Monday, 30th October 2017

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Clarity sought on private loan status

India Inc wants clarity on whether loans taken privately from individuals will be held illegal

By Sambit Saha in Calcutta
  • Published 27.05.19, 1:23 AM
  • Updated 27.05.19, 1:23 AM
  • 2 mins read
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Corporate India would look for more clarity when that happens as the ordinance is ambiguous on certain fundamental business practices such as obtaining loan from individuals on private terms. (Shutterstock)

A key piece of economic legislation involving the regulation of deposits will be keenly watched by corporate India when the new government settles down into law making and tables it on the floor of Parliament.

The government had issued an ordinance just before the dissolution of the 16th Lok Sabha in this direction. As “The Banning of Unregulated Deposit Scheme Ordinance, 2019” will have a lifespan of six months, the Centre is expected to pass an Act with the consent of Parliament by August 21.

Corporate India would look for more clarity when that happens as the ordinance is ambiguous on certain fundamental business practices such as obtaining loan from individuals on private terms.

The lawmakers, especially the department of financial services under the Union finance ministry, appeared to be mindful that a certain reading of the ordinance may have such an unintended effect.

Within days of the publication of the gazette notifying the ordinance, the department tweeted that it “exempts individual, firm, companies and LLPs from taking any loan and deposit for their course of business as per section 2(4) e, f, l and other provisions”.

Legal experts opined that it was rather unprecedented that the government was attempting to provide legal clarification by way of a tweet. “I do not recall any such thing. The tweet points out that the ordinance may have some unintended consequences. Hopefully, the government will iron out the glitches when the bill is tabled,” N. G. Khaitan, partner of Khaitan & Co, said.

An area that raised concerns within a section of corporate India, especially small and medium-scale units and privately held firms, was that the ordinance states what constitutes “deposits”.

The preamble of the ordinance says it was “an ordinance to provide for a comprehensive mechanism to ban the unregulated deposit schemes and to protect the interests of depositors and for matters connected therewith or incident thereof”, indicating that it intends to deal with ventures whose business is to take deposits.

The government planned to crack down on companies such as Saradha and Rose Valley by this law to prevent unscrupulous businessmen from taking gullible investors for a ride by promising fantastic return. Regulated deposit schemes approved by competent authorities such as the RBI and Sebi were exempted.

However, the Ordinance also provides an elaborate clarification as what will not be considered as deposits. This led some to wonder whether financial transactions — such as private moneylending — will also be construed as unregulated and face legal consequence.

The ordinance specifically says that taking a loan from relatives is not to be considered as collecting deposit. “Does it mean that a businessman cannot take loan from a third party? Does the ordinance then prevents a person in need of funds from privately borrowing from friends or well-wishers?” a city-based businessman asked.

Khaitan said though the tweet clearly said that taking loan during the course of business was exempted, this should be stated in unambiguous terms when the bill is tabled.

“The legislature is trying to prevent companies who are in the business of taking deposits. This is a laudable step. But surely, helping out a friend with loan will not come under this purview. What we need is more clarity and hopefully it will come with the bill,” Khaitan said.