Banning of Unregulated Deposit Schemes Act 2019: Offences and Attachment

Every few years an unregistered financier perfects the same machine: collect small deposits from thousands on a promised return, pay the early ones from the later ones, and vanish at the moment arithmetic requires it. The state Acts that chased these schemes were territorial and uneven, and the Protection of Interests of Depositors laws arrived only after collapse. The Banning of Unregulated Deposit Schemes Act, 2019 inverted the design. It draws up a complete map of lawful, regulated deposit taking, and bans everything off the map in advance, so that the offence is complete when the deposit is solicited, not when the money is lost.

1. The three definitions that carry the Act

Deposit

Section 2(4) defines a deposit as an amount of money received by way of advance or loan or in any other form, by any deposit taker, with a promise to return it, with or without benefit, in money or in kind or in the form of a specified service, after a period or on demand. The width is deliberate, and so are the carve-outs, which keep ordinary life out of a penal statute:

• loans from banks, and loans or assistance from public financial institutions, registered non-banking financial companies, regional financial institutions and insurers;
• amounts received from the Government or a statutory authority, or from foreign sources in accordance with the foreign exchange law;
• capital contributions of the partners of a firm or limited liability partnership, and loans to an individual from his relatives, or to a firm from the relatives of its partners;
• credit given by a seller to a buyer on the sale of property, amounts received by asset reconstruction companies, deposits and contributions under the election law, and periodic payments by members of self-help groups within prescribed ceilings;
• amounts received in the course of or for the purpose of business and bearing a genuine connection to it, such as advances for goods or services, advances against property, security deposits for performance of a contract and advances under long term supply contracts.

Deposit taker and regulated scheme

• A deposit taker under section 2(6) is any individual, group of individuals, proprietorship, partnership, limited liability partnership, company, association, trust or cooperative society which asks for, receives or solicits deposits, but excludes corporations incorporated under a Central or State Act and banking companies, whose deposits their own statutes govern.
• A regulated deposit scheme under section 2(14) is a scheme listed in the First Schedule, arranged under nine regulators: the Securities and Exchange Board of India, the Reserve Bank, the Insurance Regulatory and Development Authority of India, the State and Union territory Governments (for cooperative societies, chit funds, moneylending and prize chit schemes), the National Housing Bank, the Pension Fund Regulatory and Development Authority, the Employees' Provident Fund Organisation, the Central Registrar of Multi-State Cooperative Societies, and the Ministry of Corporate Affairs for company and nidhi deposits. The Central Government may add schemes to the Schedule.
• An unregulated deposit scheme under section 2(17) is simply a scheme or arrangement under which deposits are accepted or solicited by way of business and which is not a regulated deposit scheme. There is no third category.

Figure 1: Testing a scheme against the Act

2. The ban and the offences

Section 4 adds a second prohibition aimed at the lawful side of the map: no deposit taker, even of a regulated scheme, shall commit fraudulent default in repayment of the deposit or in rendering the promised service. Section 5 forbids wrongful inducement, knowingly making false or misleading statements or concealing material facts to induce investment in an unregulated scheme. The offences and punishments then track these prohibitions:

• Soliciting deposits for an unregulated scheme, by advertisement or otherwise, in contravention of section 3: imprisonment of 1 to 5 years and fine of ₹2 lakh to ₹10 lakh, under section 21(1).
• Accepting deposits under an unregulated scheme: imprisonment of 2 to 7 years and fine of ₹3 lakh to ₹10 lakh, under section 21(2).
• Accepting and then fraudulently defaulting on unregulated deposits: imprisonment of 3 to 10 years and fine of ₹5 lakh up to twice the amount collected, under section 21(3).
• Fraudulent default on a regulated scheme under section 4: imprisonment up to 7 years, or fine of ₹5 lakh to ₹25 crore or three times the profit made, whichever is higher, or both, under section 22.
• Wrongful inducement under section 5: imprisonment of 1 to 5 years and fine up to ₹10 lakh, under section 23.
• Repeat offenders under section 24: imprisonment of 5 to 10 years and fine of ₹10 lakh to ₹50 crore.

Figure 2: The graded punishments

• Under section 28, offences under the Act are cognizable and non-bailable, except fraudulent default on a regulated scheme under section 22 and the offence in section 26.
• Under section 30, where the depositors, deposit takers or properties are spread over more than one State or Union territory or outside India, and the amount involved is large enough to affect the public interest significantly, the Central Government may transfer the investigation to the Central Bureau of Investigation.

