Decryption of the Ordinance on unregulated deposit systems


The recently enacted Prohibition of Unregulated Depository Systems Ordinance 2019 has ruffled some feathers with news reports and legal experts voicing concerns about how the ordinance could harm people who borrow quickly from relatives or friends. friends, and businesses that take out loans from unrelated parties and businesses.

A series of finance ministry tweets last week, along with specific clarifications posted on people borrowing from friends and relatives, allayed some concerns.

We detail the different provisions and exclusions of the ordinance to explain how it will impact individuals and businesses.

The prescription

The purpose of the ordinance is to control illicit deposit / ponzi schemes that harm small investors.

But the words used to describe some of the exclusions, as provided for in Article 2 (4) of the ordinance, kept individuals and businesses in suspense.

The ordinance stipulates that any deposit system under which deposits are accepted or solicited by a depository body in a professional capacity, which is not a regulated deposit system, is prohibited.

The deposit in the ordinance was defined as “a sum of money received in the form of an advance or loan in any other form by any depository body with a promise to return whether after a specified period or otherwise or in cash or in kind in the form of a specific service with or without any benefit in the form of interest, bonuses, profits or any other form ”.

There are several exclusions in the ordinance as to what is not a “deposit”. Divergent interpretations by legal experts have led to confusion.


For example, while amounts received by an individual in the form of a loan from relatives are excluded, under section 2 (4) (f), there was ambiguity as to whether the parents included only the family. immediate, not distant friends and relations.

But the ministry has now clarified that “people who borrow or take out loans or money from relatives or friends for marriage or medical emergency or business needs or for any other personal reason have nothing to do with it. to fear.

Such transactions are not unregulated deposit systems as defined in section 2 (17) ”.

In addition, an individual can receive money from a friend residing abroad, subject, of course, to the provisions of FEMA.

At the end of the line : As for individuals, they can borrow money from relatives or friends for any purpose – business or personal – depending on the ministry’s clarification.


There were several discussions of legal experts, which may require clarification.

Under Article 2 (4) (e), any amount received as capital contributions by the partners of a general partnership is excluded from the definition of “deposit”, which implies that such amounts are permitted and do not result in penal provisions under the ordinance.

In accordance with Article 2 (4) (f), amounts received by a business in the form of a loan from relatives of one of the partners are excluded from the definition of “unregulated deposits” and are therefore permitted.

But there is uncertainty about the money received from a partner as a “loan”. Here, the government will have to issue additional clarifications.

At the end of the line : Under current arrangements, there is uncertainty as to whether a general partnership can receive money other than a capital contribution from its partner. Any amount received from a friend of a partner is not allowed.


The other concern is whether companies can take unsecured loans from entities and unrelated parties. But section 2 (4) (l) excludes the amount received for business purposes, which clearly implies that businesses can take unsecured loans from unrelated parties and businesses. The ministry, however, specifically clarified this point by stating that “small businesses, sole proprietorships, partnerships, LLPs and SMEs that take unsecured loans from parties and unrelated businesses are also exempt under the ‘article 2 (4) (I) of the law ”.

At the end of the line : There is no prohibition on small businesses receiving loans for business purposes.

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