Personal Finance

Beware of gold savings schemes!

Rajalakshmi Nirmal | Updated on April 07, 2019 Published on April 07, 2019

The ‘Banning of Unregulated Deposit Schemes Ordinance’ may not help if you lose money in these schemes run by jewellers

Cracking its whip on the Ponzi schemes in the market, the Centre in February introduced the ‘Banning of the Unregulated Deposit Schemes Ordinance’. While it initially appeared that the ordinance would cover all unregulated schemes, it has turned out that gold schemes run by jewellers could be out of the net. Jewellers — big and small — continue to raise money through gold schemes in which customers contribute a fixed sum for 11 months, and at the end buy jewellery for the accumulated value. Many jewellers are sole proprietors or run the business as a partnership firm, thus operating in a regulatory vacuum.

This is not the first time jewellers have gotten away with law.

In the new Companies Act that was notified in 2014, conditions were laid down for companies other than banks and NBFCs that want to raise deposits from public. It said that any registered company (including a jeweller) which raises money from public for a tenure of more than 365 days has to get itself rated for repayment capacity and take deposit insurance. Further, the rate of return on the deposit should not be more than what NBFCs offer, it said. But jewellers found an escape route by modifying their schemes to bring the tenure down to 11 months from 12/24/36 months earlier.

There have also been some instances of gold jewellers duping clients. A case in point is of Nathella Sampath Jewellery, a big name in the gold market in Tamil Nadu for over 75 years. In October 2017, Nathella shut shops across the State claiming financial troubles. It then also turned out that the company had fudged accounts, borrowed money from banks and defaulted on repayments. While customers who put money in Nathella’s gold savings scheme waited for the repayment, in May 2018, the company and its promoters filed for insolvency

Note that in insolvency proceedings, when assets get liquidated, there is an order of payment — first, the cost of liquidation; second, salary dues to employees, and next the dues to secured creditors. Last to be paid — provided there is money left with the liquidator — will be the unsecured creditors. Legal experts say that law sees customers of gold jewellery savings schemes as ‘unsecured operational creditors’.

The loophole

The new ordinance defines ‘deposit’ “as an amount of money received by way of advance or loan, by any deposit taker with a promise to return either in cash or in kind or in the form of a specified service, with or without any benefit.” It doesn’t matter who raises the deposit — it can be an individual, a proprietorship concern, a partnership firm, a company, a co-operative society or even a trust. So, money raised by jewellers through gold schemes can fall within the ambit of the ordinance. However, there are exceptions. Amounts raised as loan by individuals from relatives as well as advance payment for supply of goods in a business are excluded from the definition of a deposit. Jewellers claim that they sell their gold schemes to customers as instruments for planning their future gold purchase, which effectively makes the scheme a trade advance.

Anantha Padmanabhan, Chairman, All India Gem and Jewellery Domestic Council, said: “To our knowledge, the ordinance has nothing to do with savings scheme of our jewellers. The money jewellers raise is only trade advance; it can’t be considered deposit. But we have written to the Ministry of Commerce asking for clarity on whether we can give discounts/gifts to customers under the schemes.”

Legal experts, however, say there is still ambiguity on whether or not gold savings schemes of jewellers are covered under the ordinance.

In fact, one expert even said that it may not be possible for jewellers to escape through the ‘trade advance’ loophole.

CS Sikha Bansal, Senior Associate, Vinod Kothari and Company, Practising Company Secretaries, said: “If a customer puts in a generic payment for a certain number of months, and at the end of such period, he either decides on what he can buy, ordecides to take his money back, what he paid all those months was nothing but a deposit. For a payment to be an advance for goods, our view is that the advance has to be for identified, ascertainable goods. No one pays an advance for something that has not been identified as yet. In our view, the law does ban such schemes.”

No recourse

If you burn your fingers by depositing money in a scheme run by a bank/NBFC or a company registered under the Companies Act or, say, a mutual fund, the respective regulatory bodies — the Reserve Bank of India, the Ministry of Corporate Affairs (MCA) and the Securities Exchange Board of India could address your grievance. But in case of gold schemes, there is no such regulatory body.

Many of these jewellers are not registered companies, so MCA can’t step in. And given that now there is no clarity on whether these are covered under the unregulated deposits ordinance, there may not be any recourse if you lose money. You can register a police complaint, but it could end up being a long-winding process.

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