By Sravya Vemuri
The Indian Union Cabinet has approved the proposal to introduce the Banning of Unregulated Deposits Scheme, 2018, which might be introduced in the parliament in the post-recess session next month.
Curbing Ponzi schemes
The bill is seen as an important instrument to curb the ongoing Ponzi schemes in India. A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme, in that both are based on using the funds of new investors to pay off the earlier backers.
The Indian government has already equated Bitcoin and cryptocurrencies with Ponzi schemes. It was already announced in the Budget that the government will take all measures to eliminate the use of crypto-assets in financing illegitimate activities.
On Bitcoin transactions
Though there is no exclusive mentioned of words like Bitcoin in the draft bill, the explanatory notes state that any specified service, either in cash or kind, provided under unregulated deposit schemes can accompany Bitcoin transactions. The bill also empowers authorities to take strict actions against organisations dealing with cryptocurrencies.
Dealing with illicit deposits
The bill provides a comprehensive framework to deal with the problem of illicit deposits in the country. The bill completely prohibits any unregulated deposit-taking activity. Any organisation or individual indulging in the promotion or operation of such activities will be punished. Stringent punishment will be awarded to those who indulge in fraudulent default in repayment to depositors. The state governments will have to designate a competent authority to ensure the repayment of deposits in the event of default by a deposit-taking establishment.
The bill creates 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 bill would ban unregulated deposit-taking activities altogether by making them an offence ex-ante while the existing framework comes into effect ex-post, and with a considerable amount of time duration in the process.
Protecting investors
Investor protection is crucial for companies to raise the capital needed to grow, innovate, diversify, and compete. Without investor protections, equity markets fail to develop and banks become the only source of finance. If laws do not provide for such protections, investors may be reluctant to invest, unless they become controlling stakeholders.
The bill proposed the creation of an online 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 comes at a time when the government is under pressure, owing to the two baking frauds that have recently come to the fore. The bill is a welcome step to protect small investors. Such investor protection will help increase the number of investments flowing into the economy. In the long run, this would have an implication on the savings of the citizens. They tend to save more and invest it when they are guaranteed to gain from the same.
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