It is not just in India, but it has been worldwide, that crores of persons have been cheated, by fly by night operators, who floated fraudulent deposit schemes, offering very attractive returns, and after they made their millions, they closed shop and vanished. While the depositors are lured and trapped into it due to their sheer greed, in order to make quick gains, the fact yet is that depositors need to be protected by the law, to put an end to such dubious and criminal schemes to cheat people.
Therefore, except as may be permitted, companies are banned from accepting deposits from the public and there are very tight and stringent regulations under the Companies Act and SEBI law, that prevent them from doing so. Banks and NBFCs are permitted to raise public deposits, under strict regulations of the RBI and so are cooperative societies and cooperative banks. Raising of funds by mutual funds is regulated by SEBI and IRDA controls those raised by insurance companies. India thus has a comprehensive and stringent regulatory framework to prevent any illegal or unregulated deposit schemes that cheat the gullible public.
Despite that, it has been found that illegal deposit schemes, popularly known as ponzi schemes proliferate in different states and manage to cheat an unsuspecting public, lured in by high/fabulous returns on deposits. This happens where the ruling party/establishment/administration colludes and is hand in glove with such fraudsters, as has happened in the case of West Bengal, where the ponzi operators have been found to have direct links at the highest levels of the ruling TMC. These ponzi crimes also take place where the government authorities are collusive or negligent, as was found in the case of the recent ponzi at Bangalore, where RBI, SEBI and local state authorities were found to be negligent and let the deposit fraud take place. Every state also has very strict criminal laws, such as the MPID Act in the state of Maharashtra, under which such schemes are a crime, punishable with long jail terms for those who promote them.
However, the entities that have been left out of this comprehensive network of laws to prevent illegal deposits are individuals, partnership firms and unincorporated entities, who take advantage of this grey territory to float illegal deposit schemes and cheat the public. They operate surreptitiously below the radar and are caught only after their crime has become too big to remain hidden.
The recent Ordinance banning unregulated deposit schemes, primarily targets these entities which have operated below the radar. The Ordinance has raised a hue and cry, more out of confusion. Let us examine some of its features to dispel prevailing doubts and confusion.
- Under the Ordinance, a deposit means any money received in any form, with a promise to be returned. Thus if money does not have to be returned, say gifts, donations, charity grants, sales proceeds etc. then it does not fall within the scope of this Ordinance, and are not banned.
- Among the list of items that are not deposits are amounts received by an individual from his relatives or by a firm from the relatives of its partners. By implication that means that loans received from non relatives are banned. What do you do in case of any emergency, if your relatives do not fund you or if you have no credibility to take an emergency bank loan? While the sums received by an individual in the course of his business, for the purpose of his business, with a genuine business connection are not considered to be deposits and are not banned, the issue in respect of emergency loans taken by individuals for their personal use from non relatives is a grey area and remains a matter of concern.
- While an unregulated deposit has been defined to include deposits taken under a scheme, solicited by a deposit taker, by way of business, its implications are not clear. Does it refer to the business of taking deposits or any deposit taken under a deposit scheme, even if that is not the business of the deposit taker. If an individual takes a loan, not for his business purpose, that should be banned, as per this clause, but to us that is not clearly so. Moreover, does it ban unsecured loans taken from unrelated parties, by a small business, as its business of taking deposits, is a matter of concern, because that will kill their business by preventing any emergency raising of funds.
Due to this Ordinance, the business of banks and NBFCs will go up. While the government claims that this Ordinance is meant to ban ponzies, which is a laudable object, there are grey areas which will cause confusion and harassment to the small entrepreneurs and individuals. It will take time for the law to settle in, but till then it will add to the burden of the common person, as we witnessed upon the onset of the Benami Act.
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