In an effort the curb the menace of ponzi schemes, the government on Wednesday introduced a Bill which proposes a ban on unregulated deposits, and a 10-year jail term for perpetrators of such schemes.
Introduced by the Minister of State for Finance, Pon Radhakrishnan, the ‘Banning of Unregulated Deposit Schemes Bill, 2018’ has three key elements — punishment for promoting or operating an unregulated deposit scheme, stringent punishment for fraudulent default in repayment to depositors, and designation of a competent authority by the State government to ensure repayment of deposits in the event of default by a deposit-taking establishment.
The Bill contains a clause that bans deposit-takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme.
“The Bill seeks to put in place a mechanism by which the depositors can be repaid without delay, by attaching the assets of the defaulting establishments,” said the Statement of Objects and Reasons of the Bill. Non-banking entities are allowed to raise deposits from the public under various laws enacted by the Central as well as State governments. However, the regulatory framework for deposit taking activities in the country is not seamless as regulators operate in well-defined areas within the financial sector by regulating particular kind of entities or activities.
Ex-ante framework
The principle is to ban unregulated deposit-taking activities altogether, by making them an offence ex-ante, rather than the existing legislative-cum-regulatory framework, which only comes into effect ex-post with considerable time lags.
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. The Bill prescribes monetary penalty and jail term of up to 10 years for duping gullible depositors.
The monetary penalty could be as high as ₹50 crore.
The government has proposed these stringent provisions in wake of several ponzi schemes where gullible investors, mostly poor people, were defrauded of amounts running into thousands of crores of rupees.
Ensuring repayment
The Bill also proposes setting up of competent authorities by State governments to ensure repayment of deposits in the event of default by a deposit-taking establishment. Companies or institutions running unregulated schemes exploit existing regulatory gaps and lack of strict administrative measures.
Due to increase in instances of people in various parts of the country being defrauded, the Finance Minister, in his Budget Speech of 2016-17, had announced a comprehensive central legislation to deal with the menace of ponzi schemes.Subsequently, in Budget Speech 2017-18, he had announced that the draft Bill to curtail the menace of illicit deposit schemes had been placed in the public domain and would be introduced shortly after its finalisation.