How a new Ordinance will protect you from Saradha-like ponzi schemes

It has provisions for repayment of deposits to gullible investors trapped by schemes which raise funds illegally

The Union Cabinet on Tuesday cleared an ordinance that seeks to tackle the menace of ponzi schemes such as the alleged Saradha Group chit fund scam and Rose Valley ponzi scheme. 

The Unregulated Deposit Schemes Ordinance, 2019, will "immediately tackle the menace of illicit deposit-taking activities", a government release said. 

The related Bill prescribes monetary penalty which could be as high as Rs 50 crore and a jail term of up to 10 years for duping depositors.

The bill will identify three different types of offences — running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement in relation to unregulated deposit schemes. 

The Bill aims at banning unregulated deposit collections altogether, by making such activities an offence ex-ante, replacing the existing legislative-cum-regulatory framework that 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.

Here's how the Ordinance will protect gullible investors from Ponzi schemes

In essence, the Ordinance prohibits all deposit-taking activities that are not regulated by the country's various regulators, like the Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI), and Insurance Regulatory and Development Authority of India (IRDAI), among others. 

1) Offences defined:  

The related Bill defines three offences: No deposit taker shall promote, operate, advertise for seeking participation in unregulated deposit schemes, or accept money for such schemes. No deposit taker involved in a regulated deposit scheme shall fraudulently default on repayment, the return of deposit on maturity, or in rendering any specified service promised. No person shall knowingly make any statement, promise or forecast which is false, deceptive or misleading or deliberately conceal any material facts to induce people to invest in unregulated deposit schemes.  

2) Punishment up to Rs 50-crore fine:

Punishments have been listed for all the above offences. For example, soliciting for deposits in unregulated deposit schemes can lead to imprisonment for not less than one year but can extend to five years and a fine that is not less than Rs 2 lakh but which can extend to Rs 10 lakh.

Accepting deposits in unregulated deposit schemes can lead to imprisonment for not less than two years but which can extend to seven years and a fine that is not less than Rs 3 lakh but which can extend to Rs 10 lakh.

Fraudulently defaulting on repayment of unregulated deposits can lead to imprisonment for not less than three years but which can extend to ten years and a fine that is not less than Rs 5 lakh but which can extend to twice the amount collected from depositors. Repeat offenders can be jailed for 5 to 10 years and will be slapped with a fine ranging from Rs 10 lakh to Rs 50 crore.  

3) Restitution to depositors:

The related Bill also has provisions for the repayment of deposits collected by schemes that raise funds illegally.  

First, the Bill calls for appointing one or more government officers who are not below secretary to state or central government rank as the competent authority, which will have powers similar to those of a civil court. The competent authority is empowered to provisionally attach the deposit taker's property and all deposits received.

Secondly, the Bill allows constituting one or more designated courts in specified areas. 

Once provisional attachment of deposit taker's assets is done, the authority will approach the designated court for making the provisional attachment absolute and taking permission to sell the assets. The authority will have to approach the court within 30 days, which can be extended to 60 days, from the date of the order of attachment. Further, the authority shall open a bank account to disburse the money to depositors under the instructions of the concerned designated court.

The court can make the provisional attachment absolute, cancel or change said attachment, finalise the list of depositors and the amount owed to them, and direct the competent authority to sell the property and distribute the money among the depositors. 

Lastly, the court will seek to complete the proceedings within 180 days from the date of being approached by the competent authority.    

4) Creation of an online central database:

The Bill allows the central government to designate an authority to create, maintain and operate an online database for information on deposit takers. This authority can ask any regulator or competent authority to share information on deposit takers. Further, all deposit takers will have to inform the database authority about their respective businesses.