Deposits raised by unregulated entities are on the radar of Finance Ministry
CS Vinita Nair 17 February 2017
India is a country where business is largely carried on in the form of proprietary concerns and partnership firms, and not in the form of companies and Limited Liability Partnerships (LLP). The way of doing business is quite informal, including modes of raising funds for business.
While a few companies (Saradha, Sahara, Sumangal, and Sanchayita) were responsible for the scams in the past, all those doing business will have to bear the brunt of their acts. When the deposit rules under the Companies Act, 2013 became stricter, it was obvious for people to think of LLPs. Most people would prefer not to do business in a highly regulated environment, especially when the business model itself is fairly simple. Fund requirement is a perennial issue and, depending on the size of business and capacity of the businessman, the source varies. So, one may not necessarily go to a bank or a non-banking finance corporation (NBFC) or one’s relatives to raise funds for a business, and instead may go to  ‘Khanna uncle’ or ‘Balbirbhai’. However, the enforcement of Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Act, 2016 (the Bill 2016) will curb this practice. Looking at the penal provisions, businessmen would prefer to suffer losses rather than to go to jail.
Section 45S of the Reserve Bank of India (RBI) Act also prohibits acceptance of deposits by unincorporated bodies. The intent of this bill is also to spread the net on all deposit-takers who accept or solicit deposits to defraud investors, and not to meet the fund requirement in the ordinary course of business. However, the exclusion carved out does not adequately consider options like borrowings from ‘Khanna uncle’, unless they are obtained as advance for supplying goods, or rendering service, or received as credit. Similarly, raising money through issue of bonds, debentures by LLP or trust has not been included, unless these entities are Alternative Investment Funds (AIF) or mutual funds.
In September 2015, SEBI in an informal guidance given to Vijay Suraksha Realty LLP, conveyed that while the definition of ‘debt securities’ under SEBI (ILDS) Regulations 2008 covers securities issued by a LLP (a body corporate), the definition of ‘issuer’ talks specifically about company, public sector undertaking or statutory corporation. Further, the option for LLPs to raise funds from other sources, not partners or relatives of partners, gets prohibited under this Bill.  
Every Ponzi scheme is followed by a new law and such reactive law-making adds to the woes of genuine entrepreneurs. The penal provisions under such law are equally scary. ‘Scheme’ means to make plans, especially in a devious way or with intent to do something illegal or wrong. The intention is to prohibit such persons from defrauding investors. However, funds raised from third person for genuine business purpose cannot be regarded as a scheme for raising deposits in a country where a large part of business is run in an unorganised manner.
So each time an unincorporated body or LLP requires funds, it will have to look at the Central Government and plead ‘Prabhu path pradarshitkariye’ to wait for the Central Government to notify deposit schemes that shall not be treated as Unregulated Deposit Schemes for the purposes of this Act. Instead of specifying what schemes can be excluded, a litmus test must be provided such that meeting of any of those conditions would regard the loan as unregulated deposit. 
Considering the above mentioned points and keeping in view the small businesses, this Bill may be made lenient for particular cases. Protection should be given to those who intend to be protected, therefore, the known investors (other than relatives) should also be able to lend to such businesses.
(CS Vinita Nair-Dedhia is partner at Vinod Kothari & Co)
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