The burgeoning Ponzi scams across the country brought into sharp focus the inadequacy of the existing legal and regulatory framework to pin accountability on the perpetrators – a leading reason for the introduction of the Banning of Unregulated Deposits Schemes Ordinance, 2019 (“Ordinance”).
The menace of burgeoning Ponzi schemes across the country has exposed the inadequacy of the existing legal and regulatory framework in ensuring that entities who run and manage such schemes are held accountable. Indeed, one of the factors that led to the introduction of the Banning of Unregulated Deposits Schemes Ordinance, 2019 (“Ordinance”) was the controversies in relation to Ponzi schemes such as Rose Valley and Sharada in West Bengal.
What does the government seek to regulate?
In terms of the existing legal framework, the regulatory oversight on deposit taking schemes is fragmented and responsibility is spread across a number of regulators, including, the Reserve Bank of India, Securities and Exchange Board of India, etc. Acknowledging that the present regulatory framework for deposit taking schemes is not seamless, the Ordinance seeks to ensure a comprehensive ban on all unregulated deposit schemes.
What is an unregulated deposit scheme?
In terms of the Ordinance, a “deposit” has been defined in wide terms to mean an amount of money received by way of an advance or loan or in any form, by any deposit taker with a promise to return with or without interest. Given the all – encompassing nature of the definition, the Ordinance identifies a long list of instances which should not be construed as “deposit”, for instance, loans from schedule banks or co-operative bank or relatives, capital contribution by a partner for a partnership firm, credit by a buyer from a seller on the sale of any property are not included within the definition of deposit.
The Ordinance defines a “deposit taker” as an individual, a group of individuals (including partnership firms, LLPs, associations of persons, societies and trusts) or a company that solicits deposits. Banks and companies incorporated under any other law are specifically excluded from this definition.
An “unregulated deposit scheme” is therefore one involving solicitation of deposits by a deposit taker, if taken for a business purpose and not specifically registered with any of the regulators listed in the Ordinance. While it may be contended that the particularly broad scope of the terms “deposit” and “unregulated deposit scheme” set out in the Ordinance may result in teething issues and unintended difficulties, it should be kept in mind that an expansive understanding of these concepts is critical for the Ordinance to adequately protect the public.
What is the regulatory framework established under the Ordinance?
The Ordinance provides for the establishment of Designated Courts for the purpose of adjudication of matters under the Ordinance. The Ordinance also provides for the appointment of a Competent Authority for monitoring compliance under the Ordinance. The Competent Authority is vested with powers similar to that of a civil court. The Ordinance also vests police officers with powers including search, seizure and investigation of such unregulated deposit schemes.
The Competent Authority may provisionally attach deposits or property of the deposit taker, summon and examine any person(s) it believes to be connected to such schemes, as well as collect and record evidence pertaining to such matters. Upon such action as the case may be, the Competent Authority may approach the Designated Court within the prescribed time to make such provisional attachment final, or to seek permission to sell the assets so attached. Proceedings before the Designated Court are time bound and must be completed within 180 days of being approached by the Competent Authority.
In the interest of investor protection, the Ordinance also provides for the establishment of an authority (under the aegis of the Central Government) to create a central database containing information about deposit takers.
What are the offences and penalties prescribed under the Ordinance?
The Ordinance prescribes criminal imprisonment as well as fine for offences, such as, running (including advertisement, promotion, operation and acceptance of deposits) an unregulated deposit scheme, fraudulently defaulting on a regulated deposit scheme, wrongfully inducing depositors to invest in such schemes.
While the Ordinance is certainly well – intentioned inasmuch as it seeks to reinforce the importance of protecting that last-mile investor/depositor and is likely to encourage individual borrowers to seek formal lines of credit/deposit rather than accessing unorganised pools of capital for funding or savings, it has also given rise to numerous queries and created some degree of ambiguity on legitimacy of all informal credit/deposit arrangements. Since the primary intention of the Ordinance is to protect public depositors from the clutches of dubious peddlers of Ponzi schemes, it will be interesting to see how the jurisprudence develops in this space, to distinguish other informal deposit arrangements from the penal force of the Ordinance.
About the Authors
Shruti Rajan is Partner and Rishi Ray is Associate at Cyril Amarchand Mangaldas