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Karnataka appoints Regional Commissioner to compile status of ponzi cases

Topics Covered: Money laundering related issues.

Karnataka appoints Regional Commissioner to compile status of ponzi cases:


Context:

In a bid to protect the depositors’ interest in Ponzi schemes run by financial companies, against whom cases have been registered, and monitor cases pending in various courts, the State government has appointed Bengaluru Regional Commissioner to compile the status of all cases that have been filed in the State and coordinate with the district administration.

Background:

The order comes in the light of the Reserve Bank of India identifying 118 finance companies in the State and seeking action against them under:

  1. The Karnataka Protection of Interest of Depositors in Financial Establishment Act, 2004.
  2. Banning of Unregulated Deposit Scheme Act, 2019.

Need for such protective measures:

The finance companies running ponzi schemes could dupe investors completely and if movable and immovable properties belonging to these companies are not attached, there is a possibility that investors’ interest cannot be protected since these properties could be sold.

Ponzi Scheme:

  • A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
  • The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds.
  • The scheme is named after Charles Ponzi, who became notorious for using the technique in the 1920s.

Key Provisions in the Banning of Unregulated Deposit Schemes Act, 2019:

  1. Substantive banning clause which bans Deposit Takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme.
  2. Creation of three different types of offences, namely, running of Unregulated Deposit Schemes, fraudulent default in Regulated Deposit Schemes, and wrongful inducement in relation to Unregulated Deposit Schemes.
  3. Severe punishment and heavy pecuniary fines to act as deterrent.
  4. Provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
  5. Attachment of properties / assets by the Competent Authority, and subsequent realization of assets for repayment to depositors.
  6. Creation of an online central database, for collection and sharing of information on deposit-taking activities in the country.

InstaLinks:

Prelims Link:

  1. What are Ponzi Schemes?
  2. How are they regulated?
  3. Role of RBI.
  4. Key Provisions in the Banning of Unregulated Deposit Schemes Act, 2019.

Mains Link:

Enumerate the key features of the Banning of Unregulated Deposit Schemes Act, 2019.

Sources: the Hindu.