Banning of Unregulated Deposit Schemes Bill, 2018

Non-banking entities are allowed to raise deposits from the public under the provisions of various statutes enacted by the Central Government and the State Governments. However, the regulatory framework for deposit taking activity in the country is not seamless. The regulators operate in well defined areas within the financial sector by regulating particular kinds of entities or activities. For instance, Non-Banking Financial Companies are under the regulatory and supervisory jurisdiction of the Reserve Bank of India. Similarly Chit Funds, Money Circulation including multi-level marketing schemes and schemes offered by co-operative societies are under the domain of the respective State Governments. In the same manner, the Collective Investment Schemes come under the purview of the Securities and Exchange Board of India. Despite such diverse regulatory framework, schemes and arrangements leading to unauthorised collection of money and deposits fraudulently, by inducing public to invest in uncertain schemes promising high returns or other benefits, are still operating in the society.

2. The Central legislations such as the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and the Chit Funds Act, 1982 and the legislations enacted by the State Governments have not been able to completely address the issue of unregulated deposit schemes run by unscrupulous elements. This regulatory gap was highlighted in the twenty-first Report of the Parliamentary Related Standing Committee on Finance (Sixteenth Lok Sabha) titled as “Efficacy of Regulation of Collective Investment Schemes, Chit Funds, etc.”. The said Committee in its Report has recommended the requirement of “appropriate legislative provisions, coupled with effective administrative and enforcement measures in order to protect the hard-earned savings and investments made by millions of people”. Presently, there are considerable differences among State laws in protecting the interests of depositors, and many unregulated deposit taking schemes operate across State boundaries.

3. In view of the above, it becomes necessary to have a Central legislation to ensure a comprehensive ban on unregulated deposit taking activity and for its effective enforcement. The proposed Bill, namely, the Banning of Unregulated Deposit Schemes Bill, 2018, aims to prevent such unregulated deposit schemes or arrangements at their inception and at the same time makes soliciting, inviting or accepting deposits pursuant to an unregulated deposit scheme as a punishable offence. The Bill seeks to put in place a mechanism by which the depositors can be repaid without delay by attaching the assets of the defaulting establishments.

4. The Banning of Unregulated Deposit Schemes Bill, 2018, inter alia, provides for the following, namely:—

(i) to make a provision for banning of unregulated deposit schemes;

(ii) to impose an obligation on the deposit taker, pursuant to a regulated deposit scheme, not to commit any fraudulent default in the repayment or return of the deposit;

(iii) to provide for deterrent punishment for promoting or operating an unregulated deposit taking scheme;

(iv) to provide for punishment for fraudulent default in repayment to depositors;

(v) designation of a Competent Authority by the State Government to ensure repayment of deposits in the event of default by a deposit taking establishment;

(vi) to constitute the Designated Courts for such area or areas or such case or cases as per the provisions of the proposed Bill;

(vii) to empower the Central Government to designate an authority which shall create, maintain and operate an online data base for information on deposit takers operating in India; and

(viii) to confer powers and functions upon the Competent Authority including the power to attach assets of a defaulting establishment.

5. The Notes on Clauses explain in detail the provisions contained in the Bill.

6. The Bill seeks to achieve the above objectives.

Notes on Clauses of Banning Of Unregulated Deposit Schemes Bill, 2018

Clause 1.—This clause relates to Short title, extent and commencement of the proposed legislation.

Clause 2. This clause contains the Definition of various expressions used in the proposed legislation.

Clause 3.—This clause relates to Banning of unregulated deposit schemes.

This clause provides that on and from the date of commencement of this Act, the Unregulated Deposit Schemes shall be banned and 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.

Clause 4.—This clause relates to fraudulent default in regulated deposit schemes.

This clause provides that no deposit taker, while accepting deposits pursuant to a Regulated Deposit Scheme, shall commit any fraudulent default in the repayment or return of deposit on maturity or in rendering any specified service promised against such deposit.

