Crackdown on Ponzi schemes: Cabinet clears Bill to ban unregulated deposits

The Cabinet has cleared a Bill to ban unregulated deposits, by making even the act of running such Ponzi schemes an offence.

The current investor protection framework kicks in only after such schemes go bust. A Ponzi scheme is defined as a fraudulent investment operation, where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit from financial trading.

The Bill also seeks to make fraudulent defaults even in regulated deposit schemes an offence. The Cabinet also approved a Bill to facilitate the growth of chit funds, by distinguishing this segment from the banned “prize chits”. Both Bills might be introduced in Parliament in the post-recess session next month.

The Unregulated Deposit Schemes Bill, 2018, gives a list of regulated deposit-taking schemes, including collective investment schemes. Any scheme outside these would be banned. The Centre can update the list.

The Bill seeks to ban deposit-takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated schemes.

“Companies and institutions running such schemes exploit regulatory gaps and the lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings,” a government statement said.

The draft legislation identifies three types of offenses — running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement in relation to unregulated deposit schemes.

The draft law, put on the public domain, says repeat offenders will face imprisonment of five to 10 years and a fine of at least Rs 1 million, extendable to Rs 500 million.

The Bill has provisions for repayment of deposits in case these schemes manage to raise deposits illegally. It enables 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-taking activities.

The Chit Funds (Amendment) Bill, 2018, seeks to facilitate orderly growth of the sector and remove bottlenecks. This would enable greater access to other financial products.

The Bill also proposes to allow at least two subscribers to join through video conferencing, duly recorded by a foreman, as physical presence of subscribers. The Bill proposes to increase the ceiling of a foreman’s commission from 5 per cent to 7 per cent.