The Banning of Unregulated Deposit Schemes Bill, 2019, was introduced in Lok Sabha by the Minister of Finance, Mrs Nirmala Sitharaman, on July 19, 2019. The Bill provides for a mechanism to ban unregulated deposit schemes and protect the interests of depositors.  It also seeks to amend 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. Parliament has passed the Banning of Unregulated Deposit Schemes Bill, 2019, which seeks to put a mechanism by which poor depositors will get back their hard-earned money. Let’s find out What is Ponzi Scheme and the salient features of the Banning of the Unregulated Deposit Schemes Bill.

Salient Features of the Banning Of Unregulated Deposit Schemes Bill

Deposit – The Bill defines a deposit as an amount of money received through an advance, a loan, or any other form, with a promise to be returned with or without interest.  Such deposit may be returned either in cash or as a service, and the time of return may or may not be specified.  Further, the Bill defines certain amounts that shall not be included in the definition of deposits, such as amounts received in loans from relatives and contributions towards capital by partners in any partnership firm. All these provisions or Salient Features of the Banning Of Unregulated Deposit Schemes Bill are as follows:

• Currently, nine regulators oversee and regulate various deposit-taking schemes. These include: (i) the Reserve Bank of India (RBI), (ii) the Securities and Exchange Board of India (SEBI), (iii) the Ministry of Corporate Affairs, and (iv) state and union territory governments.  
• Unregulated deposit scheme: The Bill bans unregulated deposit schemes.  A deposit-taking scheme is defined as unregulated if it is taken for a business purpose and is not registered with the regulators listed in the Bill. 
• Designated Courts: The Bill provides for the constitution of one or more Designated Courts in specified areas. A judge will head this Court, not below the rank of a district and sessions judge or additional district and sessions judge.
• Central Database: The Bill provides for the central government to designate an authority to create a central online database for information on deposit takers. All deposit takers will be required to inform the database authority about their business.
• Competent Authority: 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. The Competent Authority will have powers similar to those vested in a civil court. The Competent Authority may:
  
  
  • provisionally attach the property of the deposit taker, as well as all deposits received
  • summon and examine any person it considers necessary for obtaining evidence
  • orders the production of records and evidence
• Offences and penalties: The Bill defines three types of offences and the penalties.  These offences are: (i) running (advertising, promoting, operating or accepting money for) unregulated deposit schemes, (ii) fraudulently defaulting on regulated deposit schemes, and (iii) wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.  

What Is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. ‘What is a Ponzi Scheme’ scam would be a better question.

Both Ponzi schemes and Pyramid Schemes eventually bottom out when the flood of new investors dries up, and there isn’t enough money to go around. At that point, the schemes unravel.

The History of the Ponzi Scheme

In 1920, a con artist named Charles Ponzi invented the term “Ponzi Scheme.” However, the first known cases of this type of investment fraud date back to the mid-to-late 1800s, when Adele Spitzeder in Germany and Sarah Howe in the United States staged them. In reality, Charles Dickens explained the methods of what became known as the Ponzi Scheme in two separate novels; Martin Chuzzlewit, published in 1844 and Little Dorrit, published in 1857.

Impact of the Banning Of Unregulated Deposit Schemes Bill

The Impact of the Banning Of Unregulated Deposit Schemes Bill is that the bill will assist in combating the threat of illegal deposit-taking operations (Ponzi Schemes/Chit Funds) in the country, which are currently exploiting regulatory gaps and a lack of stringent administrative measures to defraud individuals of their savings.

Conclusion

So far in this article, we have seen What is a Ponzi Scheme? And Impact of the Banning Of Unregulated Deposit Schemes Bill.

What’s the way forward?

• Policymakers will have to make sure that the bureaucrats responsible for the on-ground implementation of the bill are keen on protecting the savings of low-income households.
• Database for the end-use of deposits.
• There must also be checks against persons in power misusing the new rules to derecognise genuine deposit schemes that offer useful financial services to customers in the unorganised sector.
• In the past, there have been several cases of politicians acting in cahoots with the operators of fraudulent deposit schemes to fleece depositors of their hard-earned money.