To safeguard public savings from fraudulent financial traps, the Indian government introduced the Banning of Unregulated Deposit Schemes Act, 2019. This law prohibits individuals or entities from accepting or promoting unregulated deposit schemes without regulatory approval. It defines what constitutes a deposit, lists exemptions, and outlines strict punishments, including imprisonment and fines, for violations. The Act empowers state-appointed authorities and special courts to investigate, attach assets, and order repayments. It also creates a central database for regulated schemes, ensuring transparency.
In this blog, we will understand why the act was needed, key provisions of the act, and offences and penalties defined in the Act.
Why Was This Act Needed?
According to reports by the Reserve Bank of India (RBI) and various consumer protection agencies, the scale of losses due to such unregulated deposit schemes runs into thousands of crores of rupees every year, which affects millions of depositors, many of whom belong to economically weaker sections of society. Before the enactment of the Banning of Unregulated Deposit Schemes Act, 2019, the government had laws like the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, which aimed to curb illegal money circulation schemes. However, these laws had significant loopholes and limitations. They covered only specific types of schemes and were often difficult to enforce due to ambiguous definitions and jurisdictional challenges.
The Banning of Unregulated Deposit Schemes Act, 2019 (hereinafter referred to as the Act) was introduced to address these gaps by providing:
- A clear legal definition of unregulated deposit schemes.
- Strict prohibitions on collecting deposits through such schemes.
- Robust enforcement powers for authorities to investigate, seize assets, and prosecute offenders.
- Specific provisions to protect the interests of depositors by facilitating the recovery of their money.
- Deterrent punishments, including imprisonment and hefty fines for violators.
What Is a Deposit According to the Act?
As per Section 2 (4) of the Act, a “deposit” means any money or amount received by a person or company as an advance or loan, with a promise to repay it with or without interest, or in kind, or through any service.
Examples include:
- Money given to someone with the promise of higher returns
- Investments in schemes promising fixed or guaranteed returns
However, the Act excludes certain transactions from the definition of deposit:
- Loans from Banks and Banking Companies or any other banking company as defined under the Banking Regulation Act, 1949.
- Loans or Financial Assistance from Public Financial Institutions and Registered NBFCs.
- Amounts from the Government or Government-Guaranteed Sources.
- Funds Received from Foreign Entities.
- Contributions from Partners in Partnership or LLP
- Loans from Relatives
- Credit Extended by Sellers to Buyers
- Amounts Received by Asset Reconstruction Companies
- Political Party Deposits
- Self-Help Group Contributions
- Other Amounts Collected for Specific Purposes Within Prescribed Ceilings
- Business-Connected Amounts including:
- Payments or advances for the supply or hire of goods or the provision of services, refundable if goods or services are not provided.
- Advances received for immovable property under an agreement are adjusted against the property.
- Security or dealership deposits for contracts involving the supply of goods or services.
- Advances under long-term projects for the supply of capital goods (except certain specified cases).
What Are Unregulated Deposit Schemes?
Unregulated deposit schemes are any schemes or arrangements where deposits are accepted without registering with or being approved by regulators, such as:
- Reserve Bank of India (RBI)
- Securities and Exchange Board of India (SEBI)
- Insurance Regulatory and Development Authority of India (IRDAI)
If a scheme takes deposits but is not under the control or supervision of these authorities, it is considered “unregulated” and is illegal under this Act.
Section 3 of the Act explicitly bans the unregulated Deposit Scheme and declares it illegal in India. The act mandated that no deposit taker, whether acting directly or indirectly, shall:
- Promote or operate any such scheme;
- Publish or issue advertisements inviting the public to participate or enrol in such schemes; or
- Accept any deposits under the garb of an Unregulated Deposit Scheme.
Salient Features of the Act
1. Ban on Unregulated Deposit Schemes
The Act explicitly prohibits any person or company from promoting, operating, or accepting deposits through unregulated schemes. This means no more illegal schemes can operate.
