The depositors of unregulated deposit schemes and BUDS Act, 2019

    09-Jun-2022
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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.
(To be contd)