- Coverage of the bill
[RSTV The Big Picture] Banning Unregulated Deposit Schemes
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- The Banning of Unregulated Deposit Schemes Bill 2019 was passed unanimously by the Rajya Sabha recently.
- This bill aims to protect the investors from Ponzi schemes and tackle the menace of illicit deposit taking activities which so far exploited regulatory gaps and lack of strict administrative measures to dupe poor and gullible people.
- The bill provides for severe punishment ranging from 1 year to 10 years and fines ranging from 2 lakhs to 50 crore rupees to act as a deterrent.
- It also has adequate provisions for repayment of deposits in cases where deposits have been raised illegally.
[You need to know about the highlights of the bill. Read it first here, then read Video Summary section]
About the Banning of Unregulated Deposit Schemes Bill, 2019
- The Banning of Unregulated Deposit Schemes Bill, 2019 Bill provides for a mechanism to ban unregulated deposit schemes and protect the interests of depositors.
- It also seeks to amend 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.
- The Bill defines a deposit 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.
- Currently, nine regulators oversee and regulate various deposit-taking schemes. These include Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs, and state and union territory governments.
Unregulated deposit scheme:
- The Bill bans unregulated deposit schemes. A deposit-taking scheme is defined as unregulated if it is taken for a business purpose and is not registered with the regulators listed in the Bill.
- The Bill defines deposit takers as an individual, a group of individuals, or a company who asks for (solicits), or receives deposits. Banks and entities incorporated under any other law are not included as deposit takers.
- The Bill provides for the appointment of one or more government officers, not below the rank of Secretary to the state or central government, as the Competent Authority.
- Police officers receiving information about offences committed under the Bill will report it to the Competent Authority.
- Further, police officers (not below the rank of an officer-in-charge of a police station) may enter, search and seize any property believed to be connected with an offence under the Bill, with or without a warrant.
- The Competent Authority may: (i) provisionally attach the property of the deposit taker, as well as all deposits received, (ii) summon and examine any person it considers necessary for the purpose of obtaining evidence, and (iii) order the production of records and evidence. The Competent Authority will have powers similar to those vested in a civil court.
- The Bill provides for the constitution of one or more Designated Courts in specified areas.
- This Court will be headed by a judge not below the rank of a district and sessions judge, or additional district and sessions judge.
- 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 realize and disburse money to depositors under the instructions of the Designated Court.
- The Court will seek to complete the process within 180 days of being approached by the Competent Authority.
- 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.
Offences and penalties:
The Bill defines three types of offences, and penalties related to them.
(i) running (advertising, promoting, operating or accepting money for) unregulated deposit schemes,
(ii) fraudulently defaulting on regulated deposit schemes, and
(iii) wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.
- For example, accepting unregulated deposits will be punishable with imprisonment between two and seven years, along with a fine ranging from three to 10 lakh rupees.
- Defaulting in repayment of unregulated deposits will be punishable with imprisonment between three and 10 years, and a fine ranging from five lakh rupees to twice the amount collected from depositors.
- Further, repeated offenders under the Bill will be punishable with imprisonment between five to 10 years, along with a fine ranging from Rs 10 lakh to five crore rupees.
Coverage of the bill:
- The bill provides that all deposit-taking schemes are required to be registered with the relevant regulator (SEBI, RBI etc.).
- The bill brought all the deposit takers under one roof and covers every kind of depositors for the first time ranging from any individual to big corporations including jeweler or chit funds or plantation companies (whom are regulated by SEBI), etc.
- Most of the deposit schemes in India run on trust basis (informal) without any firm legal documentations. For instance, small shop owners have also started to take deposit to manage their working capital. These small business houses have also been considered under the bill.
- However, regulations of these companies are done by different arms of government such as Listed companies are regulated by SEBI, chit fund are regulated by Chit fund act (such as Madras chit fund act) etc.
Provisions of the Deposits covered by the Bill:
- One can make deposit with Banks with saving account or Fix deposit etc.
- Non-bank financial institution (NBFCs). NBFC have given the right to raise the money from depositors for NBFC functionalities.
- Listed/Non-listed companies can also raise 35% of their net worth in from of deposits (25% of deposits from savings account + 10% from their stakeholders).
Reconciliation with Insolvency & Bankruptcy Code
- The bill says that the depositor’s claim has the priority over other things. However, under section 53 of the Insolvency & Bankruptcy Code Bill, 2019, secured creditors have the first right to get their money back over un-secured creditors.
- Now, Depositors are un-secured creditors. Hence, a depositor wanting back their assets will only get priority after secured depositors.
- Moreover, one cannot remove this provision of prioritizing secured creditors otherwise the whole business of raising loans by providing security will be impossible.
- Hence, government should seriously consider the reconciliation of provisions under Insolvency & Bankruptcy Code and Banning of Unregulated Deposit Schemes.
- Most of the digital wallets takes ‘deposits’ (while buying or selling). Now, it is a question whether theses online wallets have right to take such deposits. It is also not clear whether theses wallets are authorized by RBI or similar agencies.
- Moreover, there is no option by which one can retrieve his/her money in case when company goes into bankruptcy as there is no legal documentation of deposit taking.
- Also, some of online wallet companies even do not put their address/contact through which one can contact them in case of any issue.
- The bill uses the word ‘appropriate government, which is state government, to address the issues related to online deposit wallets. However, the bill does not shed any light on what if a person has deposits in more than one states. It does not say which state is the competent authority to address any deposit issues.
- The bill proposes setting up of a competent authority empowered (having powers similar to those vested in a civil court) to provisionally attach the property of any deposit taker or all the deposits received.
- However, gaining the property and selling them to retrieve the money is very cumbersome process in India. The bill fails to address these issues on how to recover money from selling properties.
- There is need for the awareness campaign on fraudulent deposit taking schemes.
- The bill has the provision for all the deposit taking companies. However, there is also need for the end use of deposit takers. i.e., monitoring the usage of the deposits.
- There is no coordination between the various financial regulator such as RBI, SEBI, Ministry of corporate affairs and other state agencies. Moreover, below the district level, there are huge issues related to deposit schemes. Hence, there is need for the coordination between regulators.
- In a country like India, it is impossible to stop fraudulent completely. However, it needs to be ensure that these fraudulent activities do not happen due to the regulatory lacunae.
- There is need to give priority to the truly competent authority which develops certain knowledge standing and mechanism similar to SEBI.
- The bill seeks to tackle the menace of unregulated deposit schemes and also protect the interest of investors, specifically, the gullible investors who are wrongfully induced by the deposit takers to invest in their scheme.
- In India, most of the Ponzi deposits are given to a person without having a proper business or in some case, even not having a business. These Ponzi schemes use another person’s invested money to pay the interest to some other person.
- Some of the schemes also try to make depositors part of theses Ponzi schemes by giving them concession if the depositor brings additional investors to invest in the Ponzi scheme.
- The bill gives some surety to the depositors that they can go to a law enforcement authority to recover the money which they could not do before in absence of any such act.
- However, there are also intermediate schemes that fall between IBC and unregulatory deposits schemes, which needs to be taken care of.