Clause 5.—This clause provides for the Wrongful inducement in relation to unregulated deposit schemes.

This clause provides that no person shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, to induce another person to invest in, or become a member or participant of any Unregulated Deposit Scheme.

Clause 6.—This clause relates to Certain schemes to be Unregulated Deposit Schemes.

This clause provides that a prize chit or a money circulation scheme banned under the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an Unregulated Deposit Scheme under this Act.

Clause 7.—This clause relates to the Competent Authority.

Sub-clause (1) of this clause provides that the appropriate Government shall, by notification, appoint one or more officers not below the rank of Secretary to that Government, as the Competent Authority for the purposes of this Act.

Sub-clause (2) of this clause provides that the appropriate Government may appoint other officers to assist the Competent Authority.

Sub-clause (3) of this clause provides that the Competent Authority has been empowered to provisionally attach the money or property of any deposit taker.

Sub-clauses (4), (5), (6), (7) and (8) of this clause provides for provisions to confer such powers on the Competent Authority and its officers as may be necessary to carry out the provisions of this Bill.

Clause 8.—This clause relates to the Designated Court.

Sub-clause (1) of this clause enables the appropriate Government, with concurrence of the Chief Justice of the respective High Court, to constitute one or more Designated Courts for trying offences under this Bill. The Designated Court must be presided by a Judge not below the rank of District and Sessions Judge or Additional District Sessions Judge.

Sub-clause (2) of this clause provides that no Court other than the Designated Court shall have jurisdiction in respect of any matter to which the provisions of this Act apply.

Sub-clause (3) of this clause provides that when trying an offence under this Act, the Designated Court may also try an offence, other than an offence under this Act, with which the accused may, under the Code of Criminal Procedure, 1973, be charged at the same trial.

Clause 9.—This clause relates to Central database.

Sub-clause (1) of this clause provides that the Central Government may designate an authority which shall create, maintain and operate an online database for information on deposit takers operating in India.

Sub-clause (2) of this clause provides that the authority designated under sub-section (1) may require any Regulator or the Competent Authority to share such information on deposit takers, as may be prescribed.

Clause 10.—This clause relates to Intimation of business by deposit taker.

Sub-clause (1) of this clause provides that every deposit taker which commences or carries on its business as such on or after the commencement of this Act shall intimate the authority referred to in sub-clause (1) of clause 9 about its business in such form and manner and within such time, as may be prescribed.

Sub-clause (2) of this clause provides that the Competent Authority may, if it has reason to believe that the deposits are being solicited or accepted pursuant to an Unregulated Deposit Scheme, direct any deposit taker to furnish such statements, information or particulars, as it considers necessary, relating to or connected with the deposits received by such deposit taker.

Clause 11.—This clause relates to the Information to be shared.

Sub-clause (1) of this clause provides that the Competent Authority shall share all information received under clause 29 with the Central Bureau of Investigation and with the authority which may be designated by the Central Government under clause 9.

Sub-clause (2) of this clause provides that the appropriate Government, any Regulator, income-tax authorities or any other investigation agency, having any information or documents in respect of the offence investigated under this Act by the police or the Central Bureau of Investigation, shall share all such information or documents with the police or the Central Bureau of Investigation.

Sub-clause (3) of this clause provides that where the principal officer of any banking company, a corresponding new bank, the State Bank of India, a subsidiary bank, a regional rural bank, a co-operative bank or a multi-State co-operative bank has reason to believe that any client is a deposit taker and is acting in contravention to the provisions of this Act, he shall forthwith inform the same to the Competent Authority.

Clause 12.—This clause relates to the Priority of depositors’ claim.

This clause provides that save as otherwise provided in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency and Bankruptcy Code, 2016, any amount due to depositors from a deposit taker shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority.

Clause 13.—This clause relates to Precedence of attachment.

