Laws Governing Gold Savings Schemes By Jewellery Brands

For Gold Savings Schemes, generally the jewellers waive off / provide maturity discount for one / few month(s) (generally last month) of investment for the consumers. Though, the same is not mandatory in nature.

Such a scheme benefits the consumer to purchase gold after its instalments at a reduced price (since the payment of one month is generally waived off and / or discounted) and makes it convenient by not paying a one time hefty payment to purchase gold.

For jewellers / jewellery shops, this scheme helps in gaining payments in the form of monthly investments thereby generating a regular cash flow. Further, if the consumer fails to pay the rest of the instalments even after requisite warnings, generally the earlier instalments would not be refundable.

A lot of jewellery shops and popular brands initiate their own Gold Savings Schemes. However, one of the common aspects of the scheme is that all fall within the time frame of 11 months and / or within 365 days. Further, as will be demonstrated below, the amount collected overall must be below INR 100 crores.

Ever wondered why such commonality among all the jewellery shops where the timeline for the scheme does not go beyond 365 days i.e. say for 24 months and / or 36 months etc.? or as to why the jewellery brands do not go beyond the indirect threshold of INR 100 crores. Let's find out the answer to the same below.

Ambit of Law

Law relating to Gold Savings Schemes against the monthly fixed deposits would fall under the ambit of the (including but not limited to) following laws / rules / regulations:

• Companies Act, 2013;
• Companies (Acceptance of Deposits) Rules, 2014;
• Banning of Unregulated Deposit Schemes Act, 2019;
• Securities and Exchange Board of India Act 1992;
• Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999; etc.

Companies Act, 2013 (“Companies Act”) and Companies (Acceptance of Deposits) Rules, 2014

Chapter V (Section 73-76A) of the Companies Act, provides with respect to the “acceptance of deposits by companies”.

The first question which must be determined is whether the amount procured by the jewellery shops from the customers under the Gold Savings Scheme constitutes as “deposit”.

What constitutes as “deposit”?

Section 2(31) of the Companies Act defines “deposit” as:

“deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

As per Section 73, no company shall invite, accept or renew deposits from the public unless such a company is a (i) banking financial company, (ii) non-banking financial company, (iii) such other company as the Central Government may, after consultation with the RBI, specify and (iv) Public Company in terms of Section 76.

Thus, in terms of Section 73, since the jewellery shops are neither banking or non-banking financial company nor it is a Public Company; thereby meaning jewellery shops cannot accept “deposits”.

To determine whether the amounts collected under the Gold Savings Scheme would constitute as deposit; Rule 2(1)(c) of the Companies (Acceptance of Deposit) Rules, 2014 defines what all shall NOT constitute as “deposits”. Whereas explanation to Rule 2(1)(c) defines what all constitutes as “deposits”.

On analysing explanation to Rule 2(1)(c), the same prescribes the following:

[NOTE: For a better understanding the red text in brackets (not a part of the provision) illustrate as to how jewellery shops may be interpreted to be accepting deposits^[1] from a consumer.]

“Explanation.—For the purposes of this clause, any amount.—

(a) received by the company (jewellery shops), whether in the form of instalments or otherwise (monthly instalments paid by the customer for jewellery), from a person (i.e. the customer) with promise or offer to give returns (i.e. promise by jewellery shops to provide gold with maturity discount), in cash or in kind (maturity discount on purchasing jewellery in the form of kind from jewellery shops), on completion of the period specified in the promise or offer (assuming 24 months), or earlier, accounted for in any manner whatsoever, or

(b) any additional contributions (example: maturity discount and / discounts in the final instalment to be paid by the customer), over and above the amount under item (a) above, made by the company as part of such promise or offer,

shall be considered as deposits unless specifically excluded under this clause.”

