• The Centre’s recent ordinance banning unregulated monthly deposit schemes will not affect the ongoing monthly schemes operated by jewellery and chit fund firms.
• Banning of Unregulated Deposit Scheme Ordinance was promulugated by President Ram Nath Kovind to save gullible investors from losing money to Ponzi and fake deposit schemes. The ordinance makes such unregulated deposit schemes punishable, among other things.

Banning of Unregulated Deposit Scheme Ordinance

Features of the Bill

• 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 only comes into effect ex-post with considerable time lags; 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.
• The Bill provides for severe punishment and heavy pecuniary fines to act as a deterrent.
• The Bill provides for repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
• The Bill provides for attachment of properties/assets by the Competent Authority, and subsequent realization of assets for repayment to depositors.
• Timelines have been provided for attachment of property and restitution to depositors.
• The Bill enables the creation of an online central database, for collection and sharing of information on deposit-taking activities in the country;
• The Bill also defines “Deposit Taker” and “Deposit” comprehensively.

Definition of “Deposit Taker” and “Deposit” under the Bill

• Deposit Takers include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation; Deposit is defined in such a manner that deposit-takers are restricted from camouflaging 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.

Ponzi scheme

• A Ponzi scheme is an investment fraud where clients are promised a large profit in short term at little or no risk at all.
• Companies engaged in a Ponzi schemes mainly focus all of their energies into attracting new clients to make investments.
• This new investments (income) are used to pay original investors their returns, marked as a profit from a legitimate transaction.
• Ponzi schemes mainly rely on a constant flow of new investments to provide returns to older investors. When this flow runs out, the scheme falls apart.