Banning Unregulated Deposit Schemes

The Banning of Unregulated Deposit Schemes Act, 2019 was unanimously passed by both houses of the Parliament and recently got the president’s assent on the 31^st of July. The country’s informal economy has always been rife with incidents of unregulated lending and deposits of all kinds. Hence, to protect the interests of depositors and bring some accountability to the actions of deposit-takers, the new Act has been brought into being by the government.

The Need to Protect Investors and Depositors

To deal with this issue, the government had, in February, passed an Ordinance relating to the matter of the many unregulated deposit schemes being promulgated in the country. The Banning of Unregulated Deposit Schemes Act was introduced with the goal of curbing fraudulent and unregulated deposit-taking schemes in India, in turn, provide some respite to small savers and depositors. One of the major objectives of the new Act is also to protect small investors from Ponzi schemes and other types of unscrupulous business activities performed by certain entities and illegal concerns. The Banning of Unregulated Deposit Schemes Act, 2019 also has many provisions for the punishment and the reimbursement of investors in case any such deposit schemes do manage to raise money from them, despite the precautions taken. Once it has come into force, this law will override any other similar pieces of legislature in the country dealing with unregulated deposits.

Impact of the New Law

The new Act will have an impact on existing pieces of legislation and will be amending Section 1, 28A of the SEBI Act, Section 45-I of the RBI Act, and Section 67 of the 2002 Multi States Co-operative Societies Act. It is expected that this measure will help streamline the process and provide a comprehensive mechanism for restricting unregulated deposits in the country. This will prevent fraud, Ponzi schemes, and other types of predatory practices which often target small investors and depositors. The provisions of this Act will not be applicable to deposits made and accepted in the ordinary course of business. The term ‘deposit’, as used in the Banning of Unregulated Deposit Schemes Act, will not apply in the following cases:

Any amount of money received as a loan from a cooperative bank or scheduled bank
Any amount received as a loan or for financial assistance from a recognized public financial institution
Money received from foreign governments, international or foreign banks, foreign export credit collaborators, foreign financial institutions, or foreign authorities.
Any financial contributions made by partners in an LLP or partnership firm, for the purpose of raising capital.
Any money received by an individual from his or her relatives as a loan or gift.

In order to understand the purpose of banning unregulated deposit schemes, however, one must first understand what a regulated deposit scheme is and who the regulators are. A regulated deposit scheme must, of course, have a reliable and trusted regulator.

Understanding Regulatory Bodies and their Functions

Some of the major regulators for deposit schemes in India are the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Insurance Regulatory and Development Authority of India (IRDAI). On the other hand, an Unregulated Deposit Scheme may be defined as an arrangement under which an individual or entity solicits and accepts monetary deposits from investors via a scheme that is not overseen or regulated by any regulatory body, such as those mentioned above. The deposit taker may be an individual, a proprietary concern, an LLP or partnership firm, a trust, a company, or a cooperative society. Banking institutions – both government and private – will also fall within the category of ‘deposit taker’ as defined by this Act.

Relevant Information about Deposit Takers

Under the new law, any entity or person accepting deposits from investors must provide the relevant regulatory body or other competent authority with information about their business activities through the relevant forms and processes. If the regulatory body or authority believes that a person or organization is accepting unregulated deposits, then it is duty-bound to seek more information and obtain the required statements from the deposit-taker. If required, the information obtained in this manner will also have to be shared with the CBI and any other regulatory bodies who might need it.

Peripheral Provisions of the New Act

From the moment the Banning of Unregulated Deposit Schemes Act came into force, it became illegal for deposit-takers not only to accept money under an unregulated scheme from depositors, but also to directly or indirectly operate, promote, advertise, or issue enrolment in such schemes. Section 5 of the Act also prohibits ‘wrongful inducement’, which means that a deposit-taker may not knowingly promise, predict, or suggest any outcome that is false or misleading to potential depositors. They must also not deliberately conceal any relevant piece of information in order to persuade an individual to invest in an unregulated scheme. When investigating any case under this Act, the competent authorities will have certain powers, as prescribed via the provisions of the Act. Such powers will include:

Enforcing the attendance of any person involved in the case
Organizing an inquiry under oath
Demanding the submission of records
Receiving evidence through an affidavit
Examining documents and witnesses

If it is proved that a deposit-taker had collected monetary deposits from investors for an unregulated scheme, then any amount owed to the depositors will first be repaid before any other claims are met. Repaying the depositors will take precedence over all taxes, revenues, loans, and debts owed to any other party, including the central or state governments.

Penal Provisions Under the New Law

The Banning of Unregulated Deposit Schemes Act, 2019 prescribes a fine of anywhere between ₹2 to 10 lakhs and imprisonment for up to five years for soliciting deposits under unregulated schemes. For accepting deposits under such schemes, a fine of between ₹3 to 10 lakhs and imprisonment of two to seven years is recommended. If a person or organization is found guilty of fraudulently defaulting on the repayment of accepted deposits, then they face three to ten years of imprisonment under the Act and fines amounting to a minimum of ₹5 lakhs. The maximum limit for fines might be up to double the total amount of money collected from depositors. Apart from Sections 22 and 26, every offence committed under the new Act is non-bailable and cognizable. Any newspapers or journals which advertise or promote unregulated deposit schemes may also come under the scanner of authorities and be forced to issue a retraction of all such materials published.