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Context
President Ram Nath Kovind promulgated the Banning of Unregulated Deposit Schemes Ordinance, which bars all deposit schemes in the country that are not officially registered with the government from either seeking or accepting deposits from customers.
Background
- Budget speech 2016-17: The Finance Minister had announced that a comprehensive central legislation
- July 2018: The Banning of Unregulated Deposit Schemes Bill, 2018 was introduced in Lok Sabha by the Minister of State for Finance, Mr. Shiv Pratap Shukla.
- August 2018: Bill referred to standing committee
- January 2019: Standing committee present his report and most of the recommendation accepted by government
- Feb 2019: The bill passed in Lok Sabha but failed to pass in Rajya Sabha
What is unregulated deposit scheme
- A deposit-taking scheme is defined as unregulated if it is not registered with the regulators.
- Currently, nine regulators oversee and regulate various deposit-taking schemes. For example, RBI regulates deposits accepted by non-banking financial companies, SEBI regulates mutual funds, state and union territory governments regulate chit funds, among others. All deposit-taking schemes are required to be registered with the relevant regulator.
Need of Unregulated Deposit Scheme
Popular deposit schemes such as chit funds and gold schemes usually do not come under the purview of government regulators. These schemes exploit existing regulatory gaps and lack of strict administrative measures.
The worst victims of these schemes are the poor and the financially illiterate, and the operations of such schemes are often spread over many States. The Saradha chit fund scam in West Bengal is just one example of such a heinous financial crime against depositors. Thus, a comprehensive central legislation is needed to deal with the menace of illicit deposit taking schemes.
The Banning of Unregulated Deposit Schemes Bill
Government of India has brought Banning of Unregulated Deposit Schemes Ordinance 2019 with following objective
- For banning of unregulated deposits schemes
- To protect the interest of depositors
Important features
- Define deposits and Deposit takers
- Deposits: The Bill defines a deposit as an amount of money received through an advance, a loan, or in 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.
- Deposit taker: The Bill defines deposit takers as an individual, a group of individuals, or a company who asks for (solicits), or receives deposits. Banks and entities incorporated under any other law are not included as deposit takers.
- Compensation: A compensation to be offered to victims through the liquidation of the assets of those offering illegal deposit schemes.
- Competent Authority and Designated court: A ‘Competent Authority’ will be appointed which has the powers similar to a civil court, including powers to attach properties of the deposit takers. It also empowers police to search and seize any property believed to be connected with an offence under the Bill, with or without a warrant. The Bill also approves creating designated courts to tackle such cases
- Time Bound: Clear-cut time lines have been provided for attachment of property and restitution to depositors
- Central database: The Bill create an online central database for collection and sharing of information on deposit-taking activities in the country.
- Offences: The Bill define three types of offences.
- Running (advertising, promoting, operating or accepting money for) unregulated deposit schemes.
- Fraudulently defaulting on regulated deposit schemes
- Wrongfully inducing depositors to invest in unregulated deposit schemes by willingly falsifying facts.
- Penalties: Penalties to different offences ranging from 2 to 10 years along with a fine ranging from 3 to 5 crore rupees which act as deterrence.
- Adopts best practices from State laws: Being a comprehensive Union Law, the Bill adopts best practices from State laws, while entrusting the primary responsibility of implementing the provisions of the legislation to the State Governments.
Issues/challenges
Although the intent of the government behind bringing the ordinance is applaudable, experts believe this ordinance will have certain challenges
- Derecognise genuine deposit schemes: low-income Indian households have traditionally been depended on these small saving schemes. The new rule would derecognise genuine deposit schemes that offer useful financial services to customers in the unorganised sector.
- Impact small traders and students: This would affect a cash-strapped businessman borrowing from an acquaintance to meet a personal obligation. This could cause difficulties to small traders carrying out business as a proprietor, partnership firm or LLP. Students and the needy taking loans from charitable trusts would run into hurdles
Note: In a series of tweets, the Department of Financial Services clarifies Banning of Unregulated Deposit Ordinance-2019, exempts Individual, Firm, Companies & LLP etc. for taking any loan and deposit for their course of business
Way Ahead
- Policymakers will have to make sure that the bureaucrats responsible for the on-ground implementation of the ordinance are keen on protecting the savings of low-income households.
- 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.
Source: https://www.thehindu.com/opinion/editorial/safety-nets/article26358487.ece
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