3. The recovery machinery

Figure 3: From attachment to repayment

• Each state government appoints one or more Competent Authorities, officers not below the rank of Secretary to the government, with the powers of a civil court. On reason to believe that deposits are being taken unlawfully, the Authority may provisionally attach the deposit taker's money and property, and property acquired with depositors' money in other hands.
• The attachment goes within 30 days to the Designated Court, presided over by a judge not below the rank of District and Sessions Judge or Additional District and Sessions Judge, which confirms, varies or releases it after hearing, makes the attachment absolute, and then administers sale and equitable distribution among depositors, the statute directing the Court to endeavour to complete the proceedings within 180 days under section 15(6).
• Section 12 gives depositors' claims priority over all other debts and over revenues, taxes, cesses and rates due to the Government or a local authority, save as otherwise provided in the Securitisation Act and the Insolvency and Bankruptcy Code, whose secured-creditor priorities are preserved.
• A central online database of deposit takers under section 9 collects the intimations section 10 requires of deposit-taking businesses and information on schemes, and regulators and authorities share information into it.

4. Section 45S of the Reserve Bank of India Act, the older fence

The 2019 Act did not write on a blank page. Chapter IIIC of the Reserve Bank of India Act, 1934 had since 1984 contained section 45S, which prohibits individuals, firms and unincorporated associations from accepting public deposits at all where the business is of a financial character, leaving deposit taking to incorporated and regulated entities. Its contravention is punishable under section 58B, and the state depositor protection Acts supplied attachment machinery around it.

• 45S bans by status: an individual or unincorporated body simply may not take public deposits for a financial business, however honest the scheme.
• The 2019 Act bans by scheme: any deposit taker, incorporated or not, running a scheme no regulator watches, with its own graded offences, a dedicated authority and depositor priority.
• The two overlap but neither displaces the other; the 2019 Act expressly leaves other laws' liabilities intact, so one course of conduct can offend both.

5. Quick Revision

1. The ban is complete on solicitation; no depositor need lose money first.
2. There is no middle category: a deposit scheme is regulated or it is banned.
3. Advertising an unregulated scheme is itself an offence.
4. Attachment is the first remedy, trial the second.
5. Depositor priority yields only to the secured creditor statutes.

6. Frequently Asked Questions

Does the Act catch loans a small business takes from friends?

Usually not, and the definitions are drafted to that end. Loans from relatives are excluded from deposit outright, and amounts received in the course of or for the purpose of business, advances for goods, security deposits, dealership money, are likewise out, so long as they remain what they claim to be. The Act also aims at deposits taken by way of business, the scheme, the solicitation, the plurality of depositors, rather than an isolated private borrowing. The danger zone begins where borrowing becomes systematic and public: many lenders, promised returns, and no regulator to whom the arrangement answers. At that point the absence of a First Schedule home, not the borrower's honesty, decides the question.

A chit fund is registered under the Chit Funds Act. Is it an unregulated scheme?

No. Chits conducted under the Chit Funds Act, 1982 are within the First Schedule's list of regulated schemes, as are prize chits banned (and thereby dealt with) under the 1978 Act, moneylending under state licences, and the deposit windows of companies, non-banking financial companies, cooperative societies and provident funds under their respective regulators. The 2019 Act adds nothing to the regulation of a lawful chit; what it adds is the fate of its imitation, the unregistered chit-like scheme, which before 2019 fell between statutes and now falls squarely within the ban.

What happens to the depositors' money once a scheme is caught?

The sequence is attachment, confirmation, realisation, distribution. The Competent Authority provisionally attaches the deposit taker's assets, and traceable assets bought with the deposits in other hands, and places the attachment before the Designated Court, which hears objections and makes it absolute. The Court then has the assets sold and the proceeds distributed among depositors on an equitable basis, their claims ranking ahead of other unsecured claims and most government dues by section 12, within the broad statutory aim of 180 days. Recovery is necessarily partial where the scheme was a Ponzi, which is the Act's final argument for criminalising the solicitation itself: by the time default proves the fraud, the money has largely gone.

Why were banks and statutory corporations left out of the definition of deposit taker?

Because their deposits already live inside complete regulatory codes, and a residual ban must not double-regulate the regulated. A bank's deposit taking is licensed under the Banking Regulation Act, insured by the deposit insurance corporation, and supervised continuously; a corporation created by its own statute takes deposits on the terms that statute sets. Including them would have made every banking default a potential offence under two codes with different standards. The Act instead points all its machinery at the space outside the regulators' fences, while section 4 reaches even regulated deposit takers for the one wrong no regulator licenses: fraudulent default.

7. Related Topics and Provisions

• Acceptance of deposits and Chapter IIIB of the Reserve Bank of India Act
• The Reserve Bank's regulation of non-banking financial companies
• The Prevention of Money Laundering Act and the banker
• Deposit insurance and the DICGC
• Frauds in banking and their criminal law
• The Securitisation Act and the secured creditor's priority