On February 21, 2019 the Central Government notified the Banning of Unregulated Deposit Schemes Ordinance, 2019. The preamble to the ordinance states that it provides a comprehensive mechanism to ban the unregulated deposit schemes and to protect the interest of depositors and matters connected therewith.
CONSTITUTIONAL LEGALITY
At the outset, I have serious reservations as to validity of the legislation, whether the Parliament has the competence to enact a law to regulate money lending business. In pith and substance, the ordinance is a law to regulate and impose ban on money-lending and money lenders and this is exclusive domain of the State under Entry 30 of the State List provided under the Seventh Schedule to the Constitution.
In my view, the enacted ordinance cannot root its source from the following entries of the Union List, being 45 – Banking; 46 – Bills of exchange, cheques, promissory notes and other like instruments. Even under the Concurrent list the Parliament is unable to establish its source. Therefore, the entire ordinance is unconstitutional and vulnerable to a serious challenge. This apart, the ordinance has overriding effect and will prevail over any other laws, including laws made by any State or Union territory. However, where there is no conflict and even other laws can be made enforceable to the deposits, application of such laws is not barred.
In relation to my argument of competency of the Parliament, it is necessary to highlight that the acceptance of deposit by unincorporated bodies was already prohibited under section 45S of the Reserve Bank of India Act, 1934. This provision was challenged on the grounds of legislative competence and the Supreme Court upheld the provision on the ground that the Parliament is competent to enact laws in relation to acceptance of deposits which is similar to banking business, therefore, will fall under Entry 45 of List I of the Seventh Schedule to the Constitution. The prohibition in the challenge under section 45S was that of acceptance of deposit by inviting people to make deposit by offering higher rate of interest which were utilised by deposit taker for lending out, this activity according to the court was found to be in nature of banking activity and consequently, fell within the domain of Entry 45 – Banking. In my view the said judgment may not be applicable to the present ordinance because this ordinance not only prohibits deposits but also prohibits money-lending activity. This is so because the definition of deposit under section 2(4) of the ordinance is very wide and specifically targets advances and loans or amounts of similar nature. Therefore, in my view, in pith and substance the present ordinance is a law to prohibit money-lending activity which will be the prerogative of the State Government under Entry 30 of List II to the Seventh Schedule of the Constitution.