On July 29, Rajya Sabha passed The Banning of Unregulated Deposit Schemes Bill, 2019; it had been passed by Lok Sabha five days previously. The Bill aims to protect investors from fraudulent investment schemes, such as Ponzi schemes.

The Bill covers existing gaps in legislation that had been exploited by various parties to siphon large amounts of money away from small investors. In particular, it amends three laws, i.e., The Reserve Bank of India Act, 1934, The Securities and Exchange Board of India Act, 1992 and The Multi-State Co-operative Societies Act, 2002.

What does the bill cover?
According to an analysis by PRS India, under the Bill, deposit-taking schemes are defined as ‘unregulated’ if they are undertaken for business purposes, and additionally, are not registered with one of the nine regulatory authorities mentioned in the Bill.

What is a Ponzi scam?
A common type of scam involving unregulated deposits is the Ponzi scheme, a type of investment fraud wherein one party promises high returns on an investment with little to no risk. The early investors in a Ponzi scheme are repaid by the scheme acquiring new investors, and so on. Once there are no longer enough people to secure a new round of investments, the scheme collapses and the investors lose their money. This was the classic pattern seen in the Saradha case in West Bengal, in which politicians of the ruling party have been accused.

Oversight and regulation of deposit-taking schemes
The nine authorities charged with the oversight and regulation of deposit-taking schemes include the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), the Ministry of Corporate Affairs (MCA), and state and Union Territory governments. Each authority oversees different types of deposit-taking schemes, with the RBI overseeing deposits taken by non-banking financial companies (NBFCs), and Sebi overseeing mutual funds. Any deposit-taking scheme must be registered with the relevant authority, based on the category it falls under, and only then is its operation legal.

Powers granted under the bill
The Bill provides for the appointment of a “competent authority”, with a rank not below Secretary to the state or central government, with the power to provisionally attach the property of the deposit-taker, and all the deposits received by them. The Bill also allows the competent authority to summon and examine people to obtain evidence, and order records to be produced.

The Bill provides for the formation of designated courts in specific areas. The central government will additionally designate an authority to establish an online database with information on various deposit-takers. The database will be used to ascertain which deposit-takers are regulated, and which are not. Deposit-takers will be required to inform the authority in charge of the database about their actions and the state of their business.

Offences and penalties
Three kinds of offences are delineated under this Bill: running unregulated deposit-taking schemes (which includes advertising, operating, and accepting money for such schemes), fraudulently defaulting on the deposits made under a regulated deposit-taking scheme, and prompting investors to invest in unregulated deposit schemes by knowingly falsifying facts.

The first kind of offence has been made punishable by two to seven years’ imprisonment and a fine of Rs 3 lakh to Rs 10 lakh.

The second kind of offence is punishable by imprisonment for three to 10 years, and fines ranging from Rs 2 lakh to double the amount collected from depositors. Repeat offenders may be punished by a five- to 10-year stint in prison, and fined between Rs 10 lakh and Rs 5 crore.