INSIGHTS
BANNED: UNREGULATED DEPOSITS
Background
On 13th February, 2019 the Government of India promulgated the Ordinance completely banning unregulated deposits of any kind.
The Lok Sabha passed the Bill on the last day of the budget session. Since the Rajya Sabha was not in session and the President was satisfied that circumstances exist for initiating immediate action, according to the power granted under Article 123(1) of the Constitution of India, the President promulgated the Banning of unregulated Deposit Schemes Ordinance, 2019.
A Deposit is an amount of money received as an advance or loan with a promise to return either in cash or kind or any specified service, with or without any benefit in the form of interest, bonus, profit or in any other form. It does not include amounts borrowed from Bank, financial institutions, government / statutory authorities and others as contemplated in the Ordinance.
A detailed look at the provisions of the Ordinance:
1. It comes into force immediately and is applicable to the whole of India except the State of Jammu & Kashmir.
2. On and from the date of commencement of this Ordinance all other schemes of arrangement other than those expressly stated as “Regulated Deposit Scheme” shall be considered as unregulated schemes. No deposit taker shall directly or indirectly, promote, operate, issue any advertisement soliciting in any unregulated deposit scheme.
3. Some key definitions:
- Depositor: Anyone who makes a deposit under this ordinance.
- Deposit taker: includes any one receiving or soliciting deposits including individual(s), sole proprietary concern, firm, LLP, company, Association of persons, Trusts, co-operative societies but does not include a corporation incorporated under the parliament or legislature and a Banking company.
- Regulated Deposit Scheme: refers to schemes and arrangements included in the column 3 of the First schedule of the Ordinance.
4. The Securities and Exchange Board of India (SEBI) along with the Central and State Governments, the Ministry of Company Affairs (MCA), Reserve Bank of India (RBI) are the key regulatory authorities which shall regulate financial activities.
5. The offences under this Ordinance are broadly categorised into 3:
- fraudulent default in Regulated Deposit Schemes
- wrongful inducement into unregulated deposit schemes
- running of unregulated deposit schemes
6. Officer(s) not below the rank of Secretary to the Government shall be appointed as competent authorities. Such authority shall have the same power of the civil court vested by the Code of Civil Procedure, 1908 especially in matters relating to inspection, investigation, search, seizure and attaching assets of the defaulting deposit taker.
7. The Central government shall designate an authority which shall create, maintain and operate an online data base for information on deposit takers operating in India.
8. The government shall in concurrence with the Chief Justice of the High courts establish one or more designated courts which will have primary and exclusive jurisdiction on matters to which this Ordinance apply. At its discretion, the Supreme Court, may direct such cases to be transferred from the designated court to the apex court.
9. Punishment for offences (including for repeat offenders) include penalty and imprisonment ranging from a minimum of Rs. 1 lakh up to a maximum of 50 Crores and imprisonment of a minimum 2 years imprisonment up to a maximum of 7 years.
The crux of the regulations is the express and exhaustive definition of what constitutes regulated deposits.
What are the kinds of deposits in which investment is permitted?
Regulated Deposit Scheme: refers to schemes and arrangements included in the column 3 of the First schedule of the Ordinance. They essentially include:
SEBI
- any scheme or arrangement sponsored or carried out by a Collective Investment Management company registered under the SEBI (Collective investment scheme) Regulations, 1999
- any scheme or arrangement scheme registered under the SEBI (Alternative Investment Fund) Regulations, 2012
- any scheme or arrangement scheme registered under the SEBI (Portfolio Managers) Regulations, 1993
- any scheme or arrangement regulated under the SEBI (Share based employee benefits) Regulation, 2014 and provisions under the Companies Act, 2013
- any other scheme or arrangement registered under the SEBI Act, 1992
- any amount received as contributions by way of subscription to Mutual funds registered with SEBI
RBI
- any scheme where deposits are accepted by Non-banking financial companies as defined under section 45-I of the RBI, 1934
- any scheme or arrangement where funds are accepted by individual or entities engaged as Business consultants and Facilitators of Banks, subject to RBI guidelines
- any scheme or arrangement under which funds are received by a system operator operating under the Payment and Settlement Systems Act, 2007
- any other scheme governed and regulated under the RBI Act, 1934
IRDA
- a contract of insurance obtained pursuant to registration certificate obtained under the Insurance Act, 1938
State Government / Union Territory
- any scheme or arrangement being offered by a Co-operative Society registered under the Co-operative Societies Act, 1912 of the State government / Union territory
- any scheme or arrangement conducted as a chit business in accordance with the Chit Funds Act, 1982
- any scheme or arrangement regulated by any legislation relating to money lending for the time being in force in the state or Union territory.