2. Appointment of Competent Authorities
Each state government must appoint one or more Competent Authorities to enforce the provisions of the Act. These authorities are empowered to:
- Investigate unregulated schemes
- Freeze the assets of fraudsters
- Order refunds to depositors
- Take the necessary actions to stop the schemes
3. Designated Courts
The Act establishes Special Courts called Designated Courts to ensure speedy trials of offenses related to unregulated deposit schemes. These courts are empowered to:
- Approve the list of dues recoverable from the deposit taker’s debtors.
- Determine the value of the deposit taker’s assets and finalise the list of depositors along with the amount due to each.
- Instruct the Competent Authority to take possession of the deposit taker’s assets and permit their sale either through public auction or private sale, depending on the nature of the assets. The proceeds must be deposited into the designated bank account.
- Approve the necessary expenses incurred by the Competent Authority in taking possession and selling the assets.
- Issue orders for repayment to depositors, either in full or proportionately, depending on the availability of funds realised from the asset sale.
- Direct any person who has unlawfully benefited or avoided a loss by violating the provisions of the Act to return an equivalent amount of the benefit gained.
- Pass any other order deemed necessary for recovering the assets and repaying depositors, or to address any related matter.
4. Protection of Interested Persons (Section 18(2))
Any individual with an interest in the attached property can file an application to the Designated Court. Upon hearing both the applicant and the Competent Authority, the court may issue a suitable order to:
- Allow reasonable amounts from the attached property for the applicant’s or their family’s maintenance or for their legal defence if they are facing criminal proceedings before the Designated Court.
- Protect the interests of any ongoing business affected by the attachment of its assets.
Explanation: The term “deposit taker” also includes the directors, promoters, managers, members of the entity, or any individual whose assets have been attached under the Act.
5. Appeal to the High Court (Section 19)
If any person (including the Competent Authority) is dissatisfied with a final order passed by the Designated Court, they have the right to appeal to the High Court within 60 days from the date of the order.
The High Court has the power to allow an appeal after 60 days if it is satisfied that the delay was caused by reasonable cause.
6. Central Database
A centralized online database is created where all deposit schemes must be registered if they are regulated. This helps track and monitor deposit schemes easily, ensuring transparency.
Exemptions Under the Act
The Act does not apply to deposits accepted under schemes regulated by:
- The Reserve Bank of India (RBI).
- The Securities and Exchange Board of India (SEBI).
- The Insurance Regulatory and Development Authority of India (IRDAI).
- State or Union Territory governments under specific legislations.
Section 21: Penalties for Violation of Section 3
1. For Soliciting Deposits Illegally
Any deposit taker who invites deposits in contravention of Section 3 shall be punished with:
- Imprisonment for not less than one year, which may extend to five years; and
- A fine of not less than ₹2 lakhs, which may go up to ₹10 lakhs.
2. For Accepting Deposits Illegally
Any deposit taker who accepts deposits in violation of Section 3 shall face:
- Imprisonment of at least two years, extendable up to seven years; and
- A fine of not less than ₹3 lakhs, extendable to ₹10 lakhs.
3. For Fraudulent Default in Repayment
If a deposit taker:
- Accepts deposits under an unregulated scheme and
- Fraudulently defaults in repaying those deposits or delivering the promised service,
Then, such a deposit taker shall be punished with: - Imprisonment for not less than three years, which may extend to ten years; and
- A fine of not less than ₹5 lakhs, which may go up to twice the total amount collected from depositors under the unregulated scheme.
Conclusion
The Banning of Unregulated Deposit Schemes Act, 2019, is a landmark legislation that aims to protect citizens from fraudulent deposit schemes that operate without regulatory approval. The Act clearly bans the unregulated deposit schemes under Section 3 and lays down stringent penalties for violations. The Act seeks to curb financial scams and restore trust in the financial system. It empowers state-appointed authorities and special courts to take swift action, recover assets, and ensure repayment to depositors. With clear definitions, a central database, and strict enforcement, the law closes loopholes that fraudsters once exploited.
