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The Banning of Unregulated Deposit Schemes Bill, 2019

  • On July 19, 2019, the Minister of Finance, Ms. Nirmala Sitharaman, introduced the Banning of Unregulated Deposit Schemes Bill, 2019, in the Lok Sabha. This Bill aims to establish a mechanism to prohibit unregulated deposit schemes and safeguard the interests of depositors. Furthermore, it proposes amendments to three legislations: 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.
 
  • Deposit: According to the Bill, a deposit refers to any sum of money received through an advance, a loan, or other means, with an assurance of repayment, either with or without interest. Repayment can be made in cash or as a service, and the timing of such repayment may or may not be specified. Additionally, the Bill clarifies that certain amounts are excluded from the definition of deposits, including loans received from relatives and capital contributions made by partners in a partnership firm.

  • At present, nine regulatory bodies are responsible for overseeing and regulating different deposit-taking schemes. These regulators 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) the governments of states and union territories. For instance, the RBI governs deposits accepted by non-banking financial companies, SEBI oversees mutual funds, while state and union territory governments regulate chit funds, among others. It is mandatory for all deposit-taking schemes to be registered with the appropriate regulatory authority.

  • Unregulated Deposit Scheme: The Bill prohibits unregulated deposit schemes. A deposit-taking scheme is classified as unregulated if it is intended for a business purpose and lacks registration with any of the regulatory bodies specified in the Bill.

  • Deposit Taker: The Bill defines a deposit taker as any individual, group of individuals, or company that solicits or accepts deposits. However, banks and entities established under any other legislation are excluded from this definition.

  • Competent Authority: The Bill mandates the appointment of one or more government officials, holding at least the rank of Secretary to the state or central government, as the Competent Authority. When police officers receive information about offenses under the Bill, they are required to report it to the Competent Authority. Additionally, police officers, with a rank no lower than that of an officer-in-charge of a police station, are authorized to enter, search, and seize property suspected to be linked to an offense under the Bill, with or without a warrant. The Competent Authority is empowered to: (i) provisionally attach the deposit taker’s property and all received deposits, (ii) summon and interrogate individuals deemed necessary for evidence collection, and (iii) direct the production of documents and other evidence. Its powers are comparable to those of a civil court.

  • Designated Courts: The Bill stipulates the establishment of one or more Designated Courts in designated jurisdictions. Each court will be presided over by a judge who holds at least the rank of a District and Sessions Judge or an Additional District and Sessions Judge.

  • Following the provisional attachment of a deposit taker’s assets, the Competent Authority is required to petition the Designated Court to: (i) confirm the provisional attachment as permanent, and (ii) seek approval to liquidate the assets. This application must be made within 30 days, with an option for extension up to 60 days. Additionally, the Competent Authority will establish a bank account to manage the collection and distribution of funds to depositors, in accordance with the directives of the Designated Court.

  • The Designated Court is empowered to: (i) confirm the provisional attachment as final, (ii) modify or revoke the provisional attachment, (iii) determine and finalize the list of depositors along with their respective claims, and (iv) instruct the Competent Authority to sell the attached property and distribute the proceeds fairly among the depositors. The Court aims to conclude this process within 180 days from the date of application by the Competent Authority.

  • Central Database: The Bill mandates the central government to appoint an authority responsible for establishing an online central database to maintain information on deposit takers. All deposit takers must register their business details with this database authority. Additionally, the Competent Authority is obligated to provide the authority with all information pertaining to unregulated deposits.

  • Offences and Penalties: The Bill outlines three categories of offenses along with corresponding penalties: (i) operating, advertising, promoting, or soliciting funds for unregulated deposit schemes, (ii) fraudulent default on regulated deposit schemes, and (iii) intentionally misleading depositors to invest in unregulated schemes by providing false information. For instance, accepting unregulated deposits can lead to imprisonment for 2 to 7 years, along with a fine of ₹3 to 10 lakh. Defaulting on the repayment of such deposits carries a penalty of 3 to 10 years of imprisonment, plus a fine of ₹5 lakh to twice the amount collected from depositors. In the case of repeat offenders, the punishment escalates to 5 to 10 years of imprisonment, along with fines ranging from ₹10 lakh to ₹5 crore.