Sub-clause (1) of this clause provides that save as otherwise provided in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Insolvency and Bankruptcy Code, 2016, an order of provisional attachment passed by the Competent Authority, shall have precedence and priority, to the extent of the claims of the depositors, over any other attachment by any authority competent to attach property for repayment of any debts, revenues, taxes, cesses and other rates payable to the appropriate Government or the local authority.

Sub-clause (2) of this clause provides that where an order of provisional attachment has been passed by the Competent Authority and such attachment shall continue until an order is passed under sub-clause (3) or sub-clause (5) of clause 15 by the Designated Court and all the attached money or property of the deposit taker and the persons mentioned therein shall vest in the Competent Authority and shall remain so vested till further order of the Designated Court.

Sub-clause (3) of this clause provides that the Competent Authority shall open an account in a scheduled bank for the purpose of crediting and dealing with the money realised under this Act, which shall not be utilised except under the instructions of the Designated Court.

Sub-clause (4) of this clause provides that the Competent Authority shall not dispose of or alienate the property or money attached except in accordance with the order of the Designated Court under sub-clause (3) or sub-clause (5) of clause 15.

Sub-clause (5) of this clause provides that notwithstanding anything contained in sub-section (4), the Competent Authority may, if it thinks it expedient, order the immediate sale of perishable items or assets, and the proceeds of the sale shall be utilised in the same manner as provided for other property.

Clause 14.—This clause relates to Application for confirmation of attachment and sale of property.

Sub-clause (1) of this clause provides that the Competent Authority shall, within a period of thirty days, which may extend up to sixty days, for reasons to be recorded in writing, from the date of the order of provisional attachment, file an application with such particulars as may be prescribed, before the Designated Court for making the provisional attachment absolute, and for permission to sell the property so attached by public auction or, if necessary, by private sale.

Sub-clause (2) of this clause provides that in case where the money or property has been attached on the permission granted by a Designated Court in another State or Union territory, the application for confirmation of such attachment shall be filed in that Court.

Clause 15.—This clause relates to Confirmation of attachment by Designated Court.

Sub-clause (1) of this clause provides that the Designated Court to issue notice to the deposit taker or any other person whose property is attached under clause 14 to show cause within 30 days as to why the attachment should not be made absolute.

Sub-clause (2) of this clause provides that this clause requires the Designated Court to issue notice to all other persons, in addition to the persons referred to in sub-clause (1), represented to it as having or likely to have a claim or interest in the title of the property.

Sub-clause (3) of this clause provides that the Designated Court after following the procedure prescribed can confirm, vary or cancel the attachment. Further, on confirming the attachment, the Designated Court can direct the Competent Authority to sell the property attached.

Sub-clause (4) of this clause provides that this provision prohibits the Designated Court from releasing from attachment any property unless it is satisfied that the deposit taker or any other person referred to in sub-clause (1) has interest in such property and there will remain under attachment an amount or property sufficient for repayment.

Sub-clause (5) of this clause provides that this clause requires the Designated Court to pass any order necessary for equitable distribution among the Depositors of the money attached or realised out of the sale.

Sub-clause (6) of this clause provides that this clause sets a timeline of 180 days, from the date of receipt of application under sub-clause (1), for completion of proceedings.

Clause 16.—This clause relates to Attachment of property of malafide transferees.

Sub-clause (1) of this clause provides that where the Designated Court is satisfied that there is a reasonable cause for believing that the deposit taker has transferred any property otherwise than in good faith and not for commensurate consideration, it may, by notice, require any transferee of such property, whether or not he received the property directly from the said deposit taker, to appear on a date to be specified in the notice and show cause why so much of the transferee’s property as is equivalent to the proper value of the property transferred should not be attached.

Sub-clause (2) of this clause provides that where the said transferee does not appear and show cause on the specified date or where the Designated Court is satisfied that the transfer of the property to the said transferee was not a bonafide transfer and not for commensurate consideration, it shall order the attachment of so much of the said transferee’s property as in its opinion is equivalent to the proper value of the property transferred.

