Regulating the unregulated


Regulating the unregulated



Ever since the budget announcement in the year 2016-17 by the then Finance Minister Late Sh. Arun Jaitely, there was an expectation of a comprehensive central law to prevent the blossoming of illegal deposit schemes. And on these lines, the GoI had introduced an ordinance by the name of The Banning of unregulated deposit schemes ordinance on 19th February 2019 to ban individuals/institutions from accepting unregulated deposits.

Although Lok Sabha passed the bill but before Rajya Sabha could debate it, the houses were adjourned and dissolved. Consequently Smt N. Sitharaman reintroduced the bill in Lok Sabha in July 2019 and it became a law.

What is this bill about?

The law by the name of Banning of Unregulated Deposit Schemes Act, 2019 is an attempt to provide a wholesome mechanism to ban the unregulated deposit schemes.
The other major objective of the act is to protect the naïve & gullible depositors especially the financially illiterate ones who are more vulnerable to such schemes.

This act bans deposit taking by unregulated individuals or entities and entails hefty fines for offenders. Previously existing legislative lacunae’s are covered now under this bill, which gives it a more complete look.

Let us now understand what an unregulated deposit is?

Quite simply, whatever is not regulated comes under this category!
Under the act, deposits that are not regulated by the 9 entities (regulators) as prescribed in the act (under column 3 of the First Schedule) will constitute unregulated deposits.

So while it prohibits accepting deposits, which can potentially remain unregulated, it does not stop any entity from raising funds for its business or individual taking loans for personal use or pressing needs during time of crisis. The government provided clarity on this matter after a few financial experts had raised this ambiguity in the bill.

How does it affect a depositor/Banks/ FI/ me?

Other than prohibiting collection of unregulated funds during kitty parties, there are more repercussions of this bill than what meets the eye for the common man.

For instance, one of the indirect objectives of the bill is also to raise the savings rate in the country. So that in crisis or in times of need this saving can be deployed back in the economy through investments.
This aspect is already at play in the Indian economy when we see the unprecedented increase in deposit levels of PSBs and especially State Bank of India. Though there are various factors which can be attributed to this (flight to safety amidst uncertainty) however the role of this bill can not be excluded because if small depositors do not have anybody & everybody taking their deposits, the money will ultimately flow to PSBs only, especially from the rural areas & hinterland. This will enable our economy to bounce back from crisis in a more robust way.

Another aspect is the prevention of money laundering & flow of illicit funds for anti-national and terrorism related activities.

How can an investor make out a scheme, which is likely to be an unregulated deposit scheme?

Any investor who sees the following red signs must realize that he is either being duped or will be, shortly. Some of these signs are-

1) Your benefit (interest or income) depends solely on the number of investors you bring in, rather than actual selling of products.
2) There is a substantial difference in returns being offered to you when compared to other more prominent schemes.
3) You are being forced to purchase products that you don’t want and you are being made to purchase a lot of it!
4) Rather than the USP of products, you are being sold the rags-to-riches stories

How will the law protect you? What does the law contain?

As per the act, and this has been a major drawback too (discussed later), the appropriate Government needs to appoint a competent authority. This person cannot be below the rank of secretary.
The concerned administration is also supposed to, with the concurrence of the Chief Justice of the concerned High Court, constitute Court(s) known as the Designated Courts presided over by a Judge.

The competent authority is empowered to attach the assets and auction them under the act. Any person aggrieved is entitled to approach a High Court within 60 days from the date of order to file a petition for review.

The courts are empowered to classify these offences under three major categories-
➢ Running of these schemes
➢ Fraudulent default in regulated deposit schemes
➢ Wrongful inducement

The offences under these categories may lead to maximum fine of Rs 50 cr & 10 years imprisonment.
Another aspect that differentiate this act from others is the clause that states that, the appropriate government can direct a newspaper that is found to contain any advertisement related to these schemes to publish a full & fair retraction, free of cost.

What are the major issues facing this piece of legislation?

First & foremost, the competent authority is yet to be appointed even after lapse of 12 months from the date of enactment of the law. Without the authority, the law remains only on paper without any practical enforceability.

The other issue of contention, especially for Banks & Financial institutions, has been the treatment of depositors vis-à-vis other legislations like SARFAESI & IBC. The specific points of contention are section 31 of SARFAESI & section 31 of the IBC, which state that any amount due to depositors from a deposit taker shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority”.
The current law upholds the sanctity of these two clauses above its own and thus becomes subservient in nature.

Then is the matter of cognizability of an offence. The designated courts are not empowered to take cognizance of an offence unless reported by the regulator, which dilutes the stringency of the law

The act doesn’t prescribe the monetary thresholds that constitute a crime. The government on its part has said that this has been done to prevent illegal operators of these schemes to take money from the poor to escape the provisions. But it remains to be seen whether this clarification proves practical or not.

Another bone of contention is the prospective applicability of this statute. Experts question what will happen to the cases registered prior to date of commencement of this law? Sadly there are many and there is almost no clarity on this from any quarters. According to the law, the prohibition comes into force wef 21.02.2019. In other words, this lends questionable credibility & authenticity to those deposits garnered prior to this date. The law does not state whether these funds can continue to run these schemes or return the money immediately to the depositors. Interestingly, none of the sections of the law provide for any punishment for running a unregulated deposit scheme, they only are applicable for solicitation & acceptance.

However, the biggest problem that I foresee with this legislation is the silence regarding digital payments and float funds available in wallets/UPI apps. This requires immediate attention considering the number and amount of transactions that now happen digitally. The law is completely silent on this aspect.

What are the solutions?

It will be wishful thinking to expect a foolproof and lacunae free legislation at the first go for an intricate topic like money. However, this piece of legislation is quite near to being perfect. Some of the steps that can help improve the efficacy of the law are-

➢ Government must ensure wide publicity of the act for deterrence of offenders and knowledge of general public
➢ Competent authority and the designated courts must be appointed without any further delay
➢ Amendments, if required, shall be made to relevant sections of SARFAESI & IBC in order to protect the interest of the marginalized, illiterate and vulnerable depositors
➢ The vision of implementing executive must be to protect the low-income households
➢ Government can consider developing a database for end use of deposits
➢ There must be checks & balances for preventing misuse of the act to de-recognise genuine deposit schemes that offer useful financial services to customers in the unorganised sector
➢ Treatment of float funds & digital transactions must be laid our clearly

What does the future hold?

Saradha & Rose valley scams are still fresh in our memory. In fact, the Central Bureau of Investigation alone had lodged about 166 cases in the past four years related to chit funds and multi-crore scams, with the highest numbers in West Bengal and Odisha. So it will be in order to say that the intent behind the legislation is indeed commendable, however, the heart of the benefits for the people will squarely lie on the proper implementation of the act.




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