The depositors of unregulated deposit schemes and BUDS Act, 2019

Kh Surajfrengko Singh *

Introduction:

This is not a new situation where the trust of a long standing relationship between the depositors/investors and the deposit taking company/companies or the financial entities become unreliable. As long as the profits, dividends and particularly the assured interest in respect of the total deposited amount is paid to the depositors by the not so regulated financial entities, there is no issue or challenges since the depositors are deriving profits.

However, the deposit taking company eventually tries to diversify its operations of business with the accumulated larger amount thus received and collected from the depositors. As we keep on witnessing some of the not so regulated Financial Entities or the so called Deposit Taker company trying their luck to generate profits by establishing Cab Services, News Channel, drinking water business, running of Hospital, Supermarkets, School, Flour Mill Production and investing in the Share Market etc.

It appears that the Financial Entities or the companies lack appropriate guidance and it lacks professional advices. They do not seem to give priority in seeking consultations from the reputed consultants. Moreover, no suggestions or feedbacks seemed to have been taken from the depositors. The Financial Entities’ success rate goes on declining with the risks they keep on taking without proper market survey, research and analysis.

The diversification in business is always a good step yet the diversification should be done appropriately in consultation with the business analysts. The attitude of over-confidence boosted and backed by the incessant cash deposits inflow from the hard-earned money of the depositors perhaps is the initial phase of the gradually breaking down of the Financial Entities. Their misadventure is not limited to expansion of business areas however, it is sometimes seen to be extended to the formation of political parties.

DEPOSIT SCHEMES TURNING INTO PONZI SCHEME: A BACKGROUND

With less number of depositors and their deposits, it was earlier very convenient to manage the payouts. As long as depositors receive their assured payments on time, they would make no complaint and be rest assured. With the rise in unemployment and rampant corruption in particular aspect of getting employment, which is invisible, unproven yet apparently in existence for a long time, trigger the depositors to become prey or victim at the hands of the not so regulated Financial Entities for the generation of certain income as a means of sustainable livelihood.

The funds and the little savings received from local/traditional Scheme (Marup), sometimes a personal loan from a bank, pension benefits, funds derived from the sale of personal or ancestral properties etc had become a first choice for the depositors to deposit looking for generation of income. Undoubtedly, these are the bonafide and hard earned money of the depositors. There is perhaps a very few number of depositors whose income is derived from illegal activities yet this is not proven and just a mere assumption.

By assuming that there is such class of depositors, then it would have been certainly a boon for them since the Financial Entities do not seek for the proof of income such as (i) Audited Account Statement, (ii) Balance sheet duly prepared and certified by a Firm of Chartered Accountants, (iii) Income Tax Returns documents, (iv) Annual Bank Account statements etc and any other such evidences.

Therefore, if such practice was adopted, then it is a clear sign of running an unregulated deposit scheme thereby practicing an act of turning the black money into white money. The rate of interest is surprisingly higher and attractive ranging from 36% per annum to 60% per annum approximately. The highest interest rate per annum as decided from time to time by the Nationalized banks complying all relevant rules approximately ranges from 4% to 12% per annum, which also keeps on fluctuating.

Now, such a higher rate of interest assured to be given by the Deposit Taker Company is questionable in the eyes of any regulatory bodies, competent to evaluate and regulate in India. It is never a money chain market on the part of the depositors. They only wished and wanted the next depositor to generate income for livelihood.

POSSIBLE FACTORS FOR ADOPTING PONZI SCHEMES:

(1) The misadventures in the diversification of business operations.
(2) Difficulties in the management of payment particularly for the depositors with larger amounts.
(3) Involvement in the financially non-performing activities such as politics etc.
(4) Decrease in the cash inflow derived from businesses.
(5) Share market being like a gambling and it sometimes incurs heavy losses.
(6) Prolonged pendency of project implementation due to lengthy official processes.
(7) Trust deficit and withdrawal of deposited amount by the depositors.
(8) Extra luxurious and lucrative incentives to the Directors or Board of Directors. This is just a presumptive factor.
(9) Mushrooming number of similar Financial Entities, which are not so regulated.
(10) Inability to recover losses because of defaults in payment from the borrowers/entrepreneurs/business enterprises.
(11) Purchases of assets.

Since the execution of payout for all the depositors on the register of the Financial Entities became essential despite all the issues faced by the Financial Entities, it might have become extremely difficult to manage the payment. Therefore, the cash inflow from the recently collected deposits from the depositors seemed to have been utilised for the payment. From this moment onwards, it has turned into a Ponzi Scheme.