Clause 17.—This clause relates to the Payment in lieu of attachment.

Sub-clause (1) of this clause provides that any deposit taker or a person referred to in sub-clause (1) of clause 15, or transferee referred to in clause 16 whose property is about to be attached or has been provisionally attached under this Act, may, at any time before the confirmation of attachment, apply to the Designated Court for permission to deposit the fair value of the property in lieu of attachment.

Sub-clause (2) of this clause provides that while allowing the deposit taker or person or transferee referred to in sub-clause (1) to make the deposit under the said sub-clause, the Designated Court may order such deposit taker or person or transferee to pay any sum towards costs as may be applicable.

Clause 18.—This clause relates to the Powers of Designated Court.

Sub-clause (1) of this clause lays down all the steps that the Designated Court is empowered to take to ensure that the interest of Depositors is adequately protected.

Sub-clause (2) of this clause empowers the Designated Court to make orders for the provision of essential sums from the attached property to the deposit taker and to safeguard as far as practicable any business affected by such attachment.

Clause 19.—This clause relates to the Appeal to High Court.

This clause provides the time period within which an appeal may be filed against an order of the Designated Court. Any person, including the Competent Authority may appeal to the High Court against an order of the Designated Court, within 60 days of such order.

Clause 20.—This clause relates to the Power of Supreme Court to transfer cases.

Sub-clause (1) of this clause empowers the Supreme Court to direct that a particular case be transferred from one Designated Court to another in the event of default in any deposit scheme or deposit schemes of the nature referred to in clause 30.

Sub-clause (2) of this clause provides that the Supreme Court is empowered to act under sub-clause (1) only on the basis of an application filed by the Competent Authority or an interested party.

Sub-clause (3) of this clause provides that where an application for the exercise of the powers conferred by this section is dismissed, the Supreme Court may, if it is of opinion that the application was frivolous or vexatious, order the applicant to pay by way of compensation to any person who has opposed the application such sum not exceeding fifty thousand rupees as it may consider appropriate in the circumstances of the case.

Clause 21.—This clause relates to the Punishment for contravention of clause 3.

Sub-clause (1) of this clause provides that for soliciting Deposits in contravention of clause 3, a deposit taker is punishable with imprisonment for a minimum term of one year which may extend to five years, and with fine which shall not be less than two lakh rupees and may extend to ten lakh rupees.

Sub-clause (2) of this clause provides that for accepting Deposits in contravention of clause 3, a deposit taker is punishable with imprisonment for a minimum term of two years which may extend to seven years, and with fine which shall not be less than three lakh rupees and may extend to ten lakh rupees.

Sub-clause (3) of this clause provides that for accepting Deposits in contravention of clause 3 and committing fraudulent default in repayment, a deposit taker is punishable with imprisonment for a minimum term of three years which may extend to ten years and a fine which shall not be less than five lakh rupees which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in such schemes or arrangements.

Clause 22.—This clause relates to the Punishment for contravention of clause 4.

The punishment prescribed for contravention of clause 4 is imprisonment which may extend to seven years or a fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such fraudulent default, whichever is higher, or with both.

Clause 23.—This clause relates to the Punishment for contravention of clause 5.

The punishment prescribed for contravention of clause 10 is imprisonment for a minimum term of one year which may extend to five years and with fine which may extend to ten lakh rupees.

Clause 24.—This clause relates to the Punishment for repeat offenders.

This clause provides for a higher and more stringent punishment for repeat offenders who commit an offence after having previously been convicted for an offence under this legislation, except for an offence under clause 26. A repeat offender, under this clause, shall be punishable with imprisonment for a minimum term of five years which may extend to ten years and a fine which shall not be less than ten lakh rupees and which may extend to fifty crore rupees.

Clause 25.—This clause relates to Offences by deposit takers other than individuals.

Sub-clause (1) of this clause provides for imposition of liability in case an offence under the Act has been committed by an entity other than an individual. This sub-clause imposes liability on every person who is “in charge of, and was responsible to, the deposit taker for the conduct of the business of the company”.

