Cracking down the menace of Ponzi schemes

In order to address the Ponzi menace, the Central Government has proposed a new law which seeks to clamp down on unauthorised deposit collection activities..The proposed law prescribes, amongst other things, stringent penal and monetary provisions for offenders..Ponzi schemes in India are hardly a new phenomenon, bursting into the limelight in recent years with the Sahara-SEBI dispute. In 2014, Subrata Roy, the Chairman of the Sahara group, was arrested on orders of the Supreme Court for failing to refund money collected from depositors. In the same year, the Saradha scam which rocked West Bengal, collected nearly Rs. 1,000 crore from approximately 17 lakh depositors, according to the Special Investigation Team that probed the multi-level marketing swindle..In the absence of any reliable data, tentative estimates based on entities investigated by the CBI till date indicate that more than Rs. 68,000 crore has been collected from over six crore ‘investors’..Subsequently, a high-level Inter-Ministerial Group proposed a comprehensive law called the “Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill 2015” (Proposed Law)..The Proposed Law seeks to, inter alia, demarcate deposits into regulated and unregulated, identify regulatory framework for deposits activities and bring within its ambit, all deposit schemes which are not regulated by any other financial regulator in the country..What is a Ponzi Scheme?.Ponzi scheme is essentially a fraudulent investment scheme operated by an individual or by any type of entity, which illegally accepts money from the general public in the form of deposits and pays returns to investors from such funds raised rather than from profit earned through legitimate sources. Operators of such Ponzi schemes usually entice new investors by offering returns that are either abnormally high or unusually consistent..The Proposed Law.Overriding Effect.With 6 chapters and 29 sections, the Proposed Law is all set to override the deposit-taking provisions contained in various other laws viz. the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Multi-State Co-operative Societies Act, 2002 (MSCS Act)..While amendments to the above mentioned laws are necessary, there appears to be a discrepancy with respect to the amendment proposed in the MSCS Act..To begin with, deposits can only be accepted by ‘deposit taking establishments’..The Proposed Law includes ‘cooperative societies’ and ‘multi-state cooperative societies’ within the definition of ‘deposit taking establishments’. However, the amendment to the MSCS Act suggests otherwise. The proposed amendment prohibits multi-state cooperative societies from accepting any deposits..This discrepancy is further aggravated when the Proposed Law recognises a scheme made under Cooperative Societies Act 1912 as a ‘Regulated Deposit Scheme’, but fails to realise that the MSCS Act is merely a successor to the Cooperative Societies Act 1912..Therefore, on one hand, the Proposed Law is recognising acceptance of deposits by the multi-state cooperative societies and on the other, is expressly banning them from accepting deposits by the way of an amendment to the MSCS Act..Deposits.The Bill defines ‘Deposit’ as money taken by way of advance or loan or any other form and returned in a specified period or otherwise in cash or kind or in the form of a specified service with or without any benefit — interest, bonus, profit or any other form. All unregulated deposit schemes will come under this law.However, the word “deposit” has been very loosely defined..As noted here, the promise of ‘return’ plays a significant role in defining the term ‘deposit’. Would an entity accepting deposits without the promise of return fall outside the scope of the Proposed Law? Also, the term ‘return’ seems to be ambiguous to the extent that it does not account for transfer from the recipient to someone else..For instance, a Peer to Peer lending platform accepting money on behalf of the lender, being an intermediary, will not necessarily fall within the scope of the Proposed Law..Other features.The Proposed Law provides for a ‘Designated Court’, which shall either be a Sessions Court or a District Court, for dealing with violation as well as effective implementation of various provisions of the Proposed Law. It also gives over-riding powers to the district magistrates to seize money or other property acquired using the depositors money and the assets could be sold off to repay the depositors..As noted here, the officers who are expected to take up the task of designated authorities under the Bill are already required to perform several other functions. Consequently, they might not have the desired time and capacity to take over the functioning as designated authorities..Additionally, it has been proposed to set up an Empowered Committee consisting of representatives of various ministries, SEBI and CBI. The Empowered Committee will propose the authority which shall have the power to investigate into any alleged violations by Deposit Taking Establishments and to perform other functions..As stated earlier, stringent penalties have been imposed on defaulters. For default in repayment/return of deposits on maturity, the Proposed Law provides for a jail term up to seven years or fine of not less than Rs. 5 lakh which can be raised to Rs. 25 crore or three times the amount of profits made out of such defaults, whichever is higher, or with both. In case of repeat offenders, imprisonment for a minimum term of 5 years which may be extended to 10 years and fine extended to Rs 50 crore..Image: Source