Amidst growing public anger about banking frauds, the Union Cabinet's approval to a comprehensive new legislation to protect deposit-taking schemes went almost unnoticed. The ‘Banning of Unregulated Deposit Schemes Bill, 2018’ (BUDSB) was cleared by the Cabinet on 21st February. It aims to provide nationwide protection to victims of a whole spectrum of illegitimate schemes that have been taking advantage of financially naïve Indians and looted their savings for decades.
Deliberations at the 22nd Conference of the Central Bureau of Intelligence (CBI) and vigilance agencies in November 2016 estimated that more than 60 million Indians were victims of such unscrupulous companies spread across 26 states. The amount of money lost was estimated at a staggering Rs85,000 crore.
Dubious deposit-taking schemes take myriad forms and there are thousands of schemes proliferating all over India, from the metros to the tiniest and most economically backward regions. Moneylife
has been diligently reporting on these. We have long argued that Ponzis, multi-level marketing schemes (MLMs) and faux-chit funds, those that masquerade as regulated financial instruments, are the biggest source of losses to individuals. PACL’s deposits and the optionally convertible instruments issued by the Sahara realty companies that finally landed its founder Subrata Roy in jail, are good examples. The numbers put out at the CBI conference establish that hundreds of criminal cases had been filed at economic offences wings (EOWs) of the police across the country
This draft BUDSB has been in the works for a couple of years; the Union Budget of 2016-17 had proposed the comprehensive Central legislation in the wake of the Saradha scam in Bengal that led to over 25 suicides. An inter-ministerial group then identified gaps in the many existing legislations and regulatory framework that has, so far, failed to stop unauthorised deposit-taking. The new law will ensure that long litigations, where companies used clever lawyers to prove legitimacy, question the jurisdiction and competence of courts, will hopefully be cut to a minimum.
BUDSB envisages an outright, nationwide ban on unauthorised deposit-taking and makes the promotion and advertising of these schemes unlawful; it will also criminalise unregulated deposits with specific provisions to confiscate proceeds of crime and refund depositors’ money. In effect, all schemes that have not been specifically cleared under the law will be banned and this law will be applicable nationwide.
The statute has the potential to nip fraud at an early stage and prevent widespread losses of the type we saw in innumerable notorious collective investment schemes including Pancard,
Many states, led by Tamil Nadu and Maharashtra, already have statutes to prevent unauthorised deposit-taking. There is also the Prize Chits and Money Circulation Schemes (Banning) Act that has been effectively used by some conscientious police officials; but, barring these exceptions, the flawed statute is largely ineffective. The problem with the prize chits banning law is that the police can only act on a victim’s complaint which usually happens after the fraudsters had fled with the money.
The new law proposes the setting up of a competent authority by state governments with powers to attach properties and recover dues of depositors, in case the entities do manage to raise funds illegally. It also specifies timelines for attaching the property of fraud companies and recovering the dues. A flip side to this is that the law will only be as effective as the competent authority that is set up by each state along with courts that would try such cases and oversee repayment to depositors.
How effectively will the new BUDSB protect people from fraudulent schemes? A Central legislation is certainly a step in the right direction. The rest depends on its implementation. There has to be a robust process for reporting fraudulent and unregulated deposit-collection which will need to be followed up by quick action by the competent authority at the centre or the state to stop and wind up such schemes.
While a Central database to list authorised schemes is a good idea, it should allow ordinary people to report suspicious schemes that will continue to pop up by the thousands across India. This crowd-sourced information will need to be verified and acted upon very quickly by the competent authority, if the Act has to remain credible and useful. The Central database should publish a list of all companies and persons who have been caught and convicted in the past for running illegal deposit schemes. This will serve as a warning to others who may be lured into the scheme in different geographies.
Mahesh Athavale, a former assistant commissioner of police with the Mumbai EOW, makes another important point. He says, there are already thousands of cases registered by state governments under various depositor protection statutes. While the new Bill envisages punishment of repeat offenders under this legislation, all those who have been convicted under other statutes must also be listed in a separate schedule and considered repeat offenders under this Act.
A Central database, that also acts as a source of information, would make Digital India work effectively for people by creating a public audit trail. It will also make the competent authority accountable for its action and inaction. Remember, India’s problem has never been the absence of legislation—but the lack of accountability, corruption and ability to game the judicial system. This applies to bad loans and banking frauds, as much as it does to the thousands of illegitimate schemes that have already gobbled up a colossal Rs85,000 crore of hard-earned savings.
There is also another issue. Many deposit schemes will soon be disguised as investments, product sales or other innovations in order to sidestep the law. In the past, jewellery companies avoided tax by structuring deposits as advance monthly payments which were redeemed with the purchase of jewellery that included the interest component. This has been stopped. But several jewellers continue to run such schemes without detection.
Similarly, cash-strapped builders have been raising funds through home-buyers through many dubious strategies. As in the Nirav Modi scam, banks and finance companies that have lent funds to builders are fully aware that they are seriously cash-strapped. So, the money is routed as loans to individual borrowers (based on their personal salary documents and guarantees) who are lured through interest subvention offers. The entire project is again mortgaged to lenders, leaving ordinary buyers without recourse when the project fails to materialise.
Social activist Vijay Kumbhar has already exposed
DS Kulkarni Development Limited, once seen as the most honourable builder in Pune, as an outright fraud. The founder Deepak Kulkarni and his wife, Hemanti, who were finally arrested in February, are involved in, at least, the following types of fraud—double financing of projects, swindling money in land deals, siphoning money from the publicly listed entity and, above all, raising fixed deposits from a large number of private entities of the promoter without Reserve Bank of India’s (RBI’s) clearance.
RBI, which is caught napping in the Nirav Modi and Bank of Baroda scam, has been sleeping on such frauds too. While it permits some companies to raise deposits, it is unconcerned about those who ignore the law—it is up to individuals to be vigilant. Most people are conned by financial advisers who earn attractive commissions for garnering fixed deposits from gullible savers. RBI, as a regulator, does take any action to report or prevent such illegal activity. On needs to see how the Central statute will stop this.
Clearly, no law, however comprehensive, will work, if all regulators are not obliged to inspect, audit, investigate and act quickly. Regulators’ accountability is the key; but one is unclear how another Central legislation is going to ensure this, when there is no attempt to make existing financial regulators accountable to savers.