Sub-clause (2) of this clause provides that nothing contained in sub-clause (1) shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.

Sub-clause (3) of this clause provides for holding liable any director, manager, secretary, promoter, partner, employee or other officer of the deposit taker when it is proved that an offence has been committed with the consent or connivance of, or is attributable to an any neglect on the part of such person.

Clause 26.—This clause relates to Punishment for contravention of clause 10.

This clause provides that whoever fails to give the intimation required under sub-clause (1) of clause 10 or fails to furnish any such statements, information or particulars as required under sub-clause (2) of that clause, shall be punishable with fine which may extend to five lakh rupees.

Clause 27.—This clause relates to Cognizance of offences.

This clause provides that notwithstanding anything contained in clause 4, no Designated Court shall take cognizance of an offence punishable under that section except upon a complaint made by the Regulator, provided that the provisions of clause 4 and this section shall not apply in relation to a deposit taker which is a company.

Clause 28.—This clause relates to Offences to be cognizable and non-bailable.

This clause provides that notwithstanding anything contained in the Code of Criminal Procedure, 1973 every offence punishable under this Act, except the offence under clause 22 and clause 26, shall be cognizable and non-bailable.

Clause 29.—This clause relates to Competent Authority to be informed of offences.

This clause provides that the police officer shall, on recording information about the commission of an offence under this Act, inform the same to the Competent Authority.

Clause 30.—This clause relates to Investigation of offences by Central Bureau of Investigation.

Sub-clause (1) of this clause provides that the Competent Authority has the power to refer a case for investigation by the Central Bureau of Investigation if the two conditions prescribed in sub-clauses (a) and (b) are met.

Sub-clause (2) of this clause provides that the reference under sub-clause (1) is deemed to be with the consent of the State Government under clause 6 of the Delhi Special Police Establishment Act, 1946.

Sub-clause (3) of this clause provides that on the receipt of the reference under sub-clause (1), the Central Government may transfer the investigation of the offence to the Central Bureau of Investigation under clause 5 of the Delhi Special Police Establishment Act, 1946.

Clause 31.—This clause relates to Power to enter, search and seize without warrant.

Sub-clause (1) of this clause empowers a police officer, not below the rank of an officer-in-charge of a police station, and with the written authorisation of an officer not below the rank of Superintendent of Police, to enter and search any building, conveyance or place, in accordance with the procedure mentioned in the said sub-clause.

Sub-clause (2) of this clause provides for freezing such property, account, deposits or valuable securities maintained by any deposit taker about which a complaint has been made or credible information has been received or a reasonable suspicion exists of their having been connected with the promotion or conduct of any deposit taking scheme or arrangement in contravention of the provisions of this Act.

Sub-clause (3) of this clause provides for situations where an officer takes down any information or makes any order in writing under any of the preceding sub-clauses. The officer is mandated to send a copy of the information taken down or the order made to the Designated Court within seventy-two hours in a sealed envelope. The owner or occupier of the place shall be furnished a copy of such information or order, free of cost, upon an application made by them in this regard.

Sub-clause (4) of this clause clarifies that the provisions of the Code of Criminal Procedure, 1973 shall apply to any search, seizure or arrest made under this section.

Clause 32.—This clause relates to Application of the Code of Criminal Procedure, 1973 to proceedings before Designated Court.

Sub-clause (1) of this clause provides that the Designated Court may take cognizance of offences under this Act even without the accused being committed for trial. The intended effect of this sub-clause is to ensure speedy and expeditious disposal of cases under the Act.

Sub-clause (2) of this clause clarifies that the provisions of the Code of Criminal Procedure, 1973 shall apply to all arrests, searches and seizures and to all the proceedings under this Bill, and that the Designated Court shall be deemed to be a Court of Session and a person conducting prosecution before such Court would be a Public Prosecutor.

