Checking Ponzis

Mohan R Lavi | Updated on January 20, 2018 Published on March 24, 2016


Regulation, not ban, is the best remedy

In February 2014, the boss of the Sahara group, Subrata Roy, was arrested on orders of the Supreme Court for failing to repay money collected from depositors. In December 2014, the creators of the Saradha scam were arrested by the CBI for running a fraudulent chit scheme. The boss of Amway India, William S Pinckney, was arrested (twice) by local police. The incidents clearly illustrate the issue on regulating Ponzi Schemes — in the absence of a single and strong regulatory law, anyone can take action they deem fit.

A banning Bill

The government is proposing a Bill — ‘Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interest Bill, 2015’. It proposes penalties, including imprisonment for a minimum of three years, which can be extended to 10 years, and a fine that may be twice the aggregate funds collected from subscribers in such schemes.

The proposed law defines ‘deposit’ as money taken by way of advance or loan or any other form and returned in a specified period or otherwise in cash or kind or in the form of a specified service with or without any benefit — interest, bonus, profit or any other form.

All unregulated deposit schemes will come under this law. For default in repayment/return of deposits on maturity, the new legislation proposes jail up to seven years or fine of not less than ₹5 lakh which can be raised to ₹25 crore or three times the amount of profits made out of such defaults.

The new law also proposes setting up an empowered committee for arbitration in case of any dispute over the jurisdiction of regulators over a particular scheme.

No doubt, there is a dire need to regulate Ponzi Schemes strongly. But the proposed legislation starts off on a false note by using the word ‘banning’ instead of ‘regulate’. When a legislation has the word banning in its title, it is but natural that the other pieces of the legislation will be constructed on banning an activity rather than regulating it.

Loose definitions

Further, the word deposit has been very loosely defined — it is imperative that the law gives an indicative list of what would be termed deposits and what would not. The Companies Act, 2013, started the trend of regulations in India levying extremely high penalties and threatening to imprison offenders at every given opportunity.

The proposed legislation follows this path. While laws should provide a deterrent for unscrupulous elements to use it as they please, putting in clauses on heavy fines or imprisonment only for the sake of it serves no purpose? It would be interesting to see how much of maximum penalties have been levied as per the provisions of the Companies Act, 2013.

With a view to protect depositors, the Companies Act, 2013, rewrote the provisions on acceptance of deposits. Over a period of time, some of these provisions were whittled down. If a similar situation should not recur with the Ponzi Schemes Bill, the law should be drafted accordingly.

The proposed Bill on Ponzi Schemes can do this by providing illustrative examples of what would constitute deposits and stating that a person found guilty under this Act would be barred from doing any business in money for a decade.

Imprisonment and monetary fines would depend on the scale of the offence. Offenders would be deterred only if actual instances of action taken against offenders are in the public domain.

The writer is a chartered accountant

Published on March 24, 2016
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