The Fraud and Ponzi Schemes
The
CBI has lodged about 166 cases in the last four years related to chit funds and
multi-crore scams, with the maximum in West Bengal and Odisha. Clearly, there
have been various Ponzi type schemes run by fake companies
and institution which continue to trick the general public at large and misuse their
hard-earned savings.
What is a Ponzi Scheme?
A Ponzi scheme is a fraudulent investing scam promising high
rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by
acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors'
funds to pay the earlier backers.
How to protect the consumers?
In March 2018, the Cabinet approved the
introduction of the banning of unregulated deposit schemes Bill, 2018.
The Amendment was introduced and it was based on the recommendation of the standing committee
on finance. The bill provides
for severe punishment and heavy pecuniary fines to reduce as deterrent.
The
Bill provides for a comprehensive mechanism to tackle the menace of unlawful
deposit schemes operating in the country.
It was introduced in the wake of
recent incidents where an excessive amount of ponzi type schemes run by fake
companies and institution continue to trick the general public at large of
their hard earned savings for example - the
Sahara and Saradha schemes frauds.
Features
of the Bill
1-
The Bill creates three different types of offences, namely, running of
unregulated deposit schemes, fraudulent default in regulated deposit schemes,
and wrongful inducement in relation to unregulated deposit schemes.
2-
The bill bans deposit takers from promoting operating, issuing advertisements
or accepting deposits in any unregulated deposit scheme. The bill ban
unregulated deposit-taking activities altogether, by making them an offence.
The existing legislative-cum-regulatory framework which only comes into effect
ex-post with considerable time lags.
3-
The bill provides for repayment of deposits in cases where such schemes
nonetheless manage to raise deposits illegally.
4-
The bill provides for severe punishment and heavy penalty and fines to ac a
deterrent.
5-
The bill provides for attachment of properties/ assets by the competent
authority and subsequent realization of assets for repayment to depositors.
6-
Timelines have been provided for attachment of property and restitution to
depositors.
7-
The bill enables the creation of an online central database, for collection and
sharing of information on deposit-raking activities in the country.
8-
The bill also defines “Deposit Taker” and Deposit and “Deposit”
comprehensively.
The
Competent Authority must approach the court within 30 days (extendable to 60
days) in order to make the attachment absolute. It must also open a bank
account to realize and disburse money to depositors under the instructions of
the court.
What
is ‘deposit taker’?- it has been defined in the bill.
The
bill has provided a very wide ambit to a ‘deposit taker’ and its definition
covers all possible entities, including individuals, who are receiving or
soliciting deposits. Further, a deposit is defined in such a manner that
deposit-takers are restricted from concealing public deposits as receipts, and
at the same time, not to curb or hinder acceptance of money by an establishment
in the ordinary course of its business.
Uncertainty
regarding crypto-currencies
The
bill does not make any specific reference to crypto-currencies or online
investment portals. In the context of the recent decision by the Supreme Court,
refusing to lift the RBI’s ban in the use of crypto currency, it seems that the
framers of the bill have avoided the controversial step of according
recognition to the use of crypto currency, preferring to leave the question to
policy makers for further deliberation.
In
the event that the RBI frames future guidelines for the use of crypto currency,
parliament will have to reconsider to what extent the definition of deposits
and deposit takers would need to change.
Centralized
database
Central
database to list authorized scheme 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 act upon very quickly by the competent authority; the act has to remain
credible and useful.
The central database would 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 other who may be lured into
the scheme in different geographies.
Central
database, would also acts as source of information, which would make digital
India work effectively for people by creating a public audit trail. It will
also make the authority accountable for its action and inaction.
The
problem of India has never been the
absence of legislation—but the lack of accountably, 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 scheme that have already
implemented.
Important
point
There
are already thousands of cases registered by the state government under various
depositors’ protection statutes. While the new Bill envisages punishment of
repeat offenders under this legislation, all those who have been convicted
under the statues must also be listed in a separate schedule and considered
repeat offenders under this Act.
Critical
Issue about the deposit schemes
There
is 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,
jewelry companies avoided tax by structuring deposits as advance monthly
payments which were redeemed with the purchase of jewelry that included the
interest component. This has been stopped. But several jewelers continue to run
such schemes without detection.
Similarly,
cash strapped builders have been raising funds through home buyers through many
bluff strategies. As in the case of 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,
leaving ordinary buyers without recourse when the project fails to materialize.
RBI, while its 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 conned by financial advisers who earn
attractive commissions for garnering fixed deposits from savers. RBI, as a
regulator, does not take any action to report or prevent such illegal activity.
Conclusion
Though
the bill has tighten policies regarding banning the unregulated deposit. But comprehensive mechanism is needed to be inspected, audited, investigated and act
quickly. Regulator’s accountability is the key to curb such illegal activity.
RBI should also take command and keep eyes on such type of activities. Better
coordination and dedication is needed between bank’s employees to prevent banks
and citizens from big losses.
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