The Government has obtained cabinet approval to table two crucial Bills before Parliament, namely the Banning of Unregulated Deposit Schemes Bill (BUDS Bill) and the Chit Funds (Amendment) Bill, 2018 (Chit Fund Bill).

For a long time now, the practice of unauthorised acceptance of deposits and chit funds has been a menace. Perpetrators lure gullible investors to deposit money with the promise of astronomical returns and disappear overnight.

The Sanchayita investment scam was one of the first to hit the country in the 1980s, robbing about 1.3 lakh investors of their hard-earned savings. The Saradha group financial scam involved ₹2-3 lakh crore taken from over 17 lakh depositors. The Rose Valley Scam garnered a collection of over ₹17,000 crore from small depositors.

In the recent Pincon scam, the Kolkata-based Pincon Spirits Limited formed about six shell companies and allegedly duped 4 lakh investors from across the country of ₹1,000 crore.

The predominance of such schemes is a result of inadequate laws in place. The administration too mostly takes a reactive stance rather than a proactive approach in all these cases.

The cabinet has now taken a significant step forward through the introduction of these two Bills, which propose to revamp the current legal framework and tighten the noose of legal sanctions on perpetrators.

The BUDS Bill provides for comprehensive legislation on banning unregulated acceptance of deposits with stringent sanctions on fraudulent default in repaying depositors. The Bill also pins powers and responsibility on designated authorities to ensure repayment of deposits by various means, including attachment of assets.

The Bill designates courts to oversee the process of repayments in such situations and proposes to list down all transactions that would qualify as ‘Regulated Deposit Schemes’. Any scheme not covered in the list of Regulated Deposit Schemes is not permissible.

This could also mean that marketing schemes run by construction companies where the consumers get fixed returns on the sum deposited till possession of the flat will be in violation of the law.

There have been debates whether crypto currencies would be covered by the Bill but extending crypto currencies to “deposits” appears far-fetched. Crypto currencies, not legal tender in India, are a means of exchange and shouldn’t fall within “deposits.”

However, although the BUDS Bill provides a comprehensive framework preventing scamsters from getting away, the procedural aspects such as mode and format of complaint and steps to be followed by the designated authority/courts following a complaint are conspicuous by their absence. Further, the procedures should be time-bound to ensure an efficacious remedy to affected parties.

Chit funds Bill

The Chit Fund Bill distinguishes ‘Fraternity Funds’ from ‘Prize Chits’ which are covered under separate legislation. The Bill allows subscribers of the chit fund to join through video conferencing. The foreman is required to record minutes of the proceedings signed by such subscribers within a period of two days following the proceedings. The Bill proposes to increase the ceiling limit for foreman’s commission from 5 per cent to 7 per cent and allows the foreman a right to lien for dues from subscribers.

Although these measures are welcome, people engaged in this industry have been clamouring for substantive reforms such as reduction in the quantum of deposit required to be paid by the foreman and introducing an insurance scheme for chit funds. Therefore, there is scope for further improvement in the Chit Fund Bill.

In conclusion, these two Bills promise to become comprehensive central legislation to check the menace of illegal deposit-taking schemes and bring in progressive reform.

The legislation is expected to lay down a systematic mechanism for regulating financial transactions to curb frauds but not to completely eliminate such schemes as their advantages cannot be ignored.

The writers are Partner and Senior Associate, respectively, Khaitan & Co

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