The question is as to how long the Ponzi Scheme would survive and last. It has to have a final breaking point, which is now being witnessed in our tiny State. This breaking point breaks the hearts of the depositors and deposit takers.

THE BANNING OF UNREGULATED DEPOSIT SCHEMES ACT, 2019:

The banning of Unregulated Deposit Schemes Act, 2019 (herein under referred to as BUDS Act, 2019 in the article) became an Act on the 31st July, 2019. It is indeed a boon to all the aggrieved depositors who have deposited in the unregulated deposit schemes. With the BUDS Act, 2019 coming into force, a hope for the depositors is revived.

Basically, it is an Act to provide for a comprehensive mechanism to ban the unregulated deposit schemes, other than deposits taken in the ordinary course of business, and to protect the interest of depositors and for matter connected therewith or incidental thereto.

RELEVANT SECTIONS OF THE BUDS ACT, 2019 IN BRIEF:

(i) Section 3 of the Act speaks about the banning of the unregulated deposit schemes and further highlights that deposit taker should not directly or indirectly promote, operate, issue any advertisement soliciting participation or enrolment in or accept deposits in pursuance of an Unregulated Deposit Scheme.

(ii) Section 4 of the Act explains that no deposit taker should default in the repayment or return of deposit on maturity or rendering any specified service promised against such deposit.

(iii) Under Section 7 of the BUDS Act, 2019, there is a provision of appointment of the Competent Authority to take up the matters.

As per Notification No. 3/366/2018-D/IF dated 4th August, 2021, the Government of Manipur has appointed 4 (Four) Officers as Competent Authorities thereby assigning districts as below:-
Sl. No. Competent Authority District
1. Commissioner (Revenue) Bishnupur, Thoubal
2. Commissioner (Art & Culture) Imphal East, Imphal West
3. Commissioner (Works) Churachandpur, Chandel, Tamenglong, Senapati
4. Commissioner (Power) All other left out districts

The above officers are empowered to take up the matters related to BUDS Act, 2019.

(iv) Sec. 8 speaks about the constitution of Designated Courts.

(v) Sec. 12 of the said Act emphasizes on the priority to be given to the depositors’ dues and repayment.

(vi) Sec. 13 talks about the precedence of attachment- The order of provisional attachment of property passed by the Competent Authority shall have precedence and priority to the extent of the claims of the depositors over any other attachment by any other authority, competent to attach property for repayment of any debts, which are payable to the appropriate Government or the local authority.

(vii) Sec. 14 and Sec 15 of the BUDS Act, 2019 speak about application for confirmation of attachment, sale of property and the confirmation of attachment by the Designated Court.

(viii) Sec. 19 defines the provisions of appeal to the Hon’ble High Court if at all aggrieved by any order.

(ix) Sec. 21 to Sec. 24 highlight the penal provision under the BUDS Act, 2019 of which the punishment involves imprisonment of different terms according to nature of the offences as elucidated in each sections.

CONCLUSION

The author believes that out of many provisions of the BUDS Act, 2019, the above highlighted provisions are some of the very essential ingredients of the Act, which the common men including the depositors will benefit as an eye-opener for their issues at present. The Competent Authority is the most appropriate Authority to be approached for such nature of issues or cases.

The clueless depositors can now have a sigh of relief as they have finally understood whom to approach for issues arising out of the unregulated deposit schemes prevalent in the State. Through this article, an attempt has been made to give certain interpretation of the most essential provisions of the BUDS Act, 2019 though it does not cover the entire provisions of the Act.

It is very important on the part of the aggrieved depositors who have been victimized at the hands of the not so regulated Financial Entities/Deposit Taker that they must approach the Competent Authority by seeking legal assistance from a legal practitioner. The case or the application is recommended to be neatly drafted by seeking the help of a practicing advocate, who shall mention relevant provisions of the Act, compile the evidences accompanied by an affidavit and a Power of Attorney.

The reason for treating such matter just like the Court matter is that it has an opportunity to be further presented to the Designated Court and subject to further appeal to the Hon’ble High Court if aggrieved and deemed necessary. This shall help the Competent Authority to properly investigate the individual matter of the Depositors in course of justice delivery under the Provisions of the Banning of Unregulated Deposit Schemes Act, 2019.