On July 29, 2019, Parliament unanimously passed the Banning of Unregulated Deposit Schemes Bill, 2019 which will replace the Banning of Unregulated Deposit Schemes Ordinance, 2019, promulgated on February 21, 2019. It will help to tackle the threat of illicit deposit taking activities in the country like exploiting regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings.
- Background: The government had constituted an inter-ministerial group to address gaps in existing legislation. The recommendations included a new central law to tackle unregulated deposit schemes. The Lok Sabha had passed the bill on July 24, 2019.
- Registration: The bill proposes compulsory registration of deposit-taking schemes with a list of specified financial sector regulators or with the Central or state government.
- Benefits: It will save gullible investors from ponzi schemes run by the Saradha Group companies and protect the hard earned money of the poor people.
- Powers: The first claim on the recovered money will be of depositors. It will give power to both central and state governments to frame rules. The proposed legislation has some exclusion including money collected by real estate firms and from friends and relatives. It envisages the creation of a central online database of all deposit takers and setting up a competent authority empowered to provisionally attach the property of any deposit taker or all the deposits received. This authority will have powers similar to those of a civil court. It also allows police officers of a certain rank to search the premises of deposit takers and seize property linked to an offence under this statute.
- Punishment: The legislation provides for severe punishment ranging from 1 year to 10 years and fines ranging from Rs 2 lakh to Rs 50 crore to act as a deterrent.
- Substantive Banning Clause: The Bill includes a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme.
- Types of Offence: The law proposes to create 3 different types of offences running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement in relation to unregulated deposit schemes.
- Assets: The proposed law provides for attachment of properties or assets and subsequent realization of assets for repayment to depositors. Clear-cut timelines have been provided for attachment of property and restitution to depositors.
About Ponzi schemes:
Ponzi schemes induce unsuspecting depositors with promises of huge returns, invest heavily in marketing operations to build an ever expanding chain of investors and pay off some investors from the deposits of new participants than from any return on genuine investments. Such schemes lead to a large number of people losing money.