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Here’s how Modi government’s ordinance to ban unregulated deposits impacts you

New Delhi: In a bid to protect gullible investors from ponzi schemes, Prime Minister Narendra Modi-led government last week came out with an ordinance that banned unregulated deposit schemes, which will help to tackle the menace of illicit deposit-taking activities.

Although the intent of the government behind bringing the ordinance is applaudable, experts believe this ordinance will have widespread ramification on some sectors and small traders.

According to a report in the Economic Times, normal transactions like an individual reaching out to friends for a quick loan to tide over a crisis, a cash-strapped businessman borrowing from an acquaintance to meet a personal obligation; or, a charitable institution funding students and the ailing, cannot be done post this ordinance.

According to the ET report, some have even compared the ordinance with demonetisation, which was aimed at curbing black money. 

The new law permits deposits from ‘relatives’, banks, financial institutions, property buyers, customers (extending an advance payment), and for other designated purposes. Similarly, a proprietor can borrow from a non-relative as long as it is strictly for business purposes.

“However, the ability to augment resources for meeting personal and social commitments, (or) medical and educational urgencies will dry up as no amount can be borrowed from persons other than relatives as defined under the Companies Act. The definition is restricted to only immediate family members,” the business daily quoted a senior chartered accountant Dilip Lakhani as saying.

Worst hit from this ordinance will be multi-state cooperative societies and chit funds, which raise funds for lending to companies and entities serving as fronts for political funding. Even the real estate sector will also be the biggest hit, say experts.

“The real estate sector will be hit hard as deposits can only be accepted for a designated transaction and can be adjusted against the future sale consideration. Even if the intention of the ordinance is laudable, the language could cause difficulties to small traders carrying out business as a proprietor, partnership firm or LLP. Students and the needy taking loans from charitable trusts would (also) run into hurdles,” Dilip Lakhani further told ET.

In enforcing the ban, the ordinance has brought about amendments to the Reserve Bank of India Act, 1934, and Multi-State Cooperative Society Act, 2002, to explicitly state that “… a multistate cooperative society shall not be entitled to receive deposits from persons other than voting members”, the business daily mentioned.

Analysts believe many legitimate transactions, especially by SMEs, would be impacted due to the sweeping nature of the provisions. “I don’t know whether there was enough consultation before moving the ordinance,” Jayesh H, co-founder of law firm Juris Corp told ET.

Acceptance of unregulated deposits could trigger attachment and freezing of assets and even imprisonment — with ‘deposit’ defined as money received by way of advance or loan or in any other form by any deposit taker with a promise to return either in cash or kind or in the form of a specified service, the publication mentioned.

“This is the biggest change after demonetisation, GST and RERA that have impacted black money. It would ensure investor protection, particularly in the real estate sector. Will it have a retrospective effect on funds that individuals and firms have on their books?” Girish Vanvari, founder of tax advisory firm Transaction Square told ET. “Also, there is no threshold amount beyond which the deposit would be considered unregulated. So, even a small amount of such deposits would technically be a violation,” Lakhani added.

Like demonetisation, this ordinance will also create roadblocks for regular business transactions and will chock acceptable funding routes. For example, a limited liability partnership can accept deposits from partners as ‘partner’s capital contribution’ but not as ‘loan’. On the other hand, a partnership can avail of loans from relatives of partners but not from partners, the business daily mentioned.