Modi govt tables Bill to nip ponzi schemes like Saradha in the bud

Up to 10 years in jail for perpetrators on the anvil; competent authority set up by states to have the power to attach assets of defaulting establishments

Unable to stop the proliferation of unregulated deposits, better known as 'Ponzi schemes', the government now seeks to ban these through a legislation which provides for up to ten years in jail for those floating such schemes. 

A bill -- The Banning of Unregulated Deposit Schemes Bill, 2018 -- was tabled in the Lok Sabha by Minister of State for Finance Pon Radhakrishnan on Wednesday.

In a reflection of the slow pace of legislation in a parliamentary system, the bill has been tabled in the concluding year of the Modi government, even though the Saradha scam came to light at the fag end of the United Progressive Alliance (UPA) regime.

The bill also seeks to make it obligatory for those who float regulated deposit schemes not to commit any fraudulent default in repayment to depositors. Moreover, it calls for the setting up of a competent authority by state governments to ensure repayment in the event of default by a deposit-taking establishment. The authority will be empowered to attach assets of such an establishment. 

It also provides for setting up of designated courts to settle disputes in this regard. 

Non-banking entities are allowed to raise deposits under various laws enacted by the central as well as state governments. However, the regulatory framework for such activities in the country is not seamless. 

This is because regulators operate in well-defined areas within the financial sector, being restricted to specific entities or activities. For instance, Reserve Bank of India regulates non-banking financial companies, whereas chit funds, money circulation including multi-level marketing schemes and schemes offered by cooperatives societies are in the domain of respective state governments. Collective investment schemes come under the purview of the Securities and Exchange Board of India. 

Despite the vast regulatory universe, unauthorised deposit schemes continue to operate in the country, promising unsustainable high returns to depositors.

Pieces of central legislation such as Prize Chits and Money Circulation Schemes (Banning) Act, 1978, Chit Funds Act, 1982 and various legislation enacted by state governments have not been able to completely address the issue of unregulated deposit schemes run by unscrupulous elements. 

The regulatory gap was highlighted in the 21st report of the parliamentary standing committee on finance. The committee had recommended the need for appropriate legislative provisions, coupled with effective administrative and enforcement measures in order to protect the hard-earned savings and investments made by millions of people. 

In Budget 2016-17, Arun Jaitley had announced that a comprehensive central legislation would be brought in to deal with the menace of illicit deposit schemes.

"This was necessary as instances of people being defrauded by illicit deposit-taking schemes are rising in various parts of the country... worst victims of these schemes are the poor and financially illiterate, and the operations of such schemes are often spread over many states," Jaitley had said.