The Banning of Unregulated Deposit Schemes Ordinance, 2019 – Government’s way of tackling chit fund scams

The Ministry of Finance along with the Department of Financial services had been gearing up to introduce a legislation to provide a comprehensive code to ban unregulated deposit schemes and protect interests of depositors. The Finance Minister had announced in the Budget 2016-17 that a comprehensive central legislation would be brought to deal with the menace of unauthorised deposit taking schemes. The \"Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill, 2015\" and the Report of the Inter-Ministerial Group (IMG) for identifying gaps in the existing regulatory framework for deposit-taking activities were introduced by the Department of Financial Services in 2017 for eliciting public comments. Based on the comments received and further consultations with the stakeholders, the Draft Bill was modified and a revised version (version 2.0) was introduced. The Banning of Unregulated Deposit Schemes Bill, 2018, was then introduced in Lok Sabha on July 18, 2018 and then referred to the Standing Committee on Finance on August 10, 2018 for examination and report thereon, under Rule 331E of the Rules of Procedure and Conduct of Business in Lok Sabha. Finally, in 2019, this becomes a reality with the President promulgating the Banning of Unregulated Deposit Schemes Ordinance, 2019, with effect from February 21, 2019 (post clearance by the House of People on February 13, 2019).

As a consumer protection legislation, the intent of this statute seems to be to spread the net on all deposit takers who accept or solicit deposits to defraud investors. Unregulated deposit schemes, like pyramid schemes, have been used to swindle depositors out of enormous sums of money. India traditionally did not have a unified regulatory regime to counter Ponzi or pyramid schemes whose operators typically grab deposits to meet their promise of guaranteed returns to savers. Such schemes can swell but are destined to eventual collapse when they run out of new savers. The lack of sanctions meant that the kingpins behind such failed deposit schemes are rarely punished. Though there are host of regulations including the Chit Funds Act 1982, Companies (Acceptance of Deposits) Rules 2014, SEBI (Collective Investment Scheme) Regulations 1999 etc, the lack of a unified regulatory regime have enabled several fairly-planned deposit schemes to slip through the regulatory cracks.

The statute adopts a prescriptive approach to describe regulated deposit schemes and provides a list of schemes/ arrangements under Schedule I that are considered regulated deposit schemes, by nine specified regulators, including RBI, SEBI, MCA and state and union territory governments. The statute, further, presumes illegality for unregulated deposit schemes. Consequently, any deposit taker promoting, operating, issuing any advertisement, soliciting participation or enrolment in, or accepting deposits (directly or indirectly) in pursuance of, any deposit scheme that is not regulated is subject to stringent penalties, including imprisonment, under the provisions dealt in Sections 21-27. Based on the Britain’s Financial Services Act, this legislation seeks to consolidate and create a comprehensive code for protecting the interest of Depositors by banning Unregulated Deposit Schemes by Deposit Takers. The legislation contains total 42 sections under 8 Chapters with 2 Schedules.

The Standing Committee on Finance, in its 35-pages report, had recommended that unregulated deposits be more coherently defined and listed in a schedule to the statute. Further, the Committee had observed that the informal banking sector has various financial arrangements, involving advances to start-ups and small entrepreneurs, that may fall under the definition of unregulated deposits by default and such ambiguities be cleared. The Committee had also recommended that all offences defined under this statute be made cognisable and non-bailable. These recommendations have found shelter under the statute recently promulgated. The Statute, now, creates three distinct 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 underlying principle is that it would 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 facto with considerable time-lag.

Every Ponzi scheme is followed by a new statute and such confrontational law-making at times, add to the woes of genuine entrepreneurs. For instance, Section 2(4) in the statute provides that an advance received in connection with consideration of an immovable property under an agreement or arrangement would not be considered as deposit, provided that the same is adjusted against such immovable property in accordance with the terms of the arrangement or agreement.  Therefore, a question arises whether the advance received by a real estate developer which is subsequently refunded, owing to cancellation by a customer, would be considered as deposit as the advance would not be adjusted against the consideration for immovable property. Adding to the woe is another proviso which states that an amount would be deemed as deposit on expiry of 15 days from becoming due, where it becomes refundable due to the deposit taker not obtaining necessary permission or approval to deal in the goods/ properties/ services for which money is taken. This proviso, on a joint reading with the provisions of the recently enacted Real Estate (Regulation and Development) Act, 2016 may lead to additional issues for the developers where the necessary approvals could not be obtained. These interpretational issues may need to be ironed out over a period of time. Further, provisions have been introduced to give depositors first charge on any asset created from the deposits. The statute, being a social welfare legislation, prioritises the interests of depositors over others. The requirement of developing a public website to check whether an entity soliciting deposits is registered with a regulator or not, and to file and track complaints against unregulated deposit takers, would instil transparency in deposit related transactions. The law also provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors.

Overall, the reform is expected to create a stronger framework that is less prone to manipulation and positive knock-on effects for investment and growth by channelling savings into the formal economy. Supplementing the Government’s financial inclusion plan, the reform should aid the economy by bringing additional money into the mainstream banking system. It is important that the Government immediately puts in place, an effective implementation system, including notification of competent authorities, designated courts, central database etc to ensure that this legislation doesn’t remain a non-starter on the ground. Time would tell us if the road to effective implementation is fraught with serious difficulties or is at ease!