depositor.

 

#7. Whether business funding shall also be treated as a scheme? 

No. As per BUDS 2019, ‘Scheme’ means making plans, in a deceitful manner. The intention is purely the prohibition of such persons from defrauding investors. Hence, any funds taken from a 3rd party for the genuine business purpose shall not be treated as a scheme for raising deposits.

Also, refer to the 

 

If you want any sort of guidance regarding BUDS 2019 or the process of company formation, you can feel free to contact our business advisor at 8881-069-069.

Now you can also Download E-Startup Mobile App and Never miss the latest updates relating to your business.

Comments



Posted By Vijay chhajed
Posted Date 2019-02-28 10:43:36

nice & indepth articles.


Posted By Mudit Handa
Posted Date 2019-03-09 15:21:42

Thank you, sir, We will provide you with relevant updates in future as well.


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