The Banning of Unregulated Deposit Schemes Bill

The Banning of Unregulated Deposit Schemes Bill

Lately, there has been a lot of speculation on the Ordinance passed by the government banning innumerable Unregulated Deposit Schemes floating across the country. It is important for us to understand the entire scope of this Ordinance correctly and how it can help regulate the investment
scenarios in our country. Let us take a deeper look. In a bid to save credulous investors from Ponzi schemes, the central government recently
banned unregulated deposit schemes. This move may help tackle the menace of illicit deposit-taking activities.
Pursuant to this ordinance, no Individual or group of individuals can take any deposit or loan from any person other than relatives. In contrast, partnership firms can only take a deposit or loan from relatives or partners. Let us understand –

1) What are Unregulated Deposit Schemes?

“Unregulated Deposit Scheme means a Scheme or an Arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme, as specified under Column (3) of the First Schedule.

2) What is the Scope of this Ordinance?

• When anyone accepts or solicits deposits as a part of some scheme or arrangement is done by way of business, it will be deemed an unregulated deposit scheme. This basically implies that, taking deposits or soliciting them has to be the sole
  business goal of the Deposit Taker and that deposit taking or soliciting them is the primary business function.
• The Ordinance prohibits a deposit taker from promoting, operating, or issuing any advertisement soliciting participation or enrolment in or accepting deposits in pursuance of an Unregulated Deposit Scheme.
• The Ordinance also provides substantial Do’s and Don’ts for Regulated Deposit Schemes by prescribing a code of good governance for all deposit takers while accepting deposits for Regulated Deposit Schemes. This ensures further protection for depositors from operators of
  even the Regulated Deposit Schemes mentioned in Column – 3 of Schedule – I to the Ordinance.
• The Ordinance further protects depositors by prohibiting any person from knowingly making any statement, promise or forecast, which is false or deceptive or misleading in material facts or deliberately conceal any material facts with a view to induce any other person to
  invest in or become a member or participant of any Unregulated Deposit Scheme.

3) “How does this Ordinance benefit the Indian Masses?”

• This ordinance indeed provides a safety cover or protective net to the Indian population, especially from the unregulated and unorganized Ponzi schemes which devour the hard-earned savings of the innumerable uneducated investors in our country.
• The current Indian laws are not very stringent in protecting these investors when these schemes go defunct or the deposit takers abscond. This is contrary to the investors in the organized shares and securities market where SEBI provides adequate protection. India has
  a significant illiterate and unaware population, and every day many incidents highlighting
  how people fall prey to such schemes comes to the foreground.
• This ordinance regulates illicit deposit schemes that trick investors but does not prohibit schemes regulated by statutory authorities, as mentioned in Column 3 of the First Schedule to the Ordinance.

4) “What it doesn’t mean – Demystifying the Ordinance?”

• The government’s ordinance banning unregulated deposit schemes does not prevent any entity from seeking funds for its business or an individual from raising a quick loan from relatives to tide over a crisis.
• The government has clarified that it does not ban small and medium enterprises (SMEs) from receiving loans for business.

5) What are the penalties for defaulters?

• The Ordinance provides for severe punishment ranging from 1 year to 10 years and pecuniary fines ranging from Rs 2 lakh to Rs 50 crore to act as deterrent.
• It, too, has adequate provisions for disgorgement or repayment of deposits in cases where such schemes manage to raise deposits illegally.
• The law provides for the attachment of properties or assets and the subsequent realisation of assets for repayment to depositors. Clear-cut timelines have been provided for the attachment of property and restitution to depositors.

6) What is the way forward?

• The Ordinance provides the central government with the power to appoint a Competent Authority, who should not be below the rank of Secretary to the Government.
• The State Government will appoint other relevant officers to assist the Competent Authority, and they will collectively discharge the functions of this ordinance.
• The central government will also designate an authority to maintain a central repository of information on all such unregulated deposit schemes. Every deposit Taker, existing or new, is duty-bound to intimate such authority in a prescribed manner.
• The Ordinance also provides for the creation of a body that maintains an online database of legitimate deposit takers and schemes operating in India.