Banning of Unregulated Deposits Scheme Bill

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General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

General Studies 3

• Indian Economy, Banking

In News: Cabinet approves banning of Unregulated Deposit Schemes Bill, which seeks to prevent unregulated entities from collecting deposits and duping the poor and the gullible of their hard earned savings, such as Ponzi schemes. The Bill covers previously existing gaps in legislation that had been exploited by various parties to siphon large amounts of money away from small investors.

In essence, all deposit schemes, with or without interest, except those regulated by the government, have been banned by the bill. Such schemes can result in great losses of capital when those who hold the deposit default on its repayment. Given the extent of unregulated deposits and lending that have been part of the country’s informal economy, this law has been brought to protect the interests of depositors and holding deposit-takers accountable.

• The bill will help tackle the menace of illicit deposit-taking activities in the country, which at the present is exploiting regulatory gaps and the lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings
• The bill aims at plugging gaps in existing laws and giving powers to the government to prohibit companies from taking such funds from the public. People running such illicit deposit-taking schemes can face jail terms as well as stiff penalty if the bill becomes a law.

Background: 

In the past four years, 146 cases of illegal deposits had been investigated by the Central Bureau of Investigation, 56 by the Enforcement Directorate, 32 cases involving 223 companies by the Ministry of Corporate Affairs and the Serious Fraud Investigation Office and 978 cases were referred to various investigating enforcement agencies by the State Coordination Committees.

SEBI alone has passed 64 orders against unauthorised collective investment schemes in the last three years. Though there is no official estimate of money involved in all these cases, rough estimates put the figure at over ₹4 lakh crore.

Salient Features

• There are three different types of offences—running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement—in case of unregulated deposit schemes, according to the bill. 
• The proposed law provides for appointment senior government officials or a ‘competent authority’ that can attach assets or properties and subsequently realize the assets towards repaying depositors, the government said earlier this year. 
• There will also be a provision for creating an online central database to collect and share information on deposit-taking activities in the country.
• The proposed law has provisions of punishment as well as repayment of deposits if such schemes raise deposits illegally.
• Small businesses taking deposits from friends and relatives for purely business purposes will not come under the preview of Banning of Unregulated Deposit Scheme Bill. However, deposit scheme operated by jewellers will be illegal.

What are Deposits?

The Ordinance 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.  Such deposit may be returned either in cash or as a service, and the time of return may or may not be specified. Further, the Ordinance defines certain amounts which shall not be included in the definition of deposits such as amounts received in the form of loans from relatives and contributions towards capital by partners in any partnership firm.

What are Ponzi schemes?

A common type of scam involving unregulated deposits is the Ponzi scheme, a type of investment fraud wherein one party promises high returns on an investment with little to no risk. The early investors in a Ponzi scheme are repaid by the scheme acquiring new investors, and so on. Once there are no longer enough people to secure a new round of investments, the scheme collapses and the investors lose their money.

Which are the regulators overseeing deposit-taking schemes?

There are nine authorities charged with the oversight and regulation of deposit-taking schemes, including the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), the Ministry of Corporate Affairs (MCA), and state and union territory governments. Each authority oversees different types of deposit-taking schemes, with the RBI overseeing deposits taken by non-banking financial companies (NBFCs), and Sebi overseeing mutual funds. Any deposit-taking scheme must be registered with the relevant authority, based on the category it falls under, and only then is its operation legal.

The nine authorities charged with the oversight and regulation of deposit-taking schemes include the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), the Ministry of Corporate Affairs (MCA), and state and Union Territory governments. Each authority oversees different types of deposit-taking schemes, with the RBI overseeing deposits taken by non-banking financial companies (NBFCs), and Sebi overseeing mutual funds. Any deposit-taking scheme must be registered with the relevant authority, based on the category it falls under, and only then is its operation legal.

Connecting the Dots:

1. How will banning of unregulated deposit schemes bill save common investors? Explain.