The banning of unregulated deposit schemes bill-2019

On 19 July 2019, the Ministry of Finance introduced “the Banning of Unregulated Deposit schemes Bill, 2019” in Lok Sabha. The bill provides for a mechanism to prohibit unregulated deposit schemes and safeguard the interests of depositors. Also, the bill will instantly handle the menace of illicit deposit-collecting activities in the country launched by rapacious operators, which currently are exploiting regulatory gaps.
It will altogether prohibit unregulated deposit-taking schemes, and the law has provisions for punishment and disgorgement or repayment of deposits in cases where such schemes nonetheless handle to raise deposits illegally.
It also seeks to amend three laws, i.e.,
  • the Reserve Bank of India (RBI) Act, 1934,
  • the Securities and Exchange Board of India (SEBI) Act, 1992 and
  • the Multi-State Co-operative Societies Act, 2002.

  • Deposit:
    The Bill defines a deposit as an amount of money received through an advance, a loan, or in any other form, with a assurance to be returned with or without interest. Such a deposit may be returned either in cash or as a service, and the time of return may be specified. Moreover, the Bill defines certain amounts which shall not be included in the definition of deposits such as amounts received in the form of loans from relatives and contributions towards capital by partners in any partnership firm.

  • Presently 9 regulators regulate and oversee various deposit-taking schemes. These encompass:
    • state and union territory governments
    • the Ministry of Corporate Affairs,
    • the Reserve Bank of India (RBI),
    • the Securities and Exchange Board of India (SEBI).

    For example,
    • SEBI regulates mutual funds,
    • RBI regulates deposits accepted by non-banking financial companies (NBFC),
    • State and union territory governments regulate chit funds, among others. All deposit-taking schemes have to be registered with the relevant regulator.

  • Unregulated deposit scheme:
    The Bill prohibited unregulated deposit schemes. A deposit-taking scheme is states as unregulated if it is taken for a business purpose and is not registered with the regulators listed in the Bill.

  • Deposit taker:
    The Bill defines deposit takers as a company who asks for (solicits) or receives deposits, an individual, a group of individuals. Banks and entities incorporated under any other law are not included as deposit takers.

  • Competent Authority:
    The Bill provides for the appointment of one or more government officers of the rank of Secretary or above to the state or central government, as the Competent Authority. Police officers receiving information about offences committed under the Bill will report it to the Competent Authority. Further, police officers ( of the rank of an officer-in-charge of a police station) may enter, search and seize any property supposed to be connected with an offence under the Bill, with or without a warrant.
    The Competent Authority may:
    • summon and examine any person it considers necessary for the purpose of obtaining evidence, and order the production of records and evidence.
    • provisionally attach the property of the deposit taker, as well as all deposits received,
    The Competent Authority will have powers similar to those vested in a civil court.

  • Designated Courts:
    The Bill provides for the constitution of one or more selected Courts in specified areas. This Court will be headed by a judge of the rank of a district and sessions judge, or additional district and sessions judge.

  • After provisional attachment of the deposit taker’s assets, the Competent Authority will approach the selected Court to:
    • ask for permission to sell the assets.
    • make the provisional attachment absolute, and
    The Competent Authority will have to approach the Court within 30 days (extendable to 60 days). It will also open a bank account to realise and disburse money to depositors under the instructions of the Designated/selected Court.

  • The Designated Court will have the power to:
    • vary or cancel the provisional attachment,
    • make the provisional attachment absolute,
    • finalise the list of depositors and their respective dues, and
    • direct the Competent Authority to sell the property and equitably dispense the money realised among the depositors. The Court will seek to complete the process within 180 days of being approached by the Competent Authority.

  • Central database:
    The Bill provides for the union government to designate an authority to create an online central database for information on deposit takers. All deposit takers will have to notify the database authority about their business. The Competent Authority will have to share all information on unregulated deposits with the authority.

  • Offences and penalties:
    The Bill defines three ilks of offences, and penalties related to them. These offences are:
    • fraudulently defaulting on regulated deposit schemes,
    • running (advertising, promoting, operating, or accepting money for) unregulated deposit schemes,
    • wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.
    For example, accepting unregulated deposits will be punishable with imprisonment between 2 and 7 years, along with a fine ranging from 3 to 10 lakh rupees. Defaulting in repayment of unregulated deposits will be punishable with imprisonment between 3 and 10 years, and a fine ranging from 5 lakh rupees to twice the amount received from depositors. Further, repeated offenders under the Bill will be punishable with imprisonment between 5 to 10 years, along with a fine ranging from Rs 10 lakh to 5 crore rupees.