The Banning of Unregulated Deposit Schemes Act (BUDS Act, 2019) is a significant legislative development in India aimed at curbing illicit deposit-taking activities. This Act has crucial implications for deposit-taking operations, including network or Multi-Level Marketing (MLM) companies and their operations.
Background: The Emergence of the BUDS Act 2019
The President of India promulgated the BUDS Act 2019 on 21st February 2019 as a comprehensive legal mechanism to ban unregulated deposit schemes and protect investors' interests. This legislation was sparked by the growing menace of illicit deposit-taking activities that had duped numerous gullible investors nationwide.
Defining Unregulated Deposit Schemes
The BUDS Act 2019 defines the term "Unregulated Deposit Scheme" (UDS), providing a clear framework to discern between legitimate and fraudulent operations. UDS refers to any arrangement or scheme under which deposits are solicited or accepted by any "Deposit Taker" as part of a business operation that is not a "Regulated Deposit Scheme" (RDS), as outlined in the UDS Ordinance. Hence, any scheme falling within the ambit of 'Deposit' and not classified as an RDS under the UDS Ordinance is considered a UDS and prohibited.
Decoding Regulated Deposit Schemes
Conversely, a Regulated Deposit Scheme (RDS) refers to any permissible scheme or arrangement under which deposits are accepted or solicited by a "Deposit Taker" and specified in the UDS Ordinance.
Key Terminologies in the BUDS Act 2019
Deposit
The term "Deposit" is described as any sum of money received in the form of an advance, loan, or any other form by any Deposit Taker with a promise of return, either after a specified period or otherwise, in cash, kind, or the form of a specified service. This return could be with or without any benefit in the form of interest, bonus, profit, or any other form.
Deposit Exemptions
Certain receipts are not considered as "Deposit". This includes:
- Money received in the course of, or for the purpose of, business and bearing a genuine connection to such business.
- Loans from a bank or any public financial institution.
- Capital contributions by partners of any partnership firm or a limited liability partnership.
- Loans from relatives by an individual or partnership firm.
Deposit Taker
A "Deposit Taker" is any entity(MLM or Non MLM) or individual accepting or soliciting deposits, including individuals, proprietorship firms, partnership firms, limited liability partnerships, companies, trusts, cooperative societies, and more. However, it does not include corporations incorporated under an Act of Parliament or a state legislature, banking companies, or cooperative banks as defined in the Banking Regulation Act of 1949.
Depositor
A "Depositor" refers to any person who makes a deposit under the UDS Ordinance.
Implications of the UDS Ordinance
The UDS Ordinance explicitly prohibits unregulated deposit schemes, disallowing any person to make any misleading or false statement or conceal any material facts to induce another person to invest in or become a member or participant of any UDS. Furthermore, the ordinance considers specific schemes, such as a prize chit or a money circulation scheme, banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, as UDS.
Permissible Schemes under RDS
The UDS Ordinance also outlines several schemes and arrangements permissible as RDS. These include schemes by Collective Investment Management Companies registered with SEBI, portfolio management schemes, ESOP schemes, AIF Schemes, Mutual Funds, and other schemes or arrangements regulated or registered with SEBI. It also includes schemes under which deposits are accepted by Non-Banking Financial Companies (NBFC) registered with the Reserve Bank of India (RBI).
Fraudulent Default in RDS
The UDS Ordinance also addresses fraudulent defaults in RDS. No Deposit Taker, while accepting deposits pursuant to an RDS, is allowed to commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.
Central Database of Deposit Takers
The UDS Ordinance mandates creating, maintaining, and operating an online database for information on Deposit Takers operating in India. An authority appointed by the government will manage this database. Every Deposit Taker commencing or carrying on business after 21st February 2019 is required to inform this authority about its business.
Offences and Penalties
The UDS Ordinance provides stringent punishments for Deposit Takers, ranging from one year to ten years of imprisonment and pecuniary fines ranging from INR 2,00,000 to INR 500 million for offences prescribed under the UDS Ordinance.
Concluding Remarks
The BUDS Act 2019 provides a robust legislative framework to tackle fraudulent MLM and Non-MLM operations and Ponzi schemes. By banning unregulated deposit schemes, it seeks to protect the interests of depositors and deter MLM operations from soliciting deposits in any form for non-business purposes. However, the direct selling-MLM companies conducting business operations within the ambit of the consumer protection (direct selling) rules, 2021 and complying with the specified regulations are permitted to continue their operations, thereby underlining the significance of regulatory compliance in MLM business operations.
However we need to remember that it's crucial to avoid associating with any MLM operation soliciting deposits in any form.
