Timothy Lopes, Executive, Vinod Kothari & Company
Almost a year after the Banning of Unregulated Deposits Schemes Act, 2019 (BUDS Act/ Act) came into force, the Ministry of Finance has, vide notification dated 12th February, 2020, notified The Banning of Unregulated Deposits Schemes Rules, 2020 (BUDS Rules/ Rules).
The BUDS Act, was enacted with the intent to curb all unregulated deposits schemes being run by fraudulent means such as ponzi schemes. On the other hand, the BUDS Act lists out regulated deposit schemes, which are essentially regulated by MCA, SEBI, RBI, etc., such as collective investment schemes, alternative investment funds, portfolio management services, employee benefit schemes, mutual fund schemes, etc. regulated by SEBI; deposits accepted by NBFCs, etc. as regulated by RBI, insurance contracts regulated by IRDAI; schemes or arrangements made or offered by co-operative societies, chit funds, etc. regulated by the relevant State Government or Union Territory Government; housing finance companies regulated by the NHB; pension funds regulated by the PFRDA; pension schemes or insurance schemes framed under the Employees’ Provident Fund Miscellaneous Provisions Act, 1952; Deposits accepted or permitted under the provisions of Chapter V of the Companies Act, 2013 regulated by MCA.
The definition of deposit taker and meaning of deposit along with exclusions from the meaning, is specified under the Act. We have analysed the definitions in our related articles and write ups on the subject.
As a part of regulation, the law provides for collation of information pertaining to deposit takers.
As per Section 9 of the Act, the Central Government has the power to designate an authority (existing or already constituted) which shall create, maintain and operate an ‘online database’ for information on ‘deposit takers’ operating in India. The Rules empower the designated authority to require any regulator or any competent authority (appointed under section 7 of the Act) or any other entity/person to submit to it any information in its possession relating to deposit takers in India. However, the authority is yet to be designated, inspite of the fact that the Rules have already come into force on 12th February, 2020.
Requirement of intimation by deposit-takers
As per section 10 of the Act, every deposit taker commencing its business after the commencement of the Act, is required to intimate the authority about its business in the form and manner to be prescribed. As per rule 7 of the Rules, the intimation is to be sent within a period of 30 days from the date of commencement of business.
A relevant question here, might be whether regulated deposit takers (say, AIFs, CISs, NBFC-D, etc.) will also be required to give intimation to the designated authority of commencement of business.
Note that the explanation to section 10 reads as under –
“Explanation.—For the removal of doubts, it is hereby clarified that—
- the requirement of intimation under sub-section (1) is applicable to deposit takers accepting or soliciting deposits as defined in clause (4) of section 2; and
- the requirement of intimation under sub-section (1) applies to a company, if the company accepts the deposits under Chapter V of the Companies Act, 2013.”
Clearly, explanation (a) above makes reference to definition of deposit under section 2(4) of the BUDS Act, to determine whether the deposit taker will be required to give intimation. Note that as per the definition of deposit under section 2(4), there is no explicit exclusion with respect to regulated deposit schemes. In fact, the explanation to clause 2(4) says that with respect to NBFCs, ‘deposit’ shall be interpreted in terms of RBI Act. Hence, it can be contended that all deposit takers undertaking regulated deposit scheme shall be required to send intimations to the designated authority.
However, explanation (b) includes companies accepting deposits under the Companies Act, which is a regulated deposit scheme under the BUDS Act [entry 9 of the First Schedule], as deposit taker which shall give an intimation under BUDS Act. Therefore, it can be argued that because of this explicit inclusion of one particular regulated deposit taking entity, all other regulated deposit takers will stand exempted from the requirement of giving intimations.
The foregoing indicates that the provisions are vague insofar the regulated deposit schemes are concerned. The discussion below seeks to find an answer.
The BUDS Bill, 2015 and Report of IMG
Clause 10 of the BUDS Bill, 2015 is the same as section 10 of the BUDS Act.
State Bank of India, in their submission to the Standing Committee on Finance have opined on the provisions relating to Central Database, as there in the Bill, as under –
“The scope of the centralized database has been kept very wide and vague and it needs to have a list of all the companies which have been found in violation of the Bill and it should also maintain a list of all Government approved schemes.”
In case the requirement extends to all regulated deposit-takers there will be a tedious and added compliance burden on genuine business entities who are under the purview of regulators which already possess their data.
Further, it is highly unlikely that unregulated deposit takers will file an intimation to the authority. This was also the rationale given in the Report of the Inter-Ministerial Group (IMG) on the BUDS Bill, 2015.
The IMG stated about intimation requirement as under –
“Intimation of business by a Deposit Taking Establishment –
The intent of this provision is to prescribe an intimation requirement which will be applicable to all Deposit-taking Establishments. While it is unlikely that establishments operating Unregulated Deposit Schemes will comply with the said intimation requirements, compliance by Regulated Deposit Schemes may enable the State Government to detect deposit schemes which are operating without any registration. xxx”
In light of the discussions above, there seems to be a lack of sufficient clarity on the issue. However, it can be contended on the strength of explanation (b), that the explicit inclusion of companies accepting deposits under Companies Act, will lead to presumption that the law does not require other regulated deposit-takers to give intimation.
Further, the intention of the BUDS Act was not to cover regulated deposit takers at all. Imposing intimation requirements over regulated deposit takers would be unreasonable and counterproductive and should be meant to cover only unregulated deposit takers.
Ideally, the authority should request for the data from the Regulators which have a ready database at hand, rather than place a burden on each regulated deposit taking entity to intimate the authority.
There is a need for clarity on the provisions laid down in the Rules with respect to the online database. It would be unreasonably tedious to place an intimation burden on all deposit takers. The intent behind creating the database to detect unregulated deposit schemes should be effectively implemented rather than adding a burden of compliance to regulated entities carrying out genuine deposit taking activity. Further, the intent behind the creation of a Central Database of deposit takers is for early detection of unregulated deposit schemes. It seems as though the scope of the central database has been kept wide, as to how the database will detect unregulated deposit taking activity is yet to be seen.
 Yet to be designated by the Central Government