Banning of Unregulated Deposit Schemes Bill, 2018

In March, 2018, the Union Cabinet has approved the introduction of the Banning of Unregulated Deposit Schemes Bill, 2018. The purpose of the Bill is to tackle the menace of illicit deposit schemes operating in the country. The Bill will prohibit unregulated deposit taking activity and also sanction a stringent punishment for the companies and institutions which operate such unregulated deposit taking schemes.

Background and Rationale

In recent times there has been a spurt of ponzi schemes being run by companies and institutions to dupe general public of their hard earned money. Some of the examples are several jewellery companies that have disguised their deposits as advance payments for monthly payments which were redeemed with the purchase of jewellery and also included interest. Many builders have been raising funds from the house-buyers through such schemes. \

Adding to the nuance, banks and finance companies keep lending funds to these builders and jewelers like Nirav Modi and Deepak Kulkarni (builder based in Pune) although fully aware that these recipients are seriously cash-strapped. So, all the money is routed through loans to ordinary borrowers who are lured through interest rates. After this, the fraudulent projects are mortgaged to lenders although without any benefits. Finally when the project fails to materialize the buyers are not left with any remedy due to a void in law making in this regard.

Salient Provisions

The important provisions of the Bill are as follows:

Definitions

• The Bill defines ‘deposit taker’ as all the possible entities that includes individuals also, who are receiving or soliciting deposits. But it does not include some specific entities that are incorporated by legislation.
• ‘Deposit’ is defined in such a manner that deposit takers are restricted from camouflaging public deposits as receipts, and at the same time not to curb or hinder acceptance of money by an establishment in the ordinary course of its business.

Prohibition of unregulated schemes

• The Bill bans the deposit takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme and makes it an offence ex-ante, rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags.

Scope of unregulated deposits

• One of the first categories of unregulated deposits includes the schemes by the real estate developers offering fixed returns till possession of the property. Another category is the jewellery schemes that provide schemes which allow consumers to pay 11 installments and the company pays the last installment and another category is the other schemes which offer customers to pay the installments for a period of atleast 10 months and get 50% discounts in the monthly contributions.

Offences under the Scheme

• The Bill creates three different types of offences, namely, running of Unregulated Deposit Schemes, fraudulent default in Regulated Deposit Schemes, and wrongful inducement in relation to Unregulated Deposit Schemes.

Stringent punishment

• The Bill provides for severe punishment for fraudulent default in repayment to depositors. It also sanctions heavy pecuniary fines. All this is meant to act as a deterrent for future wrongdoers. The competent authority has the power to attach the assets or properties for the purpose of realizing the amount that has been due to the depositors and subsequent repayment.

Repayment of deposits and attachment of property

• The Bill provides for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally. Clear-cut time lines   have   been   provided for attachment of property and restitution to depositors.

Competent authority

• A competent will be designated by the state government that will ensure repayment of the deposits in the case of default by a deposit-taking establishment.

Central database

• The Bill enables the creation of an online central database, for collection and sharing of information on deposit taking activities in the country. It is expected to provide a list of authorized schemes and allow ordinary public to report on suspicious scheme. There shall also be a list of the companies that have been convicted for running the illegal deposit schemes.

Being a comprehensive Union law, the Bill adopts best practices from State law and entrusts the primary responsibility of implementing the provisions of the legislation to the State Governments thus upholding the principle of cooperative federalism.

Does the Bill have an impact on Bitcoin or Cryptocurrencies?

It has been reported that with the creation of Bitcoin and cryptocurrencies, many ponzi schemes have emerged under its shadow.  Being a new and promising market, many people jumped into investing in these without gaining proper knowledge on the same. These also provided a route to save taxes. However, in India such cryptocurrencies have already been  given the status similar to ponzi schemes. So, indirectly the Bill will curb the use of Bitcoin and cryptocurrencies and especially the ones which promise 2 and 3 times more return will be mostly hit. But the exchanges that are running as per the standard norms are not being touched upon.