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Investors may get priority in deposit scheme recoveries
Some have suggested that a committee comprising representatives of regulators such as the Reserve Bank of India (RBI) and Sebi be formed to keep a tab on suspicious market schemes.
The National Democratic Alliance (NDA) government is considering more effective safeguards to protect the interests of depositors by ensuring that when legal action is taken against a fraudulent deposit scheme, and its assets are being liquidated, investors receive priority over other stakeholders such as creditors and tax authorities, according to finance ministry officials.
The changes are likely to be incorporated in The Banning of Unregulated Deposit Schemes Bill, aimed at checking ponzi schemes and chit fund frauds.
The government is also considering a move to expand the definition of “deposit” beyond money to any valuable commodity, including gold, said an official familiar with the matter.
Market regulator Securities and Exchange Board of India (Sebi) has been seeking several changes in the legislation, including better ways of safeguarding depositors’ interests, amid a debate on whether the regulators or state governments should be given more powers to tackle fraud.
Some have suggested that a committee comprising representatives of regulators such as the Reserve Bank of India (RBI) and Sebi be formed to keep a tab on suspicious market schemes. Some lawmakers, especially those belonging to regional political parties, want wider powers for state administrations on grounds that it is the states that have to deal with fallout of any market scam.
“Deposit should not only mean money but also any valuable commodity received by any deposit taker with the promise of return after a specified period,” said a government official who did not wish to be named because the Bill is still under consideration by Parliament.
The Union government first envisaged a law to tackle ponzi scams in the wake of the Rose Valley and Saradha deposit taking scams in West Bengal in 2013. Finance minister Arun Jaitley, in his budget speech for 2016-17, declared the government’s intent to introduce a law to curb illicit deposit schemes.
This Bill provides for a complete ban on deposit-taking schemes that are not registered with competent regulators such as the RBI, Sebi, ministry of corporate affairs or state governments as the case may be, depending on the nature of the scheme. It provides for creating a competent authority and courts by the state government that will deter deposit scheme frauds or defaults with stringent punishment .
“The best way to safeguard depositors’ interests would be to completely ban any scheme that promises ‘assured returns’ above the market threshold limit. Schemes that promise doubling of deposits should always be scrutinised because it is not possible to give returns above the market yield curve,” said Kuntal Sur, partner and leader, financial services risk and regulation, PwC India.
Given the priority assigned to safeguarding the interests of depositors, the government is also considering amending the Bill to allow an aggrieved depositor to sue a registered deposit taking company in case of default. Under present rules, only the regulator can initiate action against a registered company.
“The proposal is well intended but expanding the scope to non-money considerations may be both unnecessary and non-implementable. It may also be unnecessary, as it is not a common practice to take cows or pans as part of a ponzi scheme. The proposals may be difficult to implement as it will be nearly impossible to enforce. The other provisions giving higher rights to depositors are welcome and the banning of products which do not have supervisory regulator are all welcome moves,” said Sandeep Parekh, founder, Finsec Law Advisors.
