Central Government Notifies Rules for Banning Unregulated Deposit Schemes

The Central Government, through the Ministry of Finance (Department of Financial Services), issued the Banning of Unregulated Deposit Schemes Rules, 2020, on February 12, 2020. These rules, published in the Official Gazette, came into force on the date of their publication, providing the operational framework for the Banning of Unregulated Deposit Schemes Act, 2019 (21 of 2019). Enacted under the powers conferred by section 37 of the parent Act, the rules aim to establish detailed procedures for the effective implementation and enforcement of the legislation designed to curb illicit deposit-taking activities and protect public depositors.

The newly notified rules define key terms such as "Act," "application," "authority," "Competent Authority" (an authority appointed by the appropriate Government under section 7 of the Act to implement its provisions), and "Designated Court" (a special court constituted by the appropriate Government under section 8 of the Act to adjudicate matters under the Act). A central aspect of the rules outlines the information and particulars that a Competent Authority must consider for provisionally attaching the property of a deposit taker involved in an Unregulated Deposit Scheme (a scheme not regulated by any financial sector regulator, often promising high returns, which the parent Act aims to ban). The legislation provided: “The information and particulars which the Competent Authority shall consider for provisionally attaching the property of the deposit taker shall include, namely:— (a) any complaint against the promotion or operation of an Unregulated Deposit Scheme, whether the complainant is a depositor in the said Unregulated Deposit Scheme or not...” This also extends to information from governments, law enforcement, or advertisements inducing investment in such schemes.

The rules further detail the manner of provisional attachment and administration of provisionally attached property, including serving orders on property owners, publishing orders in leading newspapers, and taking physical possession of movable and immovable assets. The Competent Authority is mandated to maintain records of attached property, assess assets and liabilities of deposit takers, and prepare lists of affected depositors. Provisions also allow for the appointment of valuers and the sale of perishable property in the best interest of depositors. Procedures for impounding and retaining records are established, allowing persons from whom records are impounded to make copies and object to retention, with the Competent Authority empowered to pass orders after a hearing. A significant provision mandates the creation of a Central Database, where a designated authority will operate a public portal containing information on deposit takers in India, actions taken against them, and updates on restitution proceedings for depositors. Deposit takers commencing business are required to submit an intimation to this authority within thirty days and report any changes within the same timeframe. The rules also specify the particulars required for an application to the Designated Court for confirmation of provisional attachment, outline the procedure to be adopted by the Designated Court, and grant authorisation for search and seizure by police officers for investigation into offences under the Act. Finally, the rules empower the appropriate Government to direct the retraction of advertisements promoting Unregulated Deposit Schemes, ensuring such retractions are prominent and published free of cost.

The legislative intent behind these rules is to provide the necessary procedural teeth to the Banning of Unregulated Deposit Schemes Act, 2019, which was enacted to address the significant gaps and limitations in the existing statutory framework concerning illicit deposit-taking activities. Prior to the Act, various state-specific laws and central regulations existed, but a comprehensive central law was needed to effectively ban unregulated schemes nationwide and protect vulnerable depositors from fraudulent practices. These rules fill critical procedural voids by establishing clear enforcement mechanisms, such as the powers and duties of Competent Authorities and Designated Courts, detailed processes for asset attachment and management, and robust information-sharing through the Central Database. They introduce new obligations for deposit takers, requiring transparency and compliance, and empower law enforcement with specific search and seizure authorities. The rules aim to ensure swift and effective action against perpetrators of unregulated schemes, facilitate the restitution of depositors' funds, and enhance public awareness through the central portal and advertisement retraction provisions, thereby strengthening investor protection and financial stability across the country.

Keywords: Unregulated Deposit Schemes, Banning of Unregulated Deposit Schemes Act, Deposit Takers, Provisional Attachment, Central Database, Financial Regulation, Investor Protection, Ministry of Finance, India Geo Tags: India District: Not Applicable