No more Ponzi Schemes - A critical analysis - Seeker's Thoughts

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No more Ponzi Schemes - A critical analysis

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.


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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