Thus, by virtue of explanation to Rule 2(1)(c), one may interpret Gold Savings Scheme by jewellery shops as “deposits”. However, as mentioned above, a company other than a (i) banking financial company, (ii) non-banking financial company, (iii) such other company as the Central Government may, after consultation with the RBI and (iv) Public Company; cannot accept deposits. Thus, jewellery shops not falling under any of the aforesaid, would not be able to initiate its Gold Savings Scheme by constituting it as a “deposit”. The reason would be that constituting the same as a deposit would be a contravention of the Companies Act.

How jewellery shops avoid falling within meaning of “deposit” and continue with its Gold Savings Scheme

Thus, to counter the same, various jewellery businesses initiate the Gold Savings Scheme by falling under Rule 2(1)(c)(xii). As per Rule 2(1)(c)(xii), any amount received by a Company as an advance for the supply of goods within a period of 365 days from the date of acceptance of such advance shall not be constituted as a deposit.

This is the reason that as a general practice, jewellery shops collect such advance for a period up to 11 months to fulfil the requirement of falling within the period of 365 days^[2]. The relevant provision under Rule 2(1)(c)(xii) is extracted as below:

(c) “deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include—

xxx

(xii) any amount received in the course of, or for the purposes of, the business of the company,—

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty-five days from the date of acceptance of such advance:

Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty-five days shall not apply:

xxx

Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules:

Explanation.—For the purposes of this sub-clause the amount shall be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.

Thus, the jewellery shops to avoid falling under the meaning of “deposits” do not offer Gold Savings Scheme beyond a period of 365 days from the receipt of advance from the customer. Thus, the Gold Savings Scheme must be designed in a manner that the benefit from such scheme is provided to the customer by the jewellery shops within 365 days.

Punishment for contravention

By virtue of Section 76A of the Companies Act, failure to the above (and contravention of Section 73 and/or 76) by a company would make it liable for punishment with fine of at least INR 1 crore or twice the amount of deposit accepted by the Company, whichever is lower, but which may extend to INR 10 crores. The said punishment is in addition to the payment of the amount of deposit or part thereof and the interest due.

Further, every officer of the Company who is in default shall be punished with imprisonment up to 7 years along with fine of at least INR 25 lakhs but which may extend to INR 2 crores. Where it is found that such an officer had contravened knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities; then such an officer shall be punished for fraud envisaged under Section 447 of the Companies Act.

Banning of Unregulated Deposit Schemes Act, 2019 (“BUDS Act, 2019”)

BUDS Act, 2019 is an act to provide for a comprehensive mechanism to ban the “unregulated deposit schemes”, other than deposits taken in the ordinary course of business, and to protect the interest of depositors etc.

In case the Gold Savings Scheme by jewellery shops goes beyond the period of 365 days, the same could also be interpreted to fall under an unregulated form of deposit. By virtue of Section 3 of the BUDS Act, 2019, such unregulated deposit schemes are banned.

Contravention of Section 3 shall make the deposit taker liable with punishment under Section 21 as per which the punishment in the respective scenarios are as follows:

• Any deposit taker who solicits deposits in contravention of Section 3- Punishment with imprisonment for a term of at least 1 year which may extend to 5 years along with fine of at least INR 2 lakhs which may extend to INR 10 lakhs.

• Any deposit taker who accepts deposits in contravention of Section 3- Punishment with imprisonment for a term of at least 2 years which may extend to 7 years along with fine of at least INR 3 lakhs which may extend to INR 10 lakhs.

• Any deposit taker who accepts deposits in contravention of Section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service- Punishment with imprisonment for a term of at least 3 years which may extend to 10 years along with fine of at least INR 5 lakhs which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in the Unregulated Deposit Scheme.

The BUDS Act, 2019 further prescribes punishment in case of fraudulent default in Regulated Deposit Schemes as well as for wrongful inducement in relation to Unregulated Deposit Schemes.

SEBI's Collective Investment Scheme (“CIS”)

As per Regulation 3 of Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 (“CIS Regulation”), no person other than a “Collective Investment Management Company” shall carry on or sponsor or launch a Collective Investment Scheme.

