The Banning of Unregulated Deposit Schemes Bill, 2019

The Banning of Unregulated Deposit Schemes Bill, 2019

Kamaraj IAS Academy | The Banning of Unregulated Deposit Schemes Bill, 2019
  • September 5, 2019, 10:19 am

In a bid to save gullible investors from ponzi schemes, Lok Sabha on Friday unanimously passed the Banning of Unregulated Deposit Schemes Bill, 2019 that seeks to put in place a mechanism by which poor depositors get back their hard earned money.

The Banning of Unregulated Deposit Schemes Bill, 2019 replaced the Ordinance on the same. Rajya Sabha passed The Banning of Unregulated Deposit Schemes Bill, 2019; it had been passed by Lok Sabha five days previously. The Bill aims to protect investors from fraudulent investment schemes, such as Ponzi schemes.

 

The Bill covers existing gaps in legislation that had been exploited by various parties to siphon large amounts of money away from small investors. In particular, it amends three laws, i.e., The Reserve Bank of India Act, 1934, The Securities and Exchange Board of India Act, 1992 and The Multi-State Co-operative Societies Act, 2002.

 

According to an analysis by PRS India, 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 mentioned in the Bill.


 

PONZI SCHEME

A common type of scam involving unregulated deposits is a 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. This was the classic pattern seen in the Saradha case in West Bengal, in which politicians of the ruling party have been accused.

 

The nine authorities charged with the oversight and regulation of deposit-taking schemes include 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.

 

FEATURES OF THE BILL

The Bill provides for the appointment of a “competent authority”, with a rank not below Secretary to the state or central government, with the power to provisionally attach 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.

 

The Bill provides for the formation of designated courts in specific areas. 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.

 

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 two to seven years’ imprisonment and a fine of Rs 3 lakh to Rs 10 lakh.

 

The second kind of offence is punishable by imprisonment for three to 10 years, and fines ranging from Rs 2 lakh to double the amount collected from depositors. Repeat offenders may be punished by a five- to 10-year stint in prison, and fined between Rs 10 lakh and Rs 5 crore.

 

After provisional attachment of the deposit taker’s assets, the Competent Authority will approach the Designated Court to: (i) make the provisional attachment absolute, and (ii) ask for permission to sell the assets. The Competent Authority will have to approach the Court within 30 days (extendable to 60 days).  It will also open a bank account to realise and disburse money to depositors under the instructions of the Designated Court.

 

The Designated Court will have the power to: (i) make the provisional attachment absolute, (ii) vary or cancel the provisional attachment, (iii) finalise the list of depositors and their respective dues, and (iv) direct the Competent Authority to sell the property and equitably distribute the money realised among the depositors. The Court will seek to complete the process within 180 days of being approached by the Competent Authority.

 

Central database: The Bill provides for the central government to designate an authority to create an online central database for information on deposit takers.  All deposit takers will be required to inform the database authority about their business. The Competent Authority will be required to share all information on unregulated deposits with the authority.

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