The Banning of Unregulated Deposit Schemes Bill, 2018 was introduced in the Lok Sabha on July 18, 2018 by Mr. Shiv Pratap Shukla, the Minister of State for Finance. The status of the Bill presently is as follows:
- It was referred to the Standing Committee on August 10, 2018 for its report.
- The Standing Committee submitted its report on January 3, 2019.
- On February 13, 2019, the Bill was passed by the Lok Sabha.
- Presently, the Bill is pending for approval/ passage in Rajya Sabha.
The Bill seeks to bring about a law to provide for mechanism to ban unregulated deposit schemes and protect interests of depositors. The Statement of Objects and Reasons of the Bill states that it has become necessary to have a Central Legislation to ensure a comprehensive ban on unregulated deposit taking activity and for its effective enforcement. It states that despite the presence of Central legislations like Prize Chits and Money Circulation Schemes (Banning) Act, 1978, Chit Funds Act, 1982 and other legislations enacted by the State Governments, the said legislations have not been able to completely address the issue of unregulated deposit schemes run by unscrupulous elements.
Non-Banking Financial Companies are under the regulatory and supervisory jurisdiction of the Reserve Bank of India. Collective Investment Schemes come under the purview of the Securities and Exchange Board of India. Despite such diverse regulatory framework, schemes and arrangements leading to unauthorised collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes, promising high returns or other benefits, are still operating. The regulators operate in well-defined areas within the financial sector by regulating particular kind of entities or activities. The Bill envisages to provide for a regulatory framework to make the deposit taking activity in a seamless manner.
Clause 2 (4) defines “deposit” as an amount of money received by way of an advance or loan or in any other form, with a promise to return whether after a specified period or otherwise, with or without interest. Such deposit may be returned either in cash or as a service.
Clause 2 (6) of the Bill defines “deposit taker” as individuals or group of individuals, proprietorship concern, partnership firm (whether registered or not), limited liability partnership registered under the Limited Liability Partnership Act, 2008, company, an association of persons, trust, a co-operative society or a multi-state co-operative society, or any other arrangement of whatsoever nature, receiving or soliciting deposits, but does not include banks and entities incorporated under any other law.
Clause 2 (17) defines “Unregulated Deposit Scheme” as a scheme or an arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a Regulated Deposit Scheme.
Clause 3 of the Bill lays down that Unregulated Deposit Scheme is banned.
Clause 7 provides for Authorities under the law. It states that the appropriate Government shall by notification appoint one or more officers, not below the rank of Secretary to that Government, as the Competent Authority. Such other officers may be appointed by the State Government as it thinks fit, to assist the aforesaid Competent Authority, by a notification.
Where the aforesaid Competent Authority or officers appointed to assist him have a reason to believe that any deposit taker is soliciting deposits which are banned, the said illegal deposits may be provisionally attached. The Competent Authority and the officers appointed to assist him would have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908.
After the aforesaid provisional attachment, the Competent Authority will approach the Designated Court to (i) make the provisional attachment absolute, and (b) ask for permission to sell the assets. The Competent Authority will have to approach the Court within 30 days (extendabe to 60 days).
Under Clause 8, one or more “Designated Courts” will be constituted in specified areas. These Courts will be headed by a judge not below the rank of a district and sessions judge.
The Designated Courts will have the power to make the provisional attachment absolute, vary or cancel the provisional attachment, finalise the list of depositors and their respective dues and direct the Competent Authority to sell the property and equitably distribute the money realised among the depositors. The Court will seek to complete to process within 180 days of being approached by the Competent Authority. The Bill however, states that unless otherwise provided by the SARFAESI Act, 2002 ad the Insolvency and Bankruptcy Code, 2016, amounts due to depositors will be paid in priority over all other debts payable by the deposit taker.
Further, police officers receiving information about the offences committed under the Bill will report to the Competent Authority. Police Officers, not below the rank of an officer-in-charge of a police station may enter, search and seize any property believed to be connected with and offence under the Bill, with or without warrant.
Chapter IV of the Bill which includes Clauses 9 to 11 provides for the Central Government to designate and authority to create an online central database for information on deposit takers. All deposit takers will be required to inform the database authority about their business. The Competent Authority will be required to share all information on unregulated deposits with the authority.
