New law against illegal deposits is tough, yet investors must remain alert

File photo of Saradha agents at a protest rally in Kolkata
In the past, scams like Rose Valley and Saradha have deprived thousands of investors of their hard-earned money. To curb the menace of illegal deposit raising, the government had introduced the Banning of Unregulated Deposit Schemes Bill in Parliament in July 2018. The Bill was subsequently referred to the Standing Committee on Finance. Recently it was passed by the Lok Sabha, but could not be passed by the Rajya Sabha. On the Cabinet’s request, the President has promulgated it as an ordinance.

Unregulated entities can’t raise deposits: At present, nine regulators regulate various deposit-taking schemes in India. The Reserve Bank of India (RBI), for instance, regulates non-banking financial companies (NBFCs), the Securities and Exchange Board of India (Sebi) regulates mutual funds, state and union territory governments regulate chit funds, and so on. According to this ordinance, all deposit-taking schemes will have to be registered with the relevant regulator. Any scheme, which is not registered with a regulator, will be deemed as unregulated. "The crux of this ordinance is that no unregulated entity will be allowed to collect deposits," says Shruti Rajan, partner, Cyril Amarchand Mangaldas.

The new law provides for the appointment of a Competent Authority (CA) in the states. If the police receive information about illegal deposit-raising activity, they will report it to the CA. The latter will have the power to provisionally attach the property of the deposit taker, and also the deposits received. This law also provides for the setting up of Designated Courts. After provisionally attaching the deposit taker's assets, the CA will go to the Designated Court to make the provisional attachment absolute, and to obtain its permission to sell the assets. The CA will also return money to depositors under the instructions of the Designated Court. All these activities will be carried out in a time-bound manner.

Power to act immediately: Earlier, the concerned authorities had to initiate enquiries, carry out investigations, and go through an elaborate process. This allowed time to illegal deposit collectors to siphon away the money they had raised. Now, the CA will be able to attach the property of illegal deposit takers the moment it receives information.

In the past, even when such illegal deposit taking came to light, sometimes no regulator cracked down on it due to confusion regarding whose jurisdiction that entity fell in. “Now, there will be a CA that will act in case of any act of illegal deposit collection. And now that the law has also specified the penalties and jail terms, action will be faster,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

This law should help curb black money. "People who have unaccounted money often park it in unregulated deposit schemes. Curbing illegal deposit-raising will also carry forward the government's drive against black money," says Abhishek A Rastogi, partner, Khaitan & Co.

This law also requires the central government to set up an authority that will create an online central database of entities permitted to collect deposits. "This will make it easier for depositors to check whether the scheme they intend to invest in is registered with a regulator. At present, verifying is difficult as only the knowledgeable few know where to look for this information," says Mumbai-based financial planner Arnav Pandya.

Risk of misuse: The new law has, however, raised fears in some quarters that it could prove to be draconian. One legal expert said that attachment and seizure of assets, or penalising without concluding a proper and fair trial is draconian. He feared that it could be misused to harass people. He felt that the same objective could be achieved if the government provided the resources to enable the judiciary to work faster.

Photo: iStock
Some provisions need fine-tuning: A few kinks may need to be ironed out over time. The ordinance provides that an advance received for the purchase of an immovable property will not be considered as a deposit, provided it is adjusted against the immovable property. "But what happens in the case of an advance received by a real estate developer, which is subsequently refunded owing to cancellation by the customer? Such an advance will not be adjusted against the purchase of an immovable property. Under the current provisions, even that could qualify as a deposit. The real estate developer would not have registered himself as a deposit-raising entity, and could become a defaulter under this law," says Sandeep Jhunjhunwala, director, Nangia Advisors.

Its current language could also pose challenges for crowdfunding activities in India. "Crowdfunding as a concept could get impacted by this ordinance. When the regulators issue specific regulations around crowdfunding, they will have to find a way around this," says Rajan.

One will have to wait and see how well this law works on the ground. In case of the Insolvency and Bankruptcy Code, resolution of each case was supposed to happen within 270 days, but that has not materialised because contending parties have gone to court.

Stay vigilant and sceptical: While the muscular provisions of this ordinance will act as a deterrent, investors should not lower their guard. "Remember that as the promised rate of return rises above the bank fixed deposit rate, so does the risk,” says Dhawan. He adds that the investor should try to understand the business in which his money will be invested for earning the promised return. “Ask yourself whether that business indeed has the ability to generate the kind of return being promised. And if it is so attractive, why aren’t the promoters raising money from a bank at a lower rate?” he adds. Pandya says that the promise of a guaranteed return over a long period should make you especially wary. He cautions that investors should not invest blindly in suspect schemes even if others around them are doing so. He advises sticking to well-known financial institutions. Finally, even if you decide to punt a small portion of your savings in such a scheme, do not go around recommending it to friends and relatives. If there is a default, you will lose not just money but also friendships..

Strong deterrents
  • The Ordinance defines three types of offences. The first is running (advertising, promoting, operating or accepting money for) unregulated deposit schemes.
  • The second is fraudulently defaulting on regulated deposit schemes.
  • The third is wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts. 
  • Accepting unregulated deposits will be punishable with imprisonment between two and seven years, along with a fine ranging from Rs 3-10 lakh.
  • Defaulting in repayment of unregulated deposits will be punishable with imprisonment between three and 10 years, and a fine ranging from Rs 5 lakh to twice the amount collected from depositors. 
  • Repeat offenders will be punishable with imprisonment between five and 10 years, along with a fine ranging from Rs 10 lakh to Rs five crore.

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