Regulate the Unregulated Deposit Schemes

With its ongoing mission to curb the unregulated deposit & Ponzi scheme and to protect the savings of the investors, the Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given its approval to introduce the “Banning the Unregulated Deposit Scheme Bill 2018” (“Bill”). The Bill is aimed at tackling the menace of illicit deposit taking activities in the country. Companies/ institutions running such schemes exploit existing regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings. The Bill may cover:

1. complete prohibition of unregulated deposit taking activity;
2. deterrent punishment for promoting or operating an unregulated deposit taking scheme;
3. stringent punishment for fraudulent default in repayment to depositors;
4. designation of a Competent Authority by the State Government to ensure repayment of deposits in the event of default by a deposit taking establishment;
5. powers and functions of the competent authority including the power to attach assets of a defaulting establishment;
6. designation of Courts to oversee repayment of depositors and to try offences under the Act; and
7. listing of Regulated Deposit Schemes in the Bill, with a clause enabling the Central Government to expand or prune the list.

Salient Features of the Bill:

• A substantive banning clause which bans Deposit Takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme. The principle is that the Bill would ban unregulated deposit taking activities altogether, by making them an offence ex-ante, rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags.
• To create three different types of offences, namely, running of Unregulated Deposit Schemes, fraudulent default in Regulated Deposit Schemes, and wrongful inducement in relation to Unregulated Deposit Schemes.
• It provides severe punishment and heavy pecuniary fines to act as deterrent.
• To have adequate provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
• It provides for attachment of properties/ assets by the Competent Authority, and subsequent realization of assets for repayment to depositors.
• Clear-cut time   lines   have   been   provided for attachment of property and restitution to depositors.
• To create an online central database, for collection and sharing of information on deposit taking activities in the country.
• Defines "Deposit Taker" and "Deposit" comprehensively.
• "Deposit Takers" include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated   by legislation.
• "Deposit" is defined in such a manner that deposit takers are restricted from camouflaging public deposits as receipts, and at the same time not to curb or hinder acceptance of money by an establishment in the ordinary course of its business.
• Being a comprehensive Union law, the Bill adopts best practices from State laws, while entrusting the primary responsibility of implementing the provisions of the legislation to the State Governments.

This Bill will be a step closer to – “Anything which is regulated is legitimate activity, if it is not regulated, it is illegitimate”.

And, to ban unregulated deposits, by making even the act of running such Ponzi schemes an offence.

The current investor protection framework kicks in only after such schemes go bust.

A Ponzi scheme is defined as a fraudulent investment operation, where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit from financial trading. This Bill should be a welcome step towards protection of small investor’s interest.

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