Cracking down on the unregulated lending market, the government has banned high-risk deposit schemes offered by builders and jewellers. The companies used the deposits to fund their needs and attracted investors by offering high interest rates. The practice was fairly common in tier II and tier III cities.
The government passed the Banning of Unregulated Deposit Schemes Ordinance on 21 February, prohibiting all deposit schemes (with or without interest) except those with regulatory approval. Though some of these deposits may have violated the existing Collective Investment Scheme (CIS) Regulations, 1999, laid out by capital market regulator Securities and Exchange Board of India (Sebi), the new ordinance is more comprehensive in the way it prohibits these companies from soliciting money from depositors.
We tell you the kind of schemes that are banned by the new law and what you can do if you are an existing investor.
Deposits with builders, jewellers and other types of businesses that do not have specific regulatory approval will be affected by the ban.
Most real estate developers were taking loans against promissory notes for repayment after tenures of 3, 6 or 12 months, said Deepak Khemani, a Mumbai-based wealth manager. A promissory note is a legal instrument that records a debt and assures repayment to the lender. The interest rates on these loans in Mumbai is in the range of 15-24%, depending on the builder’s reputation, said Khemani.
These schemes were publicised through word of mouth rather than formal advertisements. Builders would appoint brokers on commission to popularise the deposits. Often, commissions were paid in cash. There was no collateral or guarantee against these loans. “I know a few big names in Mumbai who are in deep trouble. Not only are they not able to pay the capital but they are not paying the interest either. Most investors have been asked to wait 6-12 months for interest payments, forget return of capital," he said.
In 2018, DS Kulkarni, a Pune-based real estate developer was arrested for violating the provisions of the Maharashtra Protection of Depositors Act, 1999, and various sections of the Indian Penal Code (IPC) after reportedly defaulting on deposits worth around ₹230 crore collected from at least 2,000 individuals.
Out of bounds
Deposits and loans that are not covered under the new law include loans from relatives, credit given to a buyer or seller of real estate in a property transaction, periodic payments by members of self-help groups, and advances against the supply or hiring of goods and advances against long-term projects for the supply of capital goods.
Deposits with banks, non-banking finance companies (NBFCs) and other intermediaries which have regulatory approval will also not be affected. Also, not all deposit schemes offered by builders and jewellers have been banned. Deposit schemes with builders and jewellers that work like advances against purchase of goods at a later date have not been banned under the new law.
“Incentive or assured return schemes of builders will be permitted only if the money is provided against specific immovable property to be transferred to the buyer. If the builder has to return the money with or without interest other than for situations allowed under the ordinance, it may be treated as an unregulated deposit," said Babu Sivaprakasam, partner, Economic Laws Practice, a law firm.
For example, paying ₹20 lakh as a deposit or loan to a builder and using it as payment against a flat purchase from the same builder would not be prohibited. However, depositing ₹20 lakh with the same builder against payment of interest but no asset to be acquired when the scheme ends will be treated as an unregulated deposit.
The Banning of Unregulated Deposit Schemes Ordinance, 2019, holds the deposit-taker or the company offering an unregulated deposit scheme guilty. The law does not hold the investors or depositors responsible and does not “criminalise" them.
While such schemes are likely to be discontinued by builders, jewellers or any other unregulated deposit-takers, what do you do if you have already lent money to such a company?
The status of money that has already been lent is not clear. According to Shruti Rajan, partner, financial regulatory practice, Cyril Amarchand Mangaldas, a law firm, “From a plain reading of the ordinance, it would appear that the deposits collected before the ordinance came into effect would not be automatically covered by the Banning of Unregulated Deposit Scheme Ordinance, 2019. Such investors continue to have other legal remedies."
If the jeweller or builder refuses to give back your money, you can invoke other laws like Section 420 of the IPC. The ordinance makes the entire deposit illegal, whether or not interest is paid to you.
In case you were unaware of the ban and made a deposit after the enactment of the ordinance, you can approach the “competent authority", which will be set up in due course, and will take steps to compensate you. The money owed to depositors will take priority over other debts and any taxes owed by a deposit-taker, subject to the provisions of the Insolvency and Bankruptcy Code, 2016, and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) Act, 2002.
The ordinance also allows the central government to create a registry of deposit-takers in India for you to identify the regulated ones. It may, however, take some time for the registry to be created. Watch this space.