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The Banning of Unregulated Deposits Ordinance, 2019 - for investor protection.

Day by day news are coming out about the vanishing of chit funds, ponzi or pyramid scheme companies, un authorised co-operated societies etc with crores of public money.

Purpose of the ordinance On top of the table everything looks perfect, but when we look under the table the picture is different. Every day when we read news papers, we find news about companies vanishing with public money. some examples are

  1. Some companies in financial services sell their shares, which can only be done after complying with procedures, to specific people and assure guaranteed return. They also assures the buy back, if the investor want to do so.

  2. Selling non convertible debentures like chocolates is another route which need to be regulated. Rules says that NCD can be issued for 18 months and not more than that, but the ground reality is that they are for 3 years of 5 years on renewal basis.

  3. Chit funds accepting deposit from public on assuring huge return, which in no way possible to repay.

  4. Ponzi or Pyramid companies comes out with deposit schemes where they offer unbelievable returns.

  5. Real estate companies taking deposit to complete projects where they are not authorised to accept deposits. Above list is only an indicative list, there are many other cases where the uninformed investors are lured by offering huge returns, to risk their hard earned money and face difficulties

New ordinance is also aimed to control black money transactions. After demonetisation, the situation has become difficult for black money investors to park their funds and they have started using this unauthorised channels to park their funds. The timing of the ordinance also is good, when the bubble is becoming big and the chances of breaking is approaching. There are instances where companies with pyramid schemes offer unbelievable monthly  returns and taking hundreds of crores from the market. In October 2018 one such company closed operation with around 700 crores. This is only one company, many have gone.

"No deposits taker shall directly or indirectly promote, operate issue any advertisements soliciting participation of enrolment in or accept deposits in pursuance of an unregulated deposit scheme, the ordinance explains. The law is aimed at saving the poor and innocent investors who have not financial literacy , of their hard earned savings. the law at any points is not prohibiting individual, Firm, Companies and LLP etc for taking any loan and deposits for their course of business. The ordinance ensures a comprehensive ban on unregulated deposit taking activity. The main aim is to prevent such unregulated deposit schemes or arrangements at their inception and at the same time makes soliciting, inviting or accepting deposits pursuance to an unregulated deposited scheme as punishable offence. Acceptance of unregulated deposits could trigger attachment and freezing of assets and ever imprisonment with fines which may range from Rs 2 lakhs to Rs 50 crores and also imprisonment from 1 year to 10 years. The law also provides for attachment of properties or assets and realise and repay the depositors with time limits.

My take The ordinance in its face is a great step towards investor protection. The law is not intended to prohibit any authorised deposits or loans from related persons or in the course of business. The law is intended to regulate and prohibit unregulated deposit schemes, which is intended to lure the investors with high returns and run away. A welcome move.


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