The Banning of Unregulated Deposit Schemes Bill 2018, was introduced by Minister of State for Finance P Radhakrishnan in the Lok Sabha on 18 July 2018. This Bill aims to prevent unregulated deposit schemes or arrangements at their inception and makes soliciting deposits related to an unregulated deposit scheme a punishable offence.
The Bill bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. The Banning of Unregulated Deposit Schemes Bill 2018 (BUDSB) aims to ban unregulated deposit taking activities altogether, by making them an offence ex-ante (before the event), rather than the existing legislative-cum-regulatory framework that only comes into effect ex-post (post event) with considerable time lags. This Bill would provide a nationwide protection to victims of a whole spectrum of illegitimate schemes that have been taking advantage of financially naïve Indians and looted their savings for decades.
It also talks about creation of an online central database, for collection and sharing of information on deposit taking activities in the country. However, primary responsibility of implementing provisions of the Bill is entrusted with the State Governments.
Dubious deposit-taking schemes take myriad forms and there are thousands of schemes proliferating all over India, from the metros to the tiniest and most economically backward regions. Moneylife has been diligently reporting on these. We have long argued that Ponzis, multi-level marketing schemes (MLMs) and faux-chit funds, those that masquerade as regulated financial instruments, are the biggest source of losses to individuals.
PACL’s deposits and the optionally convertible instruments issued by the Sahara realty companies that finally landed its founder Subrata Roy in jail, are good examples. The numbers put out at the CBI conference establish that hundreds of criminal cases had been filed at economic offences wings (EOWs) of the police across the country. (
Read: Central Law for Banning Unregulated Deposits: How To Make It Work)
The Bill provides for deterrent punishment for prompting or operating an unregulated deposit taking scheme. It also provides for setting up of a competent authority by the state government to ensure repayment of deposits in the event of default by a deposit-taking company. The Bill creates three different types of offences like running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement in relation to unregulated deposit schemes.
The draft BUDSB had been in the works for a couple of years; the Union Budget of 2016-17 had proposed the comprehensive Central legislation in the wake of the Saradha scam in Bengal that led to over 25 suicides. An inter-ministerial group then identified gaps in the many existing legislations and regulatory framework that has, so far, failed to stop unauthorised deposit taking. The new law will ensure that long litigations, where companies used clever lawyers to prove legitimacy, question the jurisdiction and competence of courts, will hopefully, be cut to a minimum.
Many states, led by Tamil Nadu and Maharashtra, already have statutes to prevent unauthorised deposit taking. There is also the Prize Chits and Money Circulation Schemes (Banning) Act that has been effectively used by some conscientious police officials; but barring these exceptions, the flawed statute is largely ineffective. The problem with the prize chits banning law is that the police can only act on a victim’s complaint, which usually happens after the fraudsters had fled with the money. The new Bill aims to plug this loophole by making unregulated deposit taking activities as an offence ex-ante (before the event).
The new law proposes the setting up of a competent authority by state governments with powers to attach properties and recover dues of depositors, in case the entities do manage to raise funds illegally. It also specifies timelines for attaching the property of fraud companies and recovering the dues. A flip side to this is that the law will only be as effective as the competent authority that is set up by each state along with courts that would try such cases and oversee repayment to depositors.
The statute has the potential to nip fraud at an early stage and prevent widespread losses of the type we saw in innumerable notorious collective investment schemes including Pancard, and PACL.
The Bill enables creation of an online central database, for collection and sharing of information on deposit taking activities in the country. While a Central database to list authorised schemes is a good idea, it should allow ordinary people to report suspicious schemes that will continue to pop up by the thousands across India. This crowd-sourced information will need to be verified and acted upon very quickly by the competent authority, if the Act has to remain credible and useful. The Central database should publish a list of all companies and persons who have been caught and convicted in the past for running illegal deposit schemes. This will serve as a warning to others who may be lured into the scheme in different geographies. This will ensure proper accountability and make the statute effective.
Here are salient features of the Bill:
- The Bill contains 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.
- The Bill creates 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.
- The Bill provides for severe punishment and heavy pecuniary fines to act as deterrent.
- The Bill has adequate provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
- The Bill 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.
- The Bill enables creation of an online central database, for collection and sharing of information on deposit taking activities in the country.
- The Bill 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.
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