Proposed law on ponzi scheme to hurt crowdfunding for startups: Panel
A proposed legislation to check Ponzi schemes will make crowdfunding illegal and financing for startups difficult in its present form unless the concept of an “unregulated deposit” is explicitly defined in the bill, a parliamentary panel has said.Updated: Jan 17, 2019 00:11 IST
A proposed legislation to check Ponzi schemes will make crowdfunding illegal and financing for startups difficult in its present form unless the concept of an “unregulated deposit” is explicitly defined in the bill, according to M Veerappa Moily, chairman of the parliamentary standing committee on finance.
The Banning of Unregulated Deposit Schemes Bill, 2018, which aims to check unscrupulous entities from cheating gullible investors, was introduced in the Lok Sabha in July last year. It was subsequently referred to the parliamentary committee headed by Moily for vetting. The committee submitted its recommendations on the bill to the Parliament earlier this month, on January 3.
While appreciating the intent of the bill, the panel expressed its concern over unbridled powers the proposed law gives to enforcement agencies and field staff by not defining “unregulated” deposits explicitly.
Crowdfunding entails raising small amounts of capital from a large number of people to finance a new venture, making use of the easy accessibility of vast networks of people through social media and investor websites.
“In India, the angel ecosystem is not well defined. Their funding cheque-sizes are often very small. Most of the investors are now consolidating their investments instead of funding more number of startups. The global ecosystem is well ahead of us. At this point in time, a bill in its present form can have negative impact on startups. This is the time for India to nurture startups,” said Subhadeep Bhattacharyya, co-founder, jubi.ai, a Mumbai-based tech startup.
According to the bill, barring deposits that are regulated by regulators, all other fund-raising activities fall within the definition of “unregulated” deposits.
Legitimate deposits, according to the bill, are overseen by watchdogs such as the Securities & Exchange Board of India (SEBI), Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), National Housing Bank, Pension Fund Regulatory and Development Authority, Employees’ Provident Fund Organisation, the ministry of corporate affairs and schemes offered by state governments.
The committee finds the definition ambiguous and prone to harassment and misuse. “There are also financing arrangements and channels of financing, involving entities in the informal sector including startups and small entrepreneurs, which may by ‘default’ fall under the ambit of ‘unregulated scheme’ due to absence in the Bill of a coherent, clear-cut definition of ‘unregulated’,” the report said.
“We have submitted our recommendations. Now, it is up to the government to apply its mind and accept or reject our recommendations,” Moily said.
Shruti Rajan, a partner at the law firm Cyril Amarchand Mangaldas said that while the law can have an impact on crowd funding to kick-start businesses, such funding of charitable ventures is unlikely to be affected. “The solution to that could be to introduce exceptions based on ticket size, nature of the investor, etc in this bill. But as and when SEBI introduces a regulatory structure for crowd funding, one would have to go back to this legislation and bring in necessary amendments as well,” she said.
In a submission to the panel, the finance ministry justified the government’s move to keep the definition residual. “If unregulated deposit schemes were to be defined by characteristic or features, then the possibility is always there that some illegal operators may deliberately disguise schemes to escape the provisions of the bill,” it said.
The committee, however, expressed apprehension that this bill could end up leaving “unfettered discretion” to enforcement authorities in the backdrop of the fact that there are a large number of gullible people who depend on small short-term credits or deposits to meet needs, including “trade advances, which are effectively deposits, and the vast informal banking sector”.
Rajan said the legislation has to be seen against the backdrop of an existing regulatory environment that led to ponzi schemes such as Rose Valley and Sharada in West Bengal in which thousands of investors lost money. “A law like this, therefore, only reinforces the importance of protecting that last-mile investor/depositor,” she said.
“Once it becomes law, the bill does not prohibit fund-raising from NBFCs (non-banking financial companies), MFIs (microfinance institutions), etc, even where formal banking channels are not available. In a way, this will also encourage small ventures to seek formal lines of credit rather than unorganised pools of capital for funding. All this serves the larger financial inclusion goal very well,” she said.
She proposed some exceptions. “Like we discussed with crowd funding, the government can consider including exceptions based on the ticket size, sophisticated nature of the investor, etc to allow small start-ups to create innovative funding structures that do not inadvertently trip up on this legislation,” she said.
First Published: Jan 16, 2019 10:17 IST