Govt proposes strict penalty, jail term for ponzi operators

Seeking to sternly deal with the ponzi menace, the government has proposed imprisonment of up to 10 years and fine of up to Rs 50 crore under a new draft bill for those running illicit money deposit schemes.
All unregulated deposit schemes are sought to be covered under the new law, which has also proposed strict penal and monetary provisions for the offenders.
The draft bill, which has been finalised as per recommendations of an Inter-Ministerial Group, provides that any offender shall be punishable with imprisonment for minimum term of one year which may be extended to 5 years and with fine which may extend to Rs 10 lakh.

In case of repeat offenders, the draft bill proposes imprisonment for a minimum term of 5 years which may be extended to 10 years and fine extended to Rs 50 crore.
Public comments have been sought till April 30 on the proposed law, named Banning of Unregulated Deposit Schemes and Protection of Depositors' Interests Bill.
A ponzi scheme typically involves the operator collecting a large amount of money from investors and paying them returns from their own money or the money collected from subsequent investors, rather than from profit earned by the person or entity operating such a scheme.

Such activities came to be known as ponzi schemes after Charles Ponzi, who became notorious in the US in the 1920s for deploying this technique while promising 50 per cent return on investments in 45 days and 100 per cent within 90 days.

The Government of India had constituted an IMG for identifying gaps in the existing regulatory framework for deposit-taking activities and to suggest administrative or legislative measures, including formulation of a new law, to cover all relevant aspects of 'deposit-taking'.
IMG has recommended a number of legislative and non-legislative measures, including legislation of a comprehensive Central law called the 'Banning of Unregulated Deposit Schemes and Protection of Depositors' Interests Bill'.
Finance Minister Arun Jaitley also announced in his Budget 2016-17 that a comprehensive central legislation would be brought in this fiscal to deal with the menace of unauthorised deposit taking schemes.

The proposed law defines deposit as receipt of money 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.
Currently, the onus of action against ponzi operators is largely on state government agencies, while markets regulator Sebi is authorised to take action against illicit Collective Investment Schemes and unauthorised public fund mopping activities -- typically involving over Rs 100 crore or the cases where the number of investors is 50 or more.

The new Bill proposes that district magistrates, to be made competent authority by states, could order investigation of any company or individual on their assets and documents.
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There have been thousands of instances of gullible investors being duped by illicit public deposit schemes in different parts of the country, while a number of such high profile cases have come to the notice in eastern states like West Bengal and Assam.
Some cases including the famous Saradha scam in West Bengal have even resulted in major political controversies in the recent years.
The IMG has also suggested creation of a National Intelligence Mechanism (NIM), in partnership with the state governments which would collect, collate, analyse and disseminate information on deposit-taking activities in a coordinated manner to designated Central and State Law Enforcement Agencies.

On legislative side, the IMG recommended enactment of a comprehensive central Act, which apart from providing strict penal actions against the perpetrators of illegal deposit taking schemes would also provide for protection of interest of depositors in legal deposit schemes.
Considering the nature of the illegal deposit-taking schemes, their extent and coverage, it is but natural that the state governments will need to be fully on board to tackle this menace, it said.
The Group further said there is need to examine Prize Chits and Money Circulation Scheme (Banning) Act 1978, different state Acts and various other statutes with a view to further tighten regulatory oversight over deposit schemes.

"Taking into account that many such schemes operate in multiple states, succeed in obtaining patronage of local politician/administration and require active of various regulators established under the Central Government enactments to contain the menace, the committee is of the view that there is a need for a comprehensive central government legislation to deal with the problem so as to bring in uniformity in statutory provisions throughout the country," it said.