Bundles of Indian twenty rupee banknotes (Photographer: Dhiraj Singh/Bloomberg) 

Government Says Unregulated Deposit Ordinance Bans Only Ponzi Schemes

The Banning of Unregulated Deposit Ordinance puts a check only on illicit deposit schemes that dupes gullible investors but it doesn't prohibit those regulated by law like chit funds, the government said.

To curb menace of Ponzi schemes, President Ram Nath Kovind last week promulgated the Banning of Unregulated Deposit Scheme Ordinance 2019 which seeks to make such unregulated deposit scheme punishable, among other things.

In a series of tweets, the Department of Financial Services said: "Banning of Unregulated Deposit Ordinance-2019, exempts Individual, Firm, Companies & LLP etc. for taking any loan and deposit for their course of business as per section 2(4) e,f,l and other provisions."

The clarification comes amid rumours that deposits under chit funds and loans taken by small businesses from unrelated parties and enterprises are also prohibited. However, "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," it said.

According to the ordinance, the amounts received by way of contributions towards the capital by partners of any partnership firm or a limited liability partnership are exempt. Besides, amount received by an individual by way of loan from his relatives or amount received by any firm by way of loans from relatives of any of its persons are exempt among other exemptions.

The Lok Sabha passed the Bill to this effect on the last day of the budget session by a voice vote, but the legislation couldn't get the approval of the Rajya Sabha. So, the law was enforced in the form of an ordinance last week aimed at saving poor and financially illiterate of their hard earned savings from Ponzi schemes like Saradha and Rose Valley.

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 enrollment in or accept deposits in pursuance of an unregulated deposit scheme," the ordinance said. 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 in the form of jail terms ranging from 1 year to 10 years and monetary fines ranging from Rs 2 lakh to Rs 50 crore 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.