Analysis: Banning of Unregulated Deposit Schemes Act, 2019

Introduction:

On 21 February 2019 banning of unregulated deposit scheme (ordinance) was passed by the cabinet. It was later passed by the parliament as an Act known as banning of unregulated deposit schemes Act 2019 on 31^st July 2019. This act was passed to ban unregulated deposit schemes in India which have caused major trouble for the investors or depositors in the recent past for example Sharda Scam of West Bengal in which many middle-class people have lost major investments and savings almost 200 people had committed suicide due to this scam. Due to these types of incidents, this act was passed and to ensure the safety of gullible invertors from the Ponzi schemes.

This act protects investors from solicitation and receipt of unregulated deposits as well as provides a whole framework for reporting and monitoring of deposit schemes. To understand in better we need to understand the basic terminology regarding this act in section 2 of this act definition are being provided basic questions that arrives is what does the word deposit means and what is regulated and unregulated  

Terminology

All the definitions are provided in section 2 of this act:

1. Deposits: Section 2(4) defines deposit as “an amount of money received by way of an advance or loan or in any other form, by any deposit taker with a promise to return whether after a specified period or otherwise, either in cash or in kind or in the form of a specified service, with or without any benefit in the form of interest, bonus, profit or in any other form”. It also has various exceptions that are not included in the definition of the term deposit. Here basically deposit means any type of amount taken as loan or advance which have to return at a predefined date between parties may have consideration regarding any type of interest or not.
2. Depositor: A person who makes deposits under this act. It can be also known as investors in the scheme.
3. Deposit Takers: ‘(i) any individual or group of individuals; (ii) a proprietorship concern; (iii) a partnership firm (whether registered or not); (iv) a limited liability partnership registered under the Limited Liability Partnership Act, 2008; (v) a company; (vi) an association of persons; (vii) a trust (being a private trust governed under the provisions of the Indian Trusts Act, 1882 or a public trust, whether registered or not); (viii) a co-operative society or a multi-State co-operative society; or (ix) any other arrangement of whatsoever nature, receiving or soliciting deposits, but does not include— (i) a Corporation incorporated under an Act of Parliament or a State Legislature; (ii) a banking company, a corresponding new bank, the State Bank of India, a subsidiary bank, a regional rural bank, a co-operative bank or a multi-State co-operative bank as defined in the Banking Regulation Act,1949;’
4. Regulated Deposit Scheme[1]: Schemes that are being regulated by any type of regulatory body of the government by which these schemes work there are ten types of government regulatory bodies that are mentioned under the First schedule of this act. If any scheme comes under these regulatory bodies than these are regulated deposit schemes.
5. Unregulated Deposit Scheme: Scheme or arrangement under which deposits are accepted or solicited by deposit taker by way of business (and notably not for business), and such is not regulated by any regulator or ministry. Deposits are being taken by the deposit taker as in it is business of deposit taker to take deposits and which is also not being regulated by regulators than it is an unregulated deposit scheme.
6. Competent Authority: Section 7 of this act says about the formation of competent authority with one or more officers, not below the rank of secretary to that government. Further, it also contains the power of the competent authority which is a civil court in the code of civil procedure. The competent authority also has the power to summon any person, examination of witnesses, evidence recording, e.t.c. competent authority also has the power for provisional attachment of property of the deposit taker, but it has to take absolute provisional attachment from the designated courts.
7. Designated Court[2]: section 8 tells about the formation of designated court for this act which should be in concurrence with the chief justice of high court and should be presided by a judge, not below the rank of a district and session court. The designated court has the power by which it can make provisional attachment to absolute provisional attachment in which it permits the sale of property of deposit taker for the compensation to the depositor and other liabilities; it gives direction to the competent authority of the auction of property for sale in a public or private auction.

Features of the Act  

• This act was formed for the benefits of the investors in both regulated and unregulated deposits scheme. When it comes to regulated deposit schemes the fraud occurs on the time of repayment of the deposits with benefits.
• Section 3 of this act puts a direct ban on the unregulated deposit schemes and any type of promotion regarding this scheme is also banned.
• Section 4 of this act bans any type of fraudulent default on any type of regulated deposit scheme at the time of maturity.
• Section 6 of this act makes the chit funds scheme as the unregulated deposit schemes.
• Anything which does not come under the definition of deposit will not be an unregulated deposit scheme. Eg getting a loan for certain emergencies from friends of the family.
• The competent authority has to take the best interest of the depositor in case of returning the fund by the sale of deposit takers property, in that case firstly funds of the depositors will be refunded than other government transactions will take place.
• Section 9 of this act says about the establishment central database online of the regulated deposit scheme as well as depositors so that it can be easy for depositors to invest and understand which regulated deposits are.
•  Competent authorities have to share information with the investigating authorities such as police and the Central Bureau of Investigation as well as these agencies also obligated to share crucial information regarding investigation with the competent authority. In case bank officers view a client that may be doing deposits in form or unregulated deposits than he has to share this information with the competent authority.
• No court other than the designated court shall have the jurisdiction in accordance with this act. The designated court also has the power to try offences other than the offences in this act.

Offences and Penalties [3]

Offenses:

1. Running, advertising, promoting, operating, or accepting money for unregulated schemes.
2. Fraudulently defaulting on regulated deposit schemes.
3. Wrongfully inducing depositors to invest in unregulated deposit schemes.

Penalties:

This act comes with the different types of penalties for different offenses. Every offense punishable under this act except under section 22 & 26 shall be cognizable and non-bailable offense.

•  Accepting unregulated deposits will be punishable with imprisonment between 2 to 4 years and fines ranging between 3 to 10 lakhs.
• Defaulting in repayment of the regulated deposit will lead to imprisonment of 3 to 10 years and fine ranging from 5 lakh to twice the amount collected from a depositor.
• Further repeating of offenses under this act will lead to imprisonment of 10 years with fine ranging from 10 lakh to 5 crore.

Conclusion

This law was very much needed in the fast-growing societies in which mostly the middle class thrives as many of the targets of the scam middle class as they are more venerable towards these types of unregulated schemes as they seem to very promising and make false promises regarding the benefits which by looking their promise it seems to good to be true but they target the most venerable part of society which wants to make quick benefits and get trapped in their false schemes. In previous years these type of unregulated deposit schemes has lead to costs huge losses of the hard-earned money of the common people and lead to the destruction of many families. This has to be stopped as in this act the penalties are well defined and this act gives preference to the depositors in every aspect to get their money back and it made regulations hard on regulated schemes also this is greatly beneficial 

References:

[1] The Banning of Unregulated Deposit Schemes Rules 2020 – Khaitan & Co, Khaitan & Co (2020), https://www.khaitanco.com/thought-leaderships/The-Banning-of-Unregulated-Deposit-Schemes-Rules-2020?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration (last visited Jul 1, 2020).

[2] The Banning of Unregulated Deposit Schemes Bill, 2019, PRSIndia (2020), https://www.prsindia.org/billtrack/banning-unregulated-deposit-schemes-bill-2019 (last visited Jul 1, 2020).

[3] Mr.�M. GOVINDARAJAN, THE BANNING OF UNREGULATED DEPOSIT SCHEMES ACT, 2019 AN OVERVIEW Taxmanagementindia.com (2020), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=8659 (last visited Jul 1, 2020).