Legally Yours. A check on unregulated deposits

With bank deposit interest rates nothing to write home about, the promise of higher returns which many alternative investment options provide, is too tempting to resist. But while instruments from non-banking finance companies, corporates, housing finance companies, etc. are governed by RBI, the National Housing Bank or the Ministry of Corporate Affairs to safeguard the interest of investors, many Ponzi schemes go below the radar of all watchdogs.

Schemes which can be classified as chit funds regulated by the respective States (remember the Saradha scam?) or collective investment schemes that need to be registered with SEBI (who can forget the Rose Valley scam!) circumvent regulations and engage in dubious activities, posing a risk to the hard-earned money of investors.

To bring in checks on such unregistered and unregulated schemes which dupe the public and provide a recourse to the depositor, the government has come out with a comprehensive legislation — The Banning of Unregulated Deposit Schemes Bill. This Bill went a step closer to becoming law earlier this month, after a standing committee of the Lok Sabha submitted its report.

Strict penalties

The Bill is an omnibus legislation, banning all deposit schemes which typically fall in no man’s land (unregulated deposits) and provides that no deposit-taker shall, directly or indirectly, promote, operate or issue any advertisement soliciting enrolment in such deposits. The term ‘deposit taker’ has been defined to include even agents who are usually the foot soldiers for Ponzi schemes. The punishment for ‘soliciting’ such deposits is imprisonment from one to five years and fine from ₹2 lakh to ₹10 lakh.

While the punishment for ‘accepting’ such deposits is imprisonment from two to seven years and fine from ₹3 lakh to ₹10 lakh, ‘accepting and defaulting’ on such deposits will attract imprisonment from three to 10 years and fine from ₹5 lakh to twice the amount collected. Wrongful inducement into such deposits by making false promises or deliberately concealing material facts is also considered a punishable offence.

Priority for investor money

The bill sets up a mechanism for restitution of the dues to investors who unfortunately put their money into the unregulated schemes. Towards this, the Bill provides for provisional attachment of properties/assets of deposit-takers by a competent authority to be appointed by the government, confirmation of provisional attachment by a designated court and subsequent realisation of assets for repayment to depositors.

To not make it a never-ending wait for investors, strict time-lines have been provided for attachment of property and restitution to depositors. The Bill also provides that any amount due to depositors shall be paid in priority over all other debts and all taxes, cesses, etc. payable by the entity (save as otherwise provided in the SARFAESI Act or the Insolvency and Bankruptcy Code).

Due diligence

Even as the law gains more teeth to act on unregulated entities enticing naive investors, it is better to be safe than sorry. With most unregulated entities being loosely run as collective investment schemes (CIS), you can run a background check on them before offering money on a platter. A CIS is defined as a pool of funds under any scheme or arrangement involving a corpus of ₹100 crore or more. This definition excludes schemes from co-operative societies, deposits from NBFCs and corporates, insurance or regulated pension schemes, deposits with a Nidhi, mutual benefit society or registered chit fund and units in mutual funds. A CIS must be registered with SEBI and comply with the rules/norms laid down by the regulator. So, if any entity pools money from investors and promises mouth-watering returns, it is better to look before you leap.

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