An Ordinance to Clamps down on Un regulated Deposits
25, Feb 2019
Prelims level : Economy Mains level : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
- In a bid to clamp down on Ponzi and fake deposit schemes, the government has, through an ordinance, banned unregulated deposit schemes.
- Banning of Unregulated Deposit Scheme Ordinance 2019 which seeks to make such unregulated deposit scheme punishable, among other things but it does not prohibit those regulated by law like chit funds.
- Chit fund is regulated by Chit Fund Act, 1982 and is treated as Regulated Deposit as per
- Schedule 1 of Banning of Unregulated Deposit Ordinance, 2019
- Ordinance was aimed at saving poor and financially illiterate of their hard-earned savings
- from ponzi schemes like Saradha and Rose Valley in the past.
- The legislation contains a substantive banning clause which bans deposit takers from
- promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme.
- “No deposit taker shall directly or indirectly promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an unregulated deposit scheme
What the law says?
The law also proposes to create three different types of offences –
- Running of unregulated deposit schemes,
- Fraudulent default in regulated deposit schemes, and
- Wrongful inducement in relation to unregulated deposit schemes.
- The Ordinance also provides for severe punishment ranging from 1 year to 10 years and pecuniary fines ranging from Rs 2 lakh to Rs 50 crore to act as deterrent.
- It also has adequate provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
- The law provides for attachment of properties or assets and subsequent realisation of assets for repayment to depositors. Clear-cut timelines have been provided for attachment of property and restitution to depositors.
What is chit fund?
- Chit funds are those business concerns which accept from its customers a fixed amount every month for a stipulated period which may be ranging from 1 year to 5 years. The members belonging to the chit company are classified into different groups according to the chit amount and the period.
Examples of chit concerns are:
- Balussery Benefit Chit Fund (P) Ltd.
- Shriram Chits & Investments Ltd.
Regulations Imposed by RBI on chit fund business:
- No chit fund business can be conducted except by a registered company. Chit business run by family concerns, partnership firms are restricted.
- In every state, there will be a Registrar of Chit companies with whom all the chit companies must register, giving full particulars about the chit company.
- The maximum discount that can be taken in a bid was restricted to 30% of the total chit amount. However, in 2001, the same has been enhanced to 40% (in the case of a chit for Rs. 1 lakh, not more than Rs. 40,000/- can be the bid amount).
- The details of every chit have to be furnished to the Reserve Bank of India along with the names and addresses of members.
- One-month chit amount of all the members has to be kept with the Reserve Bank of India till the particular chit comes to an end.