- On July 29, the Rajya Sabha passed the Banning of Unregulated Deposit Schemes Bill, 2019. The Bill was introduced in the Lok Sabha on July 19 by Finance Minister Nirmala Sitharaman and aims to protect investors from fraudulent investment schemes, such as Ponzi schemes. The Bill covers previously existing gaps in legislation that had been exploited by various parties to siphon large amounts of money away from small investors.
- In essence, all deposit schemes, with or without interest, except those regulated by the government, have been banned by the bill. Such schemes can result in great losses of capital when those who hold the deposit default on its repayment, as in the case of Pune’s D S Kulkarni Developers, who defaulted on the repayment of their deposits worth over Rs 1,000 crore after promising depositors high returns on their deposits.
How does Bill define deposits and deposit-takers?
- According to an analysis of the Bill by PRS India, deposits are defined as “an amount of money received through an advance, a loan, or in any other form, with a promise to be returned with or without interest”. The Bill excludes, among others, payments received in the form of a loan from relatives, and contributions towards capital made by partners in a partnership firm from this definition of deposits.
- The Bill defines a deposit-taker as the individual, group of individuals, or a company that is soliciting or receiving deposits. The provisions of the Bill make it so that in the event of prosecution, it is the deposit-taker who is liable to be prosecuted, and not those who made the deposits.
What are unregulated deposit schemes? What are Ponzi schemes?
- Under the Bill, deposit-taking schemes are defined as unregulated if they are undertaken for business purposes, and additionally, are not registered with one of the nine regulatory authorities, whom the Bill has made responsible for overseeing such deposit-taking schemes.
- A common type of scam involving unregulated deposits is the Ponzi scheme, a type of investment fraud wherein one party promises high returns on an investment with little to no risk. The early investors in a Ponzi scheme are repaid by the scheme acquiring new investors, and so on. Once there are no longer enough people to secure a new round of investments, the scheme collapses and the investors lose their money.
Which are the regulators overseeing deposit-taking schemes?
- There are nine authorities charged with the oversight and regulation of deposit-taking schemes, including the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), the Ministry of Corporate Affairs (MCA), and state and union territory governments. Each authority oversees different types of deposit-taking schemes, with the RBI overseeing deposits taken by non-banking financial companies (NBFCs), and Sebi overseeing mutual funds. Any deposit-taking scheme must be registered with the relevant authority, based on the category it falls under, and only then is its operation legal.
What is the mechanism by which the Bill aims to combat unregulated deposit schemes?
- Under the provisions of the Bill, a competent authority will be appointed, with a rank not below secretary to the state or central government. The Bill gives this authority the power to provisionally attach (a protective measure to seize property) the property of the deposit-taker and all the deposits received by them. The Bill also allows the competent authority to summon and examine people to obtain evidence, and order records to be produced.
- Furthermore, the Bill provides for the formation of designated courts in specific areas. The designated court will possess the ability to make the provisional attachment absolute once approached by the competent authority. The court will then direct the competent authority in how the deposits recovered in this manner will be equitably redistributed to the depositors. The entire process is to be completed within 180 days of the application from the competent authority to the court.
- The central government will additionally designate an authority to establish an online database with information on various deposit-takers. The database will be used to ascertain which deposit-takers are regulated, and which are not. Deposit-takers will be required to inform the authority in charge of the database about their actions and the state of their business.
What are the penalties for violating the provisions of the Bill?
- Three kinds of offences are delineated under this Bill: running unregulated deposit-taking schemes (which includes advertising, operating, and accepting money for such schemes), fraudulently defaulting on the deposits made under a regulated deposit-taking scheme, and prompting investors to invest in unregulated deposit schemes by knowingly falsifying facts.
- The first kind of offence has been made punishable by 2 to 7 years of imprisonment, and a fine of Rs 3 lakh to Rs 10 lakh. The second kind of offence is punishable by imprisonment for 3 to 10-year, and fines ranging from Rs 2 lakhs to double the amount collected from depositors. Repeat offenders may be punished by a 5 to 10-year stint in prison, and fines ranging from Rs 10 lakh to 5 crore.