14 March 2016 06:53:03 IST

Draft law readied to crack down on Ponzi, sham deposit schemes

Inter-Ministerial Group proposes stiff jail terms, fines

A high-level Inter-Ministerial Group has proposed a new law providing for punitive jail terms and fines to curb unregulated deposits and Ponzi schemes.

To clearly demarcate deposits into regulated and unregulated categories and to serve as a guide post for depositors, the inter-ministerial team has proposed a comprehensive law called ‘Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interest Bill, 2015’.

The inter-ministerial team, set up to identify gaps in the regulatory framework for deposit-taking activities and to propose measures including the formulation of a new law, submitted a report and suggested a comprehensive legislation, a copy of which is with BusinessLine .

Overrides other provisions With six chapters and 29 sections, the new umbrella legislation, which will override deposit-taking provisions in other laws, including of the States, proposes penal provisions, including imprisonment for a minimum of three years, which can be extended to 10 years, and a fine that may be twice the aggregate funds collected from the subscribers, members or participants in such schemes, if the deposit-taking establishment directly or indirectly promotes, operates or issues any advertisement soliciting participation in an unregulated scheme.

The proposed law defines ‘Deposit’ as money taken by way of advance or loan or any other form and returned in a specified period or otherwise in cash or kind or in the form of a specified service with or without any benefit — interest, bonus, profit or any other form. All unregulated deposit schemes will come under this law.

For default in repayment/return of deposits on maturity, the new legislation proposes jail up to seven years or fine of not less than ₹5 lakh which can be raised to ₹25 crore or three times the amount of profits made out of such defaults, whichever is higher, or with both. A decision on the authority to administer the law will be taken after discussions on the draft. The Department of Financial Services in the Finance Ministry now has to put it up on its website for comments of, and discussions by, stakeholders.

Official sources told BusinessLine that besides the legal and regulated activities under the various Acts such as the Banking Act, the Reserve Bank of India Act, the SEBI Act, and the Companies Act, and chit businesses governed by State governments, illegal activities on a large scale have been are reported across the country exploiting the regulatory gaps and the inadequate legal and enforcement framework.

In his Budget speech, Finance Minister Arun Jaitley, while proposing to bring in a comprehensive Central legislation in 2016-17 to deal with the menace of such schemes, had said: “In the recent past, there have been rising instances of people in various parts of the country being defrauded by illicit deposit-taking schemes. The worst victims of these schemes are the poor and the financially illiterate…”

Lack of reliable data The problem also comes from that fact that there is no reliable data on the number of such unregulated schemes. According to the IMG report, CBI investigations in different cases indicate that the deposit-taking activities of such entities cover nearly every State. Tentative estimates based on entities investigated by the CBI till date indicate that more than ₹68,000 crore has been collected from over six crore ‘investors’.

In the recent Saradha Scam that rocked West Bengal, the chit fund collected as much as ₹1,000 crore from some 17 lakh ‘depositors’, according to the Special Investigation Team that probed the multi-level marketing swindle.

Since the role of State governments is also crucial in monitoring such cases the draft law proposes that States nominate competent authorities at the district level even as regulators oversee the different deposit schemes under their respective laws such as the Companies Act.

The new law also proposes setting up an empowered committee for arbitration in case of any dispute over the jurisdiction of regulators over a particular scheme.