Sections 3, 4, 5 and 6 of the Banning of Unregulated Deposit Schemes Act, 2019
Chapter II of the Banning of Unregulated Deposit Schemes Act, 2019 creates the core statutory prohibitions against unregulated deposit schemes. Section 3 bans such schemes, Section 4 prohibits fraudulent default even in a regulated deposit scheme, Section 5 prohibits deceptive inducement into an unregulated scheme, and Section 6 treats certain already-banned prize chit and money circulation schemes as unregulated deposit schemes for the purposes of the Act.
Key definitions under Section 2
- Deposit: Broadly, money received by a deposit taker by way of advance, loan or otherwise with a promise to return it, whether in cash, kind or a specified service, with or without interest, bonus, profit or another benefit, subject to the exclusions stated in Section 2(4).
- Deposit taker: Includes individuals, proprietorships, partnership firms, LLPs, companies, associations of persons, trusts, co-operative societies and other arrangements receiving or soliciting deposits, subject to the statutory exclusions in Section 2(6).
- Regulated Deposit Scheme: A scheme specified in column (3) of the First Schedule to the Act.
- Unregulated Deposit Scheme: A scheme or arrangement under which deposits are accepted or solicited by a deposit taker by way of business and which is not a Regulated Deposit Scheme specified in the First Schedule.
These definitions are important because Section 3 does not prohibit every receipt of money. The statutory question is whether the arrangement amounts to a "deposit" under Section 2 and, if so, whether the scheme falls within a regulated category in the First Schedule or is otherwise excluded by the Act.
Section 3 - Banning of Unregulated Deposit Schemes
Statutory text:
On and from the date of commencement of this Act,-
(a) the Unregulated Deposit Schemes shall be banned; and
(b) no deposit taker shall, directly or indirectly, promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.
What Section 3 means
Section 3 is the principal prohibition. It both bans the unregulated scheme itself and separately restricts the conduct of a deposit taker. The prohibition extends beyond actually receiving money. It also covers promotion, operation and advertisements that solicit participation or enrolment.
The words "directly or indirectly" widen the reach of the section. A person cannot avoid the prohibition merely by using intermediaries, marketing agents, online promotions or another arrangement if the substance of the activity is the promotion, operation or solicitation of deposits for an Unregulated Deposit Scheme.
Section 4 - Fraudulent default in Regulated Deposit Schemes
Statutory text:
No deposit taker, while accepting deposits pursuant to a Regulated Deposit Scheme, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.
What Section 4 means
Section 4 is different from Section 3. A scheme may be regulated and therefore not banned, but the deposit taker can still violate the Act if there is a fraudulent default in repayment, return of the deposit on maturity, or delivery of a specified service promised against the deposit.
Accordingly, regulatory status is not a defence to fraudulent conduct. The section protects depositors even within a lawfully regulated deposit framework.
Section 5 - Wrongful inducement in relation to Unregulated Deposit Schemes
Statutory text:
No person by whatever name called shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, to induce another person to invest in, or become a member or participant of any Unregulated Deposit Scheme.
What Section 5 means
Section 5 targets deception used to bring people into an Unregulated Deposit Scheme. It applies to "any person", not only the deposit taker. The prohibited conduct includes knowingly making a false, deceptive or materially misleading statement, promise or forecast, as well as deliberately concealing a material fact.
The prohibited statement or concealment must be connected with inducing another person to invest in, join or participate in an Unregulated Deposit Scheme.
Section 6 - Certain scheme to be Unregulated Deposit Scheme
Statutory text:
A prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (43 of 1978) shall be deemed to be an Unregulated Deposit Scheme under this Act.
What Section 6 means
Section 6 creates a statutory deeming rule. If an arrangement is a prize chit or money circulation scheme already banned under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, it is treated as an Unregulated Deposit Scheme for the purposes of the 2019 Act.
This links the older prohibition on prize chits and money circulation schemes with the enforcement and depositor-protection framework of the BUDS Act.
Penalties connected with Sections 3, 4 and 5
| Contravention | Related punishment provision | Summary |
|---|---|---|
| Section 3 - soliciting deposits | Section 21(1) | Imprisonment from 1 to 5 years and fine from Rs. 2 lakh to Rs. 10 lakh. |
| Section 3 - accepting deposits | Section 21(2) | Imprisonment from 2 to 7 years and fine from Rs. 3 lakh to Rs. 10 lakh. |
| Section 3 - accepting deposits and fraudulently defaulting | Section 21(3) | Imprisonment from 3 to 10 years and fine from Rs. 5 lakh up to twice the aggregate funds collected. |
| Section 4 | Section 22 | Imprisonment up to 7 years, or the prescribed fine, or both. The fine may extend to Rs. 25 crore or three times the profits made out of the fraudulent default, whichever is higher, subject to the statutory minimum. |
| Section 5 | Section 23 | Imprisonment from 1 to 5 years and fine up to Rs. 10 lakh. |
Official legal resources
For the authoritative text, amendments, schedules and subordinate legislation, refer to the India Code page for the Banning of Unregulated Deposit Schemes Act, 2019 and the Department of Financial Services, Ministry of Finance.
This page is an informational summary of the statutory provisions. For a legal proceeding or transaction, the current official text, applicable rules, notifications and judicial decisions should also be checked.