Interestingly, it is said that partners' capital is not deposit. Does it mean that partner's loan is deposit? In that case, problems can arise particularly when partners retire or die and their balances are to be repaid. It is also said that only that share capital issued under Sebi guidelines is excluded from the term deposits.

Does this mean that share capital of unlisted companies would be covered under term deposits? It is submittedthat though the drafting is poor, such capital cannot be included in deposits. Note that deposits by relatives, directors, shareholders, etc are not excluded. In comparison, under the Reserve Bank of India Act, 1934, read with directions issued thereunder, deposits accepted from directors, shareholders (in case of private companies), inter-corporate deposits, etc are exempted from the legal requirements under that law.

It is provided that the deposit can be in cash or in kind. However, a clarification is made that the normal credit granted by the buyer to the seller will not be treated as deposit.

Now let us see the operative part. It is said that if such an entity fraudulently defaults in repayment of the deposits and interest, etc, the promoters, employees, partners, etc, will be fined and jailed. The fine is up to Rs 1,00,000 and jail is up to six years. It is important to note that if there is conviction, the jail and fine is mandatory and there is no provision for compounding.

First of all, whatdoes the term "fraudulent" default in repayment mean. Fraud is generally a common legal term which signifies that a false statement is consciously made to persuade another party into entering in a contract. Presumably, in this context, what is implied is that the depositor has been persuaded to make the deposit by fraud. Further, the intention in non-repayment is also fraudulent. However, what is fraudulent and what is not can be the subject of controversy. It is likely that in the application of this subjective term, dishonest entities may escape while bona fide entities may face harassment.

It is provided that, when a entity makes "impracticable or commercially unviable promises" while accepting deposits, the default in repayment of such deposits is deemed to be fraudulent. Note that it is not that a mere presumption is made that the default is fraudulent which presumption can be rebutted. Similarly, when the moneys are invested in a manner which involves "inherent risk" in recovery, the default inrepayment will be deemed to be fraudulent. In both the above cases, subjective questions arise.

What are commercially unviable promises or returns? What are the criteria to decide which investments involve inherent risk and which do not? Are investments in plantations inherently risky? Are inter-corporate deposits risky? In several cases, the answer will not be easy to find. Here again, this is where dishonest entities may find their escape routes.

The persons sought to be punished or whose properties can be attached are covered with a wide brush. Any person responsible for conduct of the business can be fined and jailed and his personal property attached.

The attachment of the property can be made on actual default or even much earlier if it is found that the business is conducted with an intent to defraud depositors. The personal self-acquired properties of the promoters, etc, can also be attached. This Ordinance being issued by the government of Maharashtra, would extend only to Maharashtra. However,questions will arise as to which entities will be covered? Will it apply only to those entities having their registered offices or principal places of business in Maharashtra? Whether it would apply even where deposits are accepted in Maharashtra through branch offices or agents? Will it apply to deposits already accepted or to deposits accepted in future? Will it apply to defaults already made or only to future defaults? These questions have not easy answers.

Nevertheless, it is clear that just because a particular entity is incorporated outside Maharashtra will not mean that it will be out of the purview of this law. In fact, it is likely that firms and other entities from all over the country may be covered by this law, particularly since a large number of them operate from Mumbai.

To conclude, the Ordinance applies to any entity, whether corporate or not, any amount received, whether deposit as commonly understood or not, and to any entity, whether engaged in a financial business or not. Theprovisions need substantial redrafting to make them effective. At the same time, some of the provisions having draconian effects and which leave scope for arbitrary action needs some safeguards and clarification.

The author is a Mumbai-based chartered accountant