Clarity sought on private loan status

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A key piece of economic legislation involving the regulation of deposits will be closely watched by Indian businesses when the new government takes a seat in making laws and tabling them on the parliamentary floor.

The government had issued an ordinance just before the dissolution of the 16th Lok Sabha to this effect. Since the “Prohibition of Unregulated Depository Systems Order, 2019” will have a six-month lifespan, the Center is expected to pass a law with the consent of Parliament by August 21.

Indian companies would seek more clarity when this happens, as the ordinance is ambiguous on some basic business practices such as obtaining loans from individuals on private terms.

Lawmakers, especially the financial services department of the Union’s finance ministry, seemed aware that a certain reading of the ordinance could have such an unexpected effect.

In the days following the publication of the gazette notifying the ordinance, the ministry tweeted that it “exempts individuals, businesses, corporations and limited liability companies (LLPs) from taking out any loans and deposits in the framework of their activities in accordance with Article 2 (4) e, f, l and other provisions “.

Legal experts felt it was rather unprecedented for the government to attempt to provide legal clarification through a tweet. “I don’t remember anything like that. The tweet points out that the order may have unintended consequences. Hopefully the government will fix the issues when the bill is tabled, ”said NG Khaitan, partner of Khaitan & Co.

One area that raised concerns among part of Indian businesses, particularly small and medium-sized units and private companies, was that the ordinance spells out what constitutes “deposits”.

The preamble to the ordinance states that it was “an ordinance providing for a comprehensive mechanism to prohibit unregulated deposit systems and protect the interests of depositors and for matters related or arising therefrom”, indicating that it intends to deal with companies whose business is to take deposits.

The government planned to crack down on companies such as Saradha and Rose Valley with this law in order to prevent unscrupulous businessmen from deceiving gullible investors into promising them a fantastic return. Regulated deposit systems approved by competent authorities such as RBI and Sebi have been exempted.

However, the ordinance also provides detailed clarification as to what will not be considered deposits. This has led some to question whether financial transactions – such as private money lending – will also be interpreted as unregulated and suffer legal consequences.

The ordinance expressly says that taking out a loan from relatives should not be considered to be collecting collateral. “Does this mean that a businessman cannot take out a loan from a third party?” Does the ordinance then prevent a person in need of funds from borrowing privately from friends or sympathizers? A city businessman asked.

Khaitan said that while the tweet made it clear that business borrowing was exempt, this should be stated in unambiguous terms when the bill is tabled.

“The legislator is trying to prevent companies that operate from receiving deposits. It is a commendable step. But surely helping a friend with a loan will not fall under this skill. What we need is more clarity and hopefully that will come with the bill, ”Khaitan said.


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