- any scheme or arrangement by a prize money or chit money circulation scheme under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978
Others
- any scheme or arrangement for deposits registered under the National Housing Bank Act, 1987
- any scheme or arrangement registered under the Pension Fund Regulatory and Development Authority Act, 2013
- any pension or insurance scheme under the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952
- any scheme or arrangement for acceptance of deposits by a Multi-State Co-operative Societies Act, 2002
- any scheme or arrangement permitted under the Companies Act, 2013
What are not regulated deposits?
Chit Fund (not regulated under the Chit Funds Act)
A prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an Unregulated Deposit Scheme under this Act.
Ponzi Scheme
A scheme where customers are lured for high and quick returns without any actual underlying business, by paying the returns to the first investors from money invested by the successive customers.
Pyramid scheme
A business model that recruits members through promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.
In toto
Aimed at tackling the menace of illicit entities / persons from taking deposits from unsuspecting investors, the Bill / Ordinance is much needed to prevent entities / persons from taking advantage of loopholes in the existing regulatory system and duping poor and gullible investors of their hard earned savings. With effective judicial mechanism in place, this Ordinance shall go long way in preventing fraud. However, the Ordinance will also put small traders and businessmen into hardship as they may not have the cushion of borrowing for a short term any small amounts to fund their businesses or for personal purposes. They may not have the ware withal to invest huge amount of money in regulated deposit schemes with a minimum lock in period. The impact may also be felt on larger businesses such a real estate. Deposits can only be accepted and adjusted against sale consideration. It will thus protect interests of investors / home buyer. In a way this ordinance is like Damocles sword – intended to safeguard interests of gullible investors but at the same time making it challenging for smaller businesses to source hand loans in times of emergency. Only time and effective implementation will tell.
Q&A
A tête-à-tête with
Mr. Siby Antony, Chairman &
Whole-time Director
of Edelweiss Asset Reconstruction Company Ltd, Edelweiss Group
A Post Graduate in Economics from Madras University and a Graduate in Mathematics from Kerala University, Mr. Siby Antony has over four decades of experience in Banking and Financial Services, especially in the space of Distressed Assets. Mr. Siby has been instrumental in setting up the Distressed Assets Business in Edelweiss.
Prior to Edelweiss, he had an aggregate service of over 35 years as a banker. Starting his career with the Reserve Bank of India in 1969, he moved to IDBI, India’s principal Development Financial Institution in 1975.He was associated with the Corporate Debt Restructuring (CDR) mechanism since inception and was responsible for setting up the CDR Cell. After retirement from IDBI Bank in 2008, he joined the Edelweiss Group to establish the distressed asset business in Edelweiss and as a first step set up Edelweiss Asset Reconstruction Company which has a license from RBI.
What has been the turning point of your life?
Movement from glamorous Project Appraisal Department of IDBI (following a setback in the career path) to manage stressed assets in CDR and Stressed Assets Stabilization Fund (first Bad Bank in India); managing NPAs in a public sector environment is perceived to be the most unglamorous work. I took it as a challenge.
What do you consider your greatest achievement?
Making a mark in stressed asset management which culminated in creation of a very successful stressed assets credit business for a renowned financial services group.
What is your definition of success?
For me success is creation of a profitable, sustainable and scalable business where trust of stakeholders is paramount and value system is the culture.
What is the one principle that has carried you this far?
Honesty
What is the one Character trait or Strength of yours that you admire the most?
Sincerity and humility
What is the most valuable lesson learnt so far?
Honesty and sincerity will keep you in good stead
What is the best indicator of your leadership?
How motivated is your team to achieve targets and the goal set
What are your top two regular practices that have helped you in life?
Regularity in morning walk and home cooked food
What is the single most important factor that clinches a deal?
Fairness
What is the your most important advice for time management?
Making someone wait for long is the worst thing. Put yourself in that position. Be aware that any time wasted is a loss for ever. Everyone’s time is precious for him/her.
What is the most important factor in resolving conflicts?
Strict adherence to corporate governance
What is the most important indicator of performance of an organization?
Sustainability of profitability
What is the most important factor to foster innovation?
