THE BANNING OF UNREGULATED DEPOSIT SCHEMES BILL, 2019
WHY THERE IS A NEED FOR SUCH A BILL?
The Indian non-banking financial sector is very diverse and complex. These entities are allowed to
raise deposits from the public under the provisions of various statutes enacted by central and state
government. In the recent past, there have been rising instances of people in various parts of the
country being defrauded by illicit deposit taking schemes commonly known as Ponzi Schemes. There
is no such law to regulate such types of schemes which tries to siphon investor’s money. The Bill
covers previously existing gaps in legislation that had been exploited by various illicit deposit-taking
HISTORY OF PONZI SCHEME
In 1919, an Italian American named Charles Ponzi who launched an investment scheme in Boston
promising investor to double their money in 90 days. Charles had no business model to double the
money in such a short time. All he did was use money being brought in by the new investor to pay
off old investor. The scheme collapsed when the money being brought in by the new investors was
less than the money being paid to old investors. Ponzi schemes are named after him.
WHAT ARE 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.
It facilitates a mechanism to ban unregistered deposits schemes and protect the interests of
depositors. It also seeks to amend three laws, i.e., the Reserve bank of India Act, 1934, the Security
Exchange Board of India Act, 1992 and Multi-State Co-operative Societies Act, 2002.
Deposit: 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. Amounts
received in the form of loan from relatives and contributions towards capital by the partner in
any partnership firm shall not be included in the definition of deposits.
Deposit taker: 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.
Regulators listed in Bill: Total nine regulators are included which oversee and regulate
various deposit-taking schemes. (i) RBI (ii) the Security Exchange Board of India (iii) the
Ministry of Corporate Affairs, (iv) IRDA and (v) state and Union Territory government. Each
authority oversees different types of deposit-taking schemes. Any deposit-taking scheme
must be registered with the relevant authority, based on the category it falls under.
Central database: The central government to designate an authority to create an online
database for information on deposit takers. All deposit takers will inform the database
authority about their business.
Competent Authority: 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 Competent
Authority. Information about offenses committed under the Bill will be reported to
Competent Authority by police officers. The police officer of a specified rank will have the power
to enter, search and seize any property with or without a warrant which is believed to be
connected with an offense under the Bill. The Competent Authority can provisionally attach
the property of the deposit taker, as well as all deposits received. It can also summon and
examine people to obtain evidence, and call for records. It will have all powers similar to
those vested in a civil court.
Designated Courts: The Bill provides for the constitution of one or more Designated Courts
in specified areas. These courts will possess the power to make provisional attachment
absolute once approach by the competent authority. The competent authority will be directed
by the court as to how the deposits recovered in this manner will be redistributed to the
original depositors or investors. This entire process needs to be completed within 180 days
of application from the competent authority to the court.
Offenses and penalties: The Bill prescribes three types of offenses, and prescribes severe
punishment and penalties related to them. These offenses are:
(i) Running (advertising, promoting, operating or accepting money for) unregulated deposit
schemes - will be punishable with imprisonment between two and seven years, along with a
fine ranging from three to 10 lakh rupees.
(ii) fraudulently defaulting on regulated deposit schemes and (iii) wrongfully inducing
depositors to invest in unregulated deposit schemes by willingly falsifying facts -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. While repeated offenders under the
Bill will be punishable with imprisonment between five to 10 years, along with a fine ranging
from INR 10 lakh to five crore rupees.
MISCONCEPTION ABOUT THE BILL.
A lot of misconception is spread in poor and illiterate section of society who is generally duped by
such illicit schemes. I would try to address some of the common misconceptions which arise due to
incomplete reading coupled with preconceived notions.
1. Mr. Zin , wishes to invest in driving school business. Mr. Yin his friend agrees to give him a loan of
INR 50Lacs. Can Mr. Zin accept the loan according to provision of this bill?
Ans : Accepting deposits is not the business activity of Mr. Zin and Obtaining loans for the purpose of
business is exempted from being considered as deposits.
2. Mr. Tian has a Vastu pooja in his house for which he borrows INR.01lacs from his brother. Will this
be considered as illegal under this law?
Ans: Mr. Tian being an individual is covered under the definition of deposit taker. Accepting loan from
brother is covered in the definition of deposit but accepting deposit is not the business activity of
Mr. Tian and thus not covered as Unregulated Deposit Scheme.
3. Mrs. Yian plans to launch a chit fund without getting it registered. She has decided to get
a contribution of 10 grams of gold from each participant each month. She will fix some monthly prize
too. Is this scheme prohibited?
Ans: The definition of deposit covers the only receipt of money and not any other commodity. Thus
the receipt of gold is not covered under deposit. This is an inadequacy in law which need amendment.
There is provision for online database but the execution will be manual in the hands of officers. The
provision which has subscribed for heavy punishment and pecuniary fines may certainly lead to
increased corruption. This type of law which imposes blanket bans may create fear in the minds of
people and hence curb unregulated deposits schemes and illegal transactions.