Acceptance of Unsecured loans & Banning of unregulated Deposit Scheme Ordinance-2019

Acceptance of Unsecured loans & Banning of unregulated Deposit Scheme Ordinance-2019


Acceptance of Unsecured loans & Bannning of unregulated Deposit Scheme Ordinance-2019

In an attempt to protect the interest of innocent gullible investor from ponzi & other fraudulent scheme, newly introduced “The Banning of Banning of Unregulated Deposit Schemes Ordinance-2019” has placed a strong ban on the acceptance of deposits, even on Individuals & FirmsThere are heavy penalty and fine for violation under the new ordinance. Controversy is at its peak as to whether individuals, proprietary firm or partnership firm can accept the unsecured loans for the business or not?

Let us try to find it out. For the purpose of this ordinance, Deposits are classified in two parts- Regulated Deposits & Unregulated Deposits. Deposits are considered as Regulated Deposits if it is accepted by few specified entities which is well regulated by few regulator like RBI, MCA, SEBI, IRDA etc. All other deposits are considered as Unregulated Deposits. New ordinance in section 3 has placed a clear cut ban on ‘unregulated deposits scheme” only & regulated Deposits are unaffected.  Section – 3 of the ordinance reads as under:

  1. Banning of Unregulated Deposit Schemes.
    On and from the date of commencement of this Ordinance,

(a) the Unregulated Deposit Schemes shall be banned; and

(b) no deposit taker shall, directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.


Fine prints of ordinance clearly convey one thing – the ban is not on ‘deposits’ but the ban is on “unregulated deposit scheme”.  “Unregulated Deposit Scheme” (UDS) is defined u/s 2(17) to mean a Scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme, as specified under column (3) of the First Schedule.

There are two important limbs which can be extracted from above definition which must exist for its classification as UDS:

    1. Deposit is accepted out of scheme or an arrangement
    2. It is accepted by way of business

Combined reading of above makes it distinctly clear that personal borrowing/loans are absolutely outside the purview of above ordinance. Question emerges as to whether “By way of business” would mean business of financing (by schemes of borrowing) or any other normal business (like manufacturing, processing, trading etc). The flow of the words whereby scheme or arrangement is prefixed to ‘by way of business’ reasonably escort to a conclusion that if raising of fund is the business of the deposit taker then only it would be treated as UDS. In my considered opinion both above limbs must co-exists for any amount being treated as UDS. If any person is taking any loan for its business of manufacturing, trading etc then it would be difficult to draw the conclusion that the amount is taken under ‘a scheme or an arrangement by way of business’. Business in the second limb can reasonably be said to be the business of borrowing by way of scheme. It’s only if the scheme or arrangement is by way of business then only the amount accepted would be reckoned as UDS and not otherwise. In my view, the ordinance merely bans UDS & it nowhere bans any other mode of accepting deposits.

The conclusion is also backed by the statement of objects & reasons to the UDS Bill introduced in 2018. First & Third Para of the bill which is backing above views are as under:

1. Despite diverse regulatory framework, schemes and arrangement leading to unauthorized collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes promising high returns or other benefits are still operating in the society. 

2. In view of above, it becomes necessary to have a central legislation to ensure a comprehensive ban on unregulated deposit taking activity and for its effective enforcement.

Despite above logical interpretation and conclusions, it would be better & in the interest of the business if a clear cut guidelines or FAQ is issued by the Ministry of Finance clarifying the above views in a simple & clear term.

[Readers may forward their feedback & queries at nareshjakhotia@gmail.comOther articles & response to queries are available ]