Encourage ideas
What is a key factor in building and maintaining a strong team?
Creating an environment of empowerment
If you are given an opportunity to live all over again what would you have done?
Not anything different
What is that one thing that you wish to change in this world using your talent and potential?
Insulate the banking system from CBI/Enforcement Directorate by creating an internal vigilance system
How important is legal affairs to an organization and your advice in this regard?
Legal affairs of an organization is of utmost importance from the perspective of risk mitigation and corporate governance. An internal set up along with an external counsel is a must for every organization.
What is one professional tip that you would like to share?
There is no substitute to hard work
CIRCULARS & NOTIFICATIONS
MCA
SEBI
fema
- Performance review of Public Interest Directors (PIDs): [Feb 05, 2019]
- Format for annual secretarial audit report and annual secretarial compliance report for listed entities and their material subsidiaries: [Feb 8, 2019]
- Physical settlement of stock derivatives: [Feb 8, 2019]
- Framework for utilization of Financial Security Deposit (FSD): [Feb 11, 2019]
- Relaxation from requirement to furnish a copy of PAN for transfer of equity shares of listed entities executed by non-residents: [Feb 11, 2019]
- Advisory Committee at Market Infrastructure Institutions (MIIs): [Feb 15, 2019]
- Revision in Haircut on Central Government Securities (G-Sec) accepted as Collateral: [Feb 21, 2019]
- External Commercial Borrowings (ECB) Policy – ECB facility for Resolution Applicants under Corporate Insolvency Resolution Process: [February 07, 2019]
- Investment by Foreign Portfolio Investors (FPI) in Debt: [February 15, 2019]
- Foreign Exchange Management (Export and import of Currency) (Amendment) Regulations, 2019: [February 26, 2019]
- Establishment of Branch Office (BO) / Liaison Office (LO) / Project Office (PO) or any other place of business in India by foreign entities: [February 27, 2019]
THE VERDICT
Supreme court must avoid turning into the executive
Writ petition (Civil) No. 109/2008; Interim order passed on 13th February, 2019
WILDLIFE FIRST & ORS. Petitioner(s) VS MINISTRY OF FOREST AND ENVIRONMENT & ORS. Respondent(s)
The Interim order
On 13th February, 2019, a three Judge bench of the Supreme Court passed an interim order directing at least 17 State governments to ensure the eviction of at least 1.1 million forest dwellers. This judgment came even as the rights of the tribal and other forest dwellers (living on the fringes of the forests and poverty) to claim the forest land as theirs under the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 or the Forest Rights Act was rejected.
The interim order passed by the Supreme Court in the writ petition, has given the States time till 27th July, 2019 (the next date of hearing ) to file a status report on the encroachments in forest lands and also evict claimants whose claims have been rejected.
The interim judgment passed by the SC has received very mixed response. Some conservation groups have welcomed the interim order stating that precious forest land will be conserved as there would be no further defragmentation of forest land. The Forest Rights Act encouraging tribal and other communities to live in forests will actually be counterproductive as they may systematically erode the ecosystem by harming wildlife and forests for their livelihood pro tribal conservation groups are up in arms. However, pro tribal conservation groups and NGO’s argue that though the Forest Act is a well-intended legislation in protection of interest of the tribals and marginalized. Though there are challenges with their mechanism and implementation, it is the only legislation that offers a ray of hope in protecting the tribal, adivasis and marginalized sections of the society.
The background
The Indian Forest Act, 1927, (which was modelled on similar previous British legislations) sought to consolidate areas having forest cover, regulate forest produce and lays down rules for declaring forest land as reserved or protected. This systematically restricted / curtailed the use of forests for livelihood by such tribal and other communities who lived for centuries in the forests. Such forest lands were being consolidated under government control.
In 2008, the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 or the Forest Rights Act was enacted recognizing rights of adivasis, indigenous, and other traditional forest dwellers over forest land. It called for tribal and forest communities to associate in protection, regeneration and development of forests. The main objective of enacting the Forest Rights Act was to ensure their right to livelihood along with the right to environment and protect marginalized socio-economic classes.
The dichotomy
The issue in the writ petition pertains only to deciding on the claims made by tribal groups of their right to livelihood and ownership of land in the forests. However, the apex court does not seem to have restricted itself to either accepting or rejecting such claims. It has gone ahead and actually ordered large scale eviction of tribal groups and communities living in forests. This has been protested on two grounds – (i) legally speaking, rejection of a claim does not automatically mean eviction. (ii) There are procedural shortcomings as in case of most of the affected people do not get a right to hearing before passing an order which involves displacing more than a million people with no backup plan in place for their relocation.
