Banning of Unregulated Deposit Schemes

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File photo of Saradha agents at a protest rally in Kolkata
New law against illegal deposits is tough, yet
investors must remain alert
Avoid schemes that promise very high rates of return, or guaranteed returns for very long periods
Sanjay Kumar Singh | New Delhi February 22, 2019 Last Updated at 12:12 IST
In the past,
scams like
Rose Valley
and Saradha
deprived
thousands of
investors of
their hard-
earned
money. To
curb the
menace of
illegal
deposit
raising, the
government
had
introduced
the Banning
of
Unregulated
Deposit
Schemes Bill
in Parliament
in July 2018.
The Bill was
subsequently
referred to
the Standing
Committee on Finance. Recently it was passed by the Lok Sabha, but could not be passed in the Rajya Sabha.
On the Cabinet's request, the President has promulgated the Bill as an ordinance.
Unregulated entities can’t raise deposits: At present, nine regulators monitor various deposit-taking schemes
in India. The Reserve Bank of India (RBI), for instance, regulates non-banking financial companies (NBFCs),
the Securities and Exchange Board of India (Sebi) oversees mutual funds, state and union territory governments
regulate chit funds, and so on. According to this ordinance, all deposit-taking schemes will have to be registered
with the relevant regulator. Any deposit-raising scheme, which is not registered with one of the regulators listed
therein, will be deemed as unregulated. "The crux of this ordinance is that no unregulated entity will be allowed
to collect deposits," says Shruti Rajan, partner, Cyril Amarchand Mangaldas.

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This new law provides for the appointment of a Competent Authority. If the police receives information about
illegal deposit-raising activity, it will report it to the Competent Authority. The latter will have the power to
provisionally attach the property of the deposit taker, and also the deposits received. Furthermore, this ordinance
provides for the setting up of Designated Courts. After provisionally attaching the deposit taker's assets, the
Competent Authority will go to the Designated Court to make the provisional attachment absolute, and to obtain
its permission to sell the assets. The Competent Authority will also return money to depositors under the
instructions of the Designated Court. All these activities will be carried out in a time-bound manner.
Power to act immediately: Earlier, the concerned authorities had to initiate enquiries, carry out investigations,
and go through an elaborate process. All this allowed time to illegal deposit collectors to siphon away the money
they had raised. Now, the Competent Authority will be able to act against illegal deposit takers the moment it
receives information. It will be able to ask for reasons, get statements of account, and then proceed to pass
attachment orders so that no further funds are raised.
Experts believe that this ordinance will be instrumental in curbing black money. "People who have unaccounted
money often park it in unregulated deposit schemes. Curbing illegal deposit-raising activity will also carry
forward the government's drive against black money," says Abhishek A Rastogi, partner, Khaitan & Co.
The new law also requires the Central Government to designate an authority that will create an online central
database of entities permitted to collect deposits. "This will make it easier for depositors to check whether the
scheme they intend to invest in is a registered one. At present, the process of verifying is difficult as only
knowledgeable people know where to look for this information," says Mumbai-based financial planner Arnav
Pandya.
Risk of misuse: Some experts fear this new law could prove to be draconian. One legal expert said that
attachment and seizure of assets, or penalising without concluding a proper and fair trial is heavy-handed. He
feared that such laws could at times be used to harass people. He felt that the same objective could also be
achieved if the government took steps to speed up the judicial process in the country.
Some provisions need fine-tuning: A few other issues will also have to be ironed out over time. The ordinance
provides that an advance received for the purchase of an immovable property will not be considered as a deposit,
provided it is adjusted against the immovable property. "But what happens in the case of an advance received by
a real estate developer, which is subsequently refunded owing to cancellation by the customer? Such an advance
will not be adjusted against the purchase of an immovable property. Under the current provisions, even that
could get qualified as a deposit. The real estate developer would not have registered himself as a deposit-raising
entity, so he could become a defaulter and be subject to the penal provisions of this law," says Sandeep
Jhunjhunwala, director, Nangia Advisors.
Its current language could also pose challenges for crowdfunding activities in India. "Crowdfunding as a concept
could get impacted by this ordinance. When the regulators issue specific regulations around crowdfunding, they
will have to find a way around this," says Rajan.
Stay vigilant: While the stronger provisions of this ordinance will definitely act as a deterrent, investors should
not lower their guard. "Do not invest in schemes that promise excessively higher rates of return than banks or the
post office. Do not get into such schemes blindly even if others around you are doing so. And stick to well-
known financial institutions," says Pandya. Be especially wary if an agent’s sales pitch is very aggressive, and if
guaranteed returns are promised for a long period.
Strong deterrents
The Ordinance defines three types of offences. The first is running (advertising, promoting,
operating or accepting money for) unregulated deposit schemes.

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The second is fraudulently defaulting on regulated deposit schemes.
The third is wrongfully inducing depositors to invest in unregulated deposit schemes by
willingly falsifying facts.
Accepting unregulated deposits will be punishable with imprisonment between two and
seven years, along with a fine ranging from Rs 3-10 lakh.
Defaulting in repayment of unregulated deposits will be punishable with imprisonment
between three and 10 years, and a fine ranging from Rs 5 lakh to twice the amount
collected from depositors.
Repeat offenders will be punishable with imprisonment between five and 10 years, along
with a fine ranging from Rs 10 lakh to Rs five crore.
Source: Prsindia.org