How a new Bill proposes to tighten the noose on ponzi schemes like Saradha

File photo of Saradha agents at a protest rally in Kolkata
Busting of the deposit collection schemes run by the Saradha group in 2013 exposed the fault lines of such ponzi schemes. The moot issue was that there is no single regulator for these fund raising activities and many don't figure anywhere in the regulated sphere. 

These activities broadly fall under a complex non-banking financial sector. At present, there are several regulators monitoring acceptance of money from the public. For example, non-banking financial companies (NBFCs) are regulated and supervised by the Reserve Bank of India (RBI) under the provisions of the Reserve Bank of India, 1934 (RBI Act). Chit funds and money circulation schemes are under the domain of state governments, while housing finance companies come under the purview of National Housing Bank (NHB). Collective investment schemes come under the purview of the Securities and Exchange Board of India (Sebi) and active deposit acceptance by companies other than NBFCs is regulated by the ministry of corporate affairs. 

Further, section 45S of the RBI Act prohibits acceptance of deposits by individuals and unincorporated entities. The obligation and the power to pursue violation of this provision rests concurrently with the RBI and the state governments concerned. RBI has consistently depended upon state governments to pursue such cases because of their relative advantage. 

According to information provided by RBI, some 978 unauthorised schemes were discussed in state level coordination committee (SLCC) meetings in various states and UTs between July 2014 and May 2018. These cases were then referred to the respective regulators and law enforcement agencies in the states. A large number of such instances have been reported from the eastern part of the country, where Saradha group was also active earlier. 

However, what exactly comes in whose jurisdiction has also been contested. For instance, the famous Sahara-Sebi case relates to the issuance of Optionally Fully Convertible Debentures (OFCDs) by two companies of Sahara India Pariwar. Sebi had claimed its jurisdiction and objected to the fact that Sahara had not sought its permission. Sahara, on the other hand, had claimed that those bonds were hybrid products and did not come under Sebi's jurisdiction. The group claimed the instruments were governed by the Registrar of Companies (ROC) under the Ministry of Corporate Affairs, from which the two Sahara companies had already taken permission and submitted the red herring prospectus with ROC before issuing the bonds.

Later the Securities Appellate Tribunal (SAT) upheld Sebi's jurisdiction over the OFCDs. 

As deliberations were on for action against CIS operators before the schemes went bust, Sebi was given more teeth in 2014 to deal with these schemes proactively, before they started assuming dangerous proportions. 

Sebi was vested with explicit powers to disgorge illegal gains made through fraudulent deposit schemes and capital market offences. Those who lost money could be compensated from the sale of recovered assets of a delinquent company. The money collected would be parked in Sebi’s Investor Protection and Education Fund. Sebi could, with a magistrate’s permission, conduct search and seizure operations and initiate recovery proceedings. 

Along with it, a comprehensive Bill was proposed in 2016-17 by then finance minister Arun Jaitley to deal with the menace of illicit deposit taking schemes. 

Subsequently, a draft bill was put in public domain. Then, the Banning of Unregulated Deposit Schemes Bill, 2018, was introduced in Parliament on July 18, 2018. 

The Bill identifies 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 which could be as high as Rs 50 crore and a jail term of up to 10 years for duping gullible depositors.

The principle is that the Bill would ban unregulated deposit collections altogether, by making them an offence ex-ante, replacing the existing legislative-cum-regulatory framework which only comes into effect ex-post, with considerable time lags.

The Bill has provisions for repayment of deposits in case the schemes manage to raise funds illegally. It allows states to designate a competent authority to ensure repayment of deposits in the event of a default. The Bill also prescribes powers and functions of the competent authority, including the power to attach assets of a defaulting establishment.

Timelines have been given for attachment of property and restitution to depositors. The Bill seeks to enable creation of an online central database for collection and sharing of information on deposit collections.

Basically, it bans all the deposit taking activities that are not listed in a clause of the Bill that is regulated by various regulators. What's more, regulated deposit taking activities include EPF, which is regulated by EPFO, and the schemes regulated by PFRDA and IRDAI.  

This, the Parliament's standing committee on finance said, leaves remaining deposit schemes for interpretation and could lead to arbitrary decision by the authorities. The committee, therefore, recommended that uregulated schemes which are sought to be banned by the Bill should be more coherently defined in the Bill, with an indicative list by way of a schedule of such schemes, drawn on the basis of experience and ground realities. This, it added, could be amended or modified as and when required. The Bill, again tabled in the Lok Sabha, is being debated now. 

Securities and Exchange Board of India (Sebi)
Collective Investment Schemes, Alternative Investment Funds, funds managed by portfolio investors, share based employee benefits, subscriptions to mutual funds etc
Reserve Bank of India (RBI)
Deposits accepted by non- banking finance companies (NBFCs), funds accepted by business correspondents etc
Insurance Regulatory and Development Authority of India (IRDAI) Insurance contracts
States, union territories 
Deposits accepted by cooperative societies, chit funds, money circulation scheme including multi-level marketing schemes 
National Housing Bank (NHB) 
Deposits accepted by housing finance companies
Pension Fund Regulatory and Development Authority of India (PFRDA) Deposits accepted for new pension system (NPS), Atal Pension Yojana etc
Employees Provident Fund Organisation (EPFO) Deposits accepted for EPF etc
Central registrar, multi-state cooperative societies
Deposits accepted by multi-state cooperative societies
Union Ministry of Corporate Affairs  Deposits accepted by Nidhi companies or mutual benefit societies
Deposits in the non-banking financial sector, which do not broadly fall under the above heads, would be  banned once Banning of Unregulated Deposit Schemes Bill, 2018 comes into force

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