Clause 33.—This clause relates to Publication of advertisement of Unregulated Deposit Scheme.

This clause provides that any newspaper or publication containing material or advertisement relating to an Unregulated Deposit Scheme may be directed by the State Government to publish a full and fair retraction of the material or advertisement free of cost. It also provides that the retraction should be published in the same manner and in the same position as the alleged material or advertisement on Unregulated Deposit Scheme.

Clause 34.—This clause relates to this Act to have overriding effect.

This clause provides that save as otherwise expressly provided in this Act, the provisions of this Act shall have effect notwithstanding anything contained in any other law for the time being in force, including any law made by any State or Union territory.

Clause 35.—This clause relates to Application of other laws not barred.

This clause provides that the provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.

Clause 36.—This clause relates to Protection of action taken in good faith.

This clause provides that no suit, prosecution or other legal proceedings shall lie against the appropriate Government or the Competent Authority or any officer of the appropriate Government for anything which is in good faith done or intended to be done under this Act or the rules made thereunder.

Clause 37.—This clause relates to Power of Central Government to make rules.

This clause empowers the Central Government to make rules for carrying out the provisions of the proposed legislation.

Clause 38.—This clause relates to Power of State Government, etc. to make rules.

This clause empowers the respective State Governments to make rules for carrying out the provisions of the proposed legislation.

Clause 39.—This clause relates to Laying of rules.

This clause provides for laying of the rules by the Central Government and State Governments in the respective legislature.

Clause 40.—This clause relates to Power to remove difficulties.

This clause empowers the Central Government to make such provisions and issue clarifications as may be required for the proper and effective functioning of the Bill. This is a time-bound provision and the Central Government cannot take such measures for removal of difficulties after the expiry of three years from the commencement of this Bill.

Clause 41.—This clause relates to Power to amend First Schedule.

This clause allows the Central Government to add or omit from First Schedule any scheme or arrangement by notification.

Clause 42.—This clause relates to Amendment to certain enactments.

This clause provides that the enactments listed in the Second Schedule will stand amended in the manner prescribed in the Schedule.

FINANCIAL MEMORANDUM

The Bill has no financial implications and does not involve any expenditure of recurring or non-recurring nature from the Consolidated Fund of India.

MEMORANDUM REGARDING DELEGATED LEGISLATION

Clause 37 of the Bill empowers the Central Government to make rules for carrying out the provisions of the Act. The matters in respect of which the rules may be made, inter alia, include (a) the information and other particulars to be taken into consideration before issuing an order, and the manner of attachment, under sub-section (3) of section 7; (b) information to be shared under sub-section (2) of section 9; (c) the form and manner in which and the time within which the intimation shall be given under sub-section (1) of section 10; (d) the particulars contained in the application to be filed by the Competent Authority before the Designated Court under sub-section (1) of section 14; (e) the procedure to be adopted by the Designated Court before issuing an order under sub-section (3) of section 15; and (f) the manner of publication of advertisement under section 33.

Clause 38 of the Bill empowers the State Government to make rules, in consultation with the Central Government, for carrying out the provisions of the Act. The matters in respect of which the rules may be made, inter alia, include (a) the ceiling for self-help groups under clause (j) of sub-section (4) of section 2; (b) ceiling and purpose of collection of other amounts which will not be classified as deposits for the purposes of this legislation, under clause (k) of sub-section (4) of section 2; (c) the manner of provisional attachment of property by the Competent Authority under sub-section (3) of section 7; (d) powers of the Competent Authority under clause (f) of sub-section (4) of section 7; and (e) rules relating to impounding and custody of records under sub-section (8) of section 7.

Clause 41 empowers the Central Government to add or omit schemes or arrangement to or from the list of Regulated Deposit Schemes specified in the First Schedule of the proposed legislation.

The matters in respect of which rules may be made are matters of procedure and administrative detail and it is not practicable to provide for them in the Bill itself. The delegation of legislative power is, therefore, of a normal character.

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