Govt approves law to protect small investors from ponzi schemes


New Delhi: The Union cabinet on Tuesday approved the introduction of a proposed law to ban unregulated entities from collecting deposits from individuals in an effort to protect small investors from ponzi schemes.

The Banning of Unregulated Deposit Schemes Bill, 2018, which is likely to be tabled in Parliament in the second half of the budget session starting next month, seeks to plug loopholes in existing laws.

The bill was envisaged after the collapse of Saradha Group in April 2013. Its chairman and managing director Sudipta Sen was arrested after it started defaulting on repayments following pressure on its finances. The government had subsequently constituted an inter-ministerial group to look into such deposit-collecting companies that fleeced investors. The cabinet also approved the Chit Funds (Amendment) Bill, 2018.

Comprehensive central legislation is needed to curb illicit deposit-taking schemes and boost the confidence of investors in dealing with financial products, said Abhishek A. Rastogi, a partner at law firm Khaitan & Co.

“The guidelines and legislation should ensure that the activities are regulated so that there are no frauds but at the same time not kill the schemes as the benefits cannot be ignored,” Rastogi said.

The cabinet’s decision comes at a time when the government is under pressure following two banking frauds that have recently come to the fore.

The bill proposes to prevent companies which are unauthorized to collect deposits from promoting, operating, issuing advertisements and collecting deposits. It also proposes to make these offences ex-ante.

This means that the government won’t have to wait till the fraud comes to light but can act beforehand to stop such soliciting.

The bill also proposes the setting up of a competent authority by state governments with powers to attach properties and recover dues to depositors in case the entities do manage to raise funds illegally.

The bill sets a timeline for both the attachment of properties and for recovering the amounts, the government said in a statement.

It also proposes creation of an online central database for collection and sharing of such deposit-taking activities and designation of courts to try such cases and oversee repayment to depositors. The bill will list the regulated deposit schemes, giving powers to the central government to expand or trim the list.

Finance minister Arun Jaitley, in his 2017-18 budget speech, had said the government will introduce the bill as part of a ‘Clean India’ agenda.livemint