Column | High time Kerala nipped financial frauds with BUDS

financial-fraud
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The collapse of a Pathanamthitta-based private finance company in Kerala, in which thousands of ordinary people have lost their savings, is the latest in a long line of such developments which have been rocking the State seasonally for several years. 

Going by the State’s track record, this may not be the last too as Kerala’s per capita income has been higher than most other States and the remittances from West Asia have led to investible surpluses in people’s hands.

But it is high time Kerala put legal systems in place to prevent such financial crimes so that housewives, single women and the aged are not duped of their life’s savings, lured only by the promise of higher returns, herd mentality and the image of a “friendly neighbourhood deposit-taker”.

The framework for such a legal bulwark is provided by the recently enacted Banning of Unlawful Deposits Schemes (BUDS) Act of 2019, enacted in July last year (Act 21 of 2019)  and the Rules for which have been notified by the Union Government in February, 2020.

This is a comprehensive law which can make a big difference especially in Kerala and sooner the State government acts on it, the better it would be for the public.

According to BUDS Act, it would be illegal for any person or company to accept deposits unless it is under schemes regulated by entities like RBI, SEBI, Insurance Regulatory Authority or schemes operated under Acts of the State Government like the Cooperatives Act or the Chit Funds Act. In short, deposits from the public cannot be accepted unless the schemes are regulated by some legal provisions.

The mere act of raising deposits has been made a cognisable and non-bailable offence under this Act.

With the coming into force of the BUDS Act, how do we ensure that nobody raises deposits from the public as it was done by the Finance Companies in Pathanamthitta?

The BUDS Act mandates the following to be done by the State Government.

1. The State Government has to appoint one officer not below the rank of Secretary as the Competent Authority under BUDS Act. 

2. It may also appoint one or more Officers to assist this Authority in discharging its functions

3. The Competent Authority will have quasi-judicial powers to conduct investigations if it comes to know that entities are raising deposits unlawfully or illegally, outside of any Regulated Deposit schemes.

4. With the concurrence of the Chief Justice of the Kerala High Court, the government should constitute one or more Designated Courts (like Special Courts) for trying offences under this Act.

5. The Competent Authority mentioned above has wide-ranging powers to attach assets and property owned by offenders, who have raised unregulated deposits, and pay the amounts to depositors. The payment to depositors will have a claim even above dues to the State government like taxes/cess, subject to certain conditions.

6. The Union Government is responsible for creating a centralised database of regulated deposit takers operating in India.  All regulated entities including banks are required to furnish information on their deposit schemes to this entity. The objective seems to be that the Competent Authority appointed by the State government will use this database and any deposits being mobilised, which does not get reported in this database, would be illegal.

7. Even advertisements carried by the media of entities which are unregulated will be curbed as per the BUDS Act. If any newspaper of TV channel carries an advertisement of an unregulated deposit scheme, the State Government has the powers to direct the media to publish a retraction, which can be proportionate to the advertisement, free of cost

8. The punishment for raising deposits and acting fraudulently is a prison term which may extend up to 10 years in addition to fines.

9. The Act provides for punishment for fraudulent default in the case of Regulated Deposit Schemes too.

10. The maximum period prescribed for the conclusion of proceedings by the Designated Courts at the State level is 180 days from the date of application by the Competent Authority for completion of proceedings.

Given the propensity of the public in Kerala to get lured by schemes offering high returns, the only defence against financial frauds and defalcation of depositors’ funds is awareness among the public that none of the deposits, except those with banks regulated by RBI, enjoy any protection of their deposits. 

Bank deposits are insured up to Rs 5 lakh per depositor per bank, whereas deposits with companies and chit funds are not insured at all. It has always puzzled me why people do not take as much care in placing their deposits as they do while buying a TV or even a mobile phone. Would anybody buy an unknown brand just because it is cheap? In the same way, the mere fact of high returns should put people on guard that something is amiss when it comes to deposit schemes. 

The implementation of the BUDS Act by the State will go a long way in preventing serious financial frauds from happening here again, though ultimately it is “caveat emptor” here too, like in other goods and services. 

(S. Adikesavan is a top executive with a public sector bank. Views are personal)

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