gold investment scheme

8/12/2019 Gold Investment Scheme

1/4

Gold investment scheme: Is itillegal under new Companies Act?

NIVEDITA SHANKAR 08/04/2014 02:57 PM

Section 74 and 75 of new Companies Act classify any default in

repayment of deposits accepted before the enforcement of Act, as

liable to be termed as fraud under section 447 if it can be proved

that the intent behind accepting such deposits was to defraud

depositors

The Companies Act, 2013 (Act, 2013) and its allied rules have re-enforced what

used to be the starting lines in every question paper go through every line

carefully.. With a hurried attempt to meet the enforcement date of 1 April

2014 the Ministry of Corporate Affairs (MCA) at the last minute has come out

with the final draft of rules. The allied rules carry such myriad provisions that

it has become necessary to peruse each and every line to understand the intent

and probable impact of the same.

One such provision is a seemingly innocuous provision of Explanation (a) to

Rule 2 of Companies (Acceptance of Deposits) Rules, 2014. It reads as any

amount:

received by the company, whether in the form of instalments or otherwise,

rom a person with promise or offer to give returns, in cash or in kind, on

completion of the period specified in the promise or offer, or earlier,

accounted for in any manner whatsoever.

Key features of gold purchase schemes


2/4

Such schemes promise the last installment as free or waived after the payment

of all the previous installments. That is, the investor pays for say the first 11

installments and the company shall then pay the 12th installment. It is up to

the investor to purchase any jewellery at the prevailing price from the company

only. The amount accumulated can thus be used only to purchase in kind and is

not refundable in cash.

Can such gold purchase schemes be treated as advances?

Surely not. Advances are always against some pre-identified goods or service.

The question of determining the goods and services at a later date does not

arise at all and neither does the element of returns does not arise at all. Thus,

even if it is argued that the gold purchase schemes are in the nature ofadvances, the argument can easily be struck down as there can be no promise

or offer to give returns in case of advances.

Were such gold purchase schemes regulated so far?

The answer is a disappointing no and the same can be attributed to the

lackadaisical attitude of regulators. Recent reports suggest that both Securities

and Exchange Board of India(SEBI) and Reserve Bank of India (RBI) have

washed their hands off of classifying such gold purchase schemes. The passing

the buck game has even been played by the courtsof the land. To put it simply,

such schemes are:

1. Nothing but pooling in of funds

2. entrustment of money to someone such that the investors are not the oneswho are managing their own money

3. Although it may be argued by companies floating such gold jewellery

schemes that there is not sharing of returns in such cases as the amount

received from each investor is earmarked, yet this may not be enough to

rule out that gold purchase schemes are in effect Collective Investment

Schemes as defined in section 11AA of SEBI Act, 1992.

Thus, even if regulators have washed their hands off in deciding the true

character of such gold purchase schemes, the fact remains that the investment
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1385611633700.pdfhttp://www.moneylife.in/article/gold-investment-schemes-regulations/35879.html


3/4

of investors was at large risk as there was nothing stopping such companies

from ending their operations overnight and walking away with the hard earned

money.

How does Act, 2013 come into the fore?

The explanation reproduced above shows how gold purchase schemes from 1

April 2014 shall be taken to deposits. The reproduced text shows that where

any amount:

1. is received by a company whether in installments or other wise

2. the receipt is towards some promise or offer to give returns

3. such returns may be in cash or in kind

4. returns will be received at the end of a particular period

5. the accounting for such amounts may be done in any manner

Then the same shall be taken to be a deemed deposit and to all such deposits

the elaborate provisions under Deposit Rules, 2014 shall apply.

ut the question arises that even if such schemes are covered under thedefinition of deposit would they remain legal? The answer is to this is no and

here is why. Under Rule 3(6) of Companies (Acceptance of Deposits) Rules,

2014, no company can accept deposit, which carries a rate of interest more

than what has been prescribed by RBI for deposit accepting non-banking

financial companies (NBFCs).

We have drawn the internal rate of return (IRR) of such schemes considering amonthly deposit of Rs1,000:

As perinformation available on RBIs site, the present rate of interest on

deposits cannot be more than 12.5% at present. This clearly shows that the

present jewellery schemes may actually be promising returns under a scheme

which is illegal. Thus, such schemes seem to be a complete impossibility.

Additionally, companies offering such deposit schemes will also have to comply

with requirements like creation of deposit redemption reserve, appointment of

deposit trustee, create deposit insurance among others.
http://www.rbi.org.in/scripts/BS_NBFCDepositors.aspx


4/4

In the run up to the enforcement of the Act,

2013 and usual year end pressures,

companies and their secretarial

departments will also have to take note of

such provisions. It remains to be seen ifcompanies have already taken note that

such schemes are no longer unregulated. To

conclude as the position remains now such

schemes are deposits from 1 April 2014.

What is even more important is to take

note of the provisions of section 74 and 75

of Act, 2013 which classify any default inrepayment of deposits accepted before the enforcement of Act, 2013 as liable

under section 447 which pertains to fraud if it can be proved that the intent

behind accepting such deposits was to defraud depositors.

(Nivedita Shankaris a Company Secretary and works as senior associate at

Vinod Kothari & Company)
http://www.moneylife.in/author/nivedita-shankar.html

gold investment scheme

Documents