Chapter VI which deals with Offences and Penalties defines three types of offences and penalties related to them. The offences as per the Bill are (a) running unregulated deposit schemes (b) fraudulently defaulting on regulated deposit schemes, and (c) wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.
Accepting unregulated deposits will be punishable with imprisonment between 2 and 7 years, along with a fine ranging from rupees 3 to 10 lakhs. Defaulting in repayment of unregulated deposits will be punishable with imprisonment between 3 to 10 years and a fine ranging from rupees 5 lakhs to twice the amount collected from depositors. Repeat offenders will be punishable with imprisonment between 5 to 10 years, along with a fine ranging from rupees 10 lakhs to 5 crores.
CRITICISM OF THE BILL:
Under the Bill, the definition of ‘unregulated deposits’ is too wide and leaves a lot of room for interpretation. This will lead to subjective and conflicting decisions by the Authorities while adjudicating offences related to such offences. ‘Unregulated deposits’ ought to be defined more comprehensively.
Moreover, in the the informal banking sector there are various financial arrangements, involving advances to start-ups and small entrepreneurs, that may fall under the definition of unregulated deposits by default. Such ambiguities need to be cleared to prevent undue harassment and misuse of these financing entities.
The Bill also states that unless otherwise provided by the SARFAESI Act, 2002 and the Insolvency and Bankruptcy Code, 2016, amounts due to depositors will be paid in priority over all other debts payable by the deposit taker. Repaying depositors’ money is the most critical part of process of restitution of depositors. Therefore, exceptions under the SARFAESI Act and IBC ought to be removed from the Bill and a time-frame ought to be specified for repayment of depositors’ dues.
Moreover, the Bill does not provide for a Central Regulatory Authority. State Governments are the designated authorities for implementing the provisions of the Bill. The Bill provides for an authority at the central level which will create, maintain and operate an online database on deposit-takers operating in India. State Level Coordination Committees under RBI, with representation from agencies such as SEBI and state police departments, presently function as ad-hoc coordinating mechanisms to look into deposit taking businesses. The present system could be institutionalised under the Central Authority. The mandate of the authority should be extended to also include regulation and monitoring of the implementation of the provisions of the Bill.
Under the Bill, all offences except fraudulent default in regulated deposit schemes and failure to notify the central authority, maintaining the database of deposit takers, of a deposit taking business are cognizible and non-bailable. It would be more effective if all offences in the Bill be made cognizible and non-bailable.
The Bill provides for the appointment of one or more government officers, not below the rank of Secretary to the state or central government, as the Competent Authority. If the Authority believes that any offence involves more than one state or union territory, or a significant amount of money, then they must refer the matter to the Central Bureau of Investigation (CBI) for investigation. However, such matters may involve offences under various economic laws. Further, the CBI already has huge workload. It is recommended that other investigating agencies such as the Serious Fraud Investigation Office also be involved depending on the subject matter. The central government also should take suo motu cognizance of any offence which involves more than one state and refer it to the appropriate investigation authority.
A public website be developed: (i) for people to check whether an entity soliciting deposits is registered with a regulator, and (ii) to file and track complaints against unregulated deposit takers.
In a nutshell, it is the following that the Bill seeks to provide for, as has been stated in its Statement of Objects and Reasons –
- to make a provision for banning of unregulated deposit schemes;
- to impose an obligation on the deposit taker, pursuant to a regulated deposit scheme, not to commit any fraudulent default in the repayment or return of the deposit;
- to provide for deterrent punishment for promoting or operating an unregulated deposit taking scheme;
- to provide for punishment for fraudulent default in repayment to depositors;
- designation of a Competent Authority by the State Government to ensure repayment of deposits in the event of default by a deposit taking establishment;
- to constitute the Designated Courts for such area or areas or such case or cases as per the provisions of the proposed Bill;
- to empower the Central Government to designate an authority which shall create, maintain and operate an online data base for information on deposit takers operating in India; and
- to confer powers and functions upon the Competent Authority including the power to attach assets of a defaulting establishment.
The present Bill if passed by the Upper House shall go a long way in empowering the depositors, who sometimes unfortunately have to lose their hard-earned life’s savings to unscrupulous deposit-takers, who entice them with unrealistic schemes and false promises. However, like other laws which have been passed keeping the interest of depositors in view, the real challenge would be the implementation of the law, once passed.