Regulation 2(1)(h) defines a Collective Investment Management Company as a company incorporated under the Companies Act (either under the 1956 or 2013 Act) and registered with SEBI and whose object is to organise, operate and manage a Collective Investment Scheme.

Assuming that the jewellery shops are not registered with SEBI as a Collective Investment Management Company, the question would arise if the Gold Savings Scheme by jewellery shops would fall under a Collective Investment Scheme.

As per proviso to Section 11AA(1) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act, 1992”), pooling of funds under any scheme or arrangement, which is not registered with SEBI (or does not fall within any other mandated condition under the said Act) involving a corpus amount of INR 100 crores or more shall be deemed to be a Collective Investment Scheme.

Thus, it is imperative that the jewellery shops to ensure that the investment amount collected from the customers must not exceed / go beyond the corpus amount of INR 100 crores per se, to ensure that its Gold Savings Scheme does not fall under CIS.

Section 11AA(2) further prescribes as to what all additionally constitutes as a collective investment scheme which includes any scheme or arrangement made or offered by any person under which:

• the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;

• the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;

• the property, contribution or investment forming part of such scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

• the investors do not have day-to-day control over the management and operation of the scheme or arrangement.

Arguably, the aforesaid points (i) & (ii) could also be interpreted as a scheme of work as generated/offered by jewellery shops. However, SEBI has previously clarified that to conclude whether a Scheme is a CIS or not, it is necessary that such Scheme satisfies all the aforementioned conditions.^[3] Further, as a counter argument, jewellery shops may rely on the observations of the Nagpur Bench of the Hon'ble Bombay High Court in a PIL titled as “Sandeep Badriprasad Agrawal v. SEBI & Ors.”^[4].

In “Sandeep Badriprasad Agrawal v. SEBI & Ors.”^[5] the Petitioner had sought directions against Respondents including SEBI to take action against the Jewellery shop owners, running Gold Savings Schemes. The Petitioner alleged that under the said scheme the jewellery shop owners receive monthly instalments for a period of 11 months and at the end of 11 months give golden ornaments equal to the said amount. The Petitioner alleged the same to be illegal. The Bombay High Court dismissed the PIL with the view that if any jewellery shop owner is running the aforesaid alleged scheme and the consumers are voluntarily taking part in the same then such a scheme is purely a commercial transaction between the jewellery shop owner and the customer.

Relevant observations of the Bombay High Court are as follows:

“2. Firstly, we do not find any public interest in the petition. If any shop owner is running such a scheme and the consumers are voluntarily taking part in such a scheme, it is purely a commercial transaction between a businessman and a consumer.

3. If the petitioner so desires to bring it in the nature of public ambit the least that is expected is to point out as to under what statutory provisions or the rules framed thereunder the said scheme is prohibited. Nothing is placed on record in that regard.

4. In that view of the matter, petition is found to be without substance and it is dismissed.”

Thus, the Bombay High Court has observed and recognized the Gold Savings Scheme as a commercial transaction between the parties i.e. the jewellery shop owner and the customers.

The jewellers and the jewellery shops being involved in Gold Savings Schemes can be said to be falling under a safe haven since such a scheme has been interpreted as a commercial transaction, as envisaged by the Hon'ble Bombay High Court.

However, it must be noted that the Bombay High Court may not have deep dived onto the aspects of such scheme. The question arises whether the jewellers have been able to escape by not falling under the (indirect) requirements of law on the basis of technicalities.

It would be really interesting to see in the future if any further challenges to such schemes take place, and if yes, what would be the approach of the Courts on the same.

Jewellers being aware of the limitation of this scheme have safeguarded themselves by ensuring that investments collected is for the period within 365 days and that the investments collected do not go beyond 100 crores to not fall under SEBI's fist.

The author is an Advocate practicing at Delhi. Views are personal.