This has put the Supreme Court in a spot. The judiciary has the authority to decide on the legality or otherwise of a rights, obligations and liabilities of parties to a case. In the process of doing so, the apex court also decided on whether the action taken by the administration and or executive is valid / legal. It is for the executive and or administrative machinery which is more in tune with the ground situation to direct eviction after providing for their relocation and rehabilitation. So when the judiciary also takes on the role of the executive, then the aggrieved common man will have no where to go as the perpetrator and the relief provider will be one and the same!
Sum and substance
As far as the case is concerned, there is a very fine line distinguishing the need to protect the tribal and forest communities vis-a vis protecting the natural forest and other resources. It is the same fine line that will distinguish whether the Judiciary will become the Executive as well. It then brings to fore that the judiciary must act with utmost diligence and empathy while using their vast powers in adjudicating issues that have large scale consequences. The Judiciary shall have to balance the two.
GO FIGURE
LEGAL-EASE
A right of use over property of another. Traditionally the permitted kinds of uses were limited, the most important being rights of way and rights concerning flowing waters. The easement was normally for the benefit of adjoining lands, no matter who the owner was, rather than for the benefit of a specific individual.
Famacide
A killer of reputations slanderer.
Gallows
A scaffold; a beam laid over either one or two posts, from which persons sentenced to capital punishment are hanged.
Hadd
In Hindu law, a boundary or limit. A statutory punishment defined by law, and not arbitrary.
INFOGRAPHIC
The Game Changer
(P)REVIEW
PRESUMED INNOCENT (1990) (Movie)
A 1990 American courtroom thriller, the movie is based on the novel of the same name by Scott Turow. With several movie moguls and production houses vying to make the movie, eventually Warner Bros and Sydney Pollock produced the movie while Alan J Pakula co-wrote and directed the movie. The central character portrayed brilliantly by Hollywood superstar Harrison Ford has him play the role of Rozat "Rusty" Sabich a prosecutor who is close to the District attorney. Rusty is asked to investigate the death of his colleague Carolyn (Greta Sacchi) who is found murdered under mysterious circumstances. There is conflict of interest as (the married) Rusty has an affair with Carolyn that is short lived. Despite being a fling, Rusty is unable to get Carolyn out of his thoughts. He deliberately changes the investigating officer and asks him to selectively investigate the case overlooking details of their affair. However, in a series of events, Rusty comes to know that the ambitious Carolyn had affairs with a lot of men in the hope of advancing her career and this only complicates the case. When the tables turn and original investigating officer is put back on the case, he wastes no time in bringing out the affair to light. Rusty is now accused of murdering Carolyn. Pushed to the corner, Rusty hires a top defense attorney who tactfully and with medical evidence establishes that there is little or no evidence or motive. As a result the Judge dismisses the case/ charge. In the meanwhile Rusty gets to the bottom of the case and finds out the real murderer. Unexpected.
THE CHILDREN ACT by IAN MCEWAN (2014)
(Book / Novel)
This 2014 publication by English author Ian McEwan has direct reference to the UK Children Act, 1989. Fiona Maye is a respected High Court Judge in London often known to give judgments that are pragmatic yet sensitive to religious beliefs and culture. Successful and acclaimed professionally, Fiona’s personal life is in absolute disarray. Childless (due to her professional commitments) and no visible love for her husband Jack, her family is crumbling. When her husband moves out on her, she further immerses herself into work. She deals with a case involving a nearing 18 year old terminally ill patient, Adam, whose parents refuse to transfuse blood as it is against their religious belief. A visit to the hospital and spending time with the young boy, Fiona directs the court to allow the transfusion. Slowly Adam starts keeping in touch with her. In the meantime Fiona and her husband Jack begin reconciling with each other. How (and whether) she saves her marriage as well as the young boy forms the rest of the read.
JAG (1995-2005) (TV Series)
The US Military acronym for Judge Advocate General, JAG is a US naval legal thriller that ran for 10 seasons. The episodes were invariably based on real incidents or cases of the US Navy. Some of the main characters were also involved in CIA intelligence operations.
Don't cry because it's over, smile because it happened.
– Dr. Seuss
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