What to Check before depositing your money in any Scheme ?

By | August 6, 2016

1. Which entities are authorised to raise deposits from public?

The entities authorised to accept deposits are given in the table as below:

Sr. No. Category Regulator Additional Comments
1 Commercial and Cooperative Banks Reserve Bank of India (RBI) All Commercial and Co-operative Banks are entitled to accept deposits
2 Non-Banking Finance Companies (NBFCs) RBI Only few NBFCs are authorised to accept deposit upto a certain limit (Click here to view the complete list)
3 Housing Finance Companies (HFCs) National Housing Bank (NHB) Only few HFCs are permitted to accept deposits(Click here to view the complete list)
4 Other Companies Ministry of Corporate Affairs (MCA) Only eligible companies are allowed to accept deposits under Companies (Acceptance of Deposit) Rules, 2014 upto a certain limit (Click here to view the list of the companies which have filed advertisements with the MCA for accepting deposits)
5 Cooperative Credit Societies Registrar of Cooperative Societies (RCS) Can only accept deposits from their voting members
6 Multi State Cooperative Societies Central Registrar of Cooperative Societies Can only accept deposits from their voting members

It is not legally permissible for other entities to accept public deposits.

2. Whether unincorporated bodies can accept deposit?

Unincorporated bodies like individuals, partnership firms, HUF and other association of individuals cannot accept any deposit if they are carrying on any kind of financial business. (Please refer to section 45S of the RBI Act,1934)

3. Can a Co-operative Credit Society accept deposits from the public?

No. They can accept deposits only from their voting members within the limit specified in their bye laws. They cannot accept deposits from nominal/associate members/general public.

4. Can a Salary Earners’ Society accept deposits from the public?

No. These societies are formed for salaried employees and hence they can accept deposit only from their own members and not from others.

5. Can Proprietorship/Partnership Concerns accept public deposits?

No. Proprietorship and partnership concerns are un-incorporated bodies. Hence they are prohibited under Section 45S of the RBI Act, 1934 from accepting public deposits if they are engaged in financial business in any manner.

6. There are many jewellery shops taking money from the public in instalments. Is this amounting to acceptance of deposits?

It depends on whether the money is received as advance for delivering jewellery at a future date or whether the money is received with a promise to return the same with interest, as also on when the jewellery is delivered. The money accepted by Jewellery shops in instalments for the purpose of delivering jewellery within 365 days of receiving the instalment is not deposit. It will amount to acceptance of deposits if in return for the money received, the jewellery shop promises to return the principal amount along with or without interest, or if the jewellery is delivered after more than 365 days of receiving the instalments.

7. What is Collective Investment Schemes (CIS)? Are they regulated?

Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS. Investors do not have day to day control over the management and operation of such scheme or arrangement. SEBI is the regulator of CIS. A company can raise money under this scheme only after registration with SEBI and obtaining a credit rating for its scheme. Please click here for the FAQs on CIS for more details.

8. What is Chit Fund Activity?

Chit Funds activity involves contributions by members in instalments by way of subscription to the Chit and by rotation each member of the Chit receives the chit amount. As per section 45I (bb) of the RBI Act, any subscription to Chit is specifically excluded from the definition of deposit and cannot be termed as deposit. While Chit fund Companies registered with respective State Governments may collect subscription to Chit as above, they are prohibited by RBI from accepting deposits.

9. Whether conducting of Chit Fund business permissible under law?

The chit fund business is governed by Chit Funds Act, 1982 which is a Central Act administered by State Governments. The Chit Fund Companies registered under the Chit Fund Act can legally carry on chit fund business.

10. What are money circulation/Ponzi/ schemes?

Money circulation or Ponzi schemes are schemes promising easy or quick money upon enrolment of members. Income under pyramid structured schemes do not come as much from the sale of products, as they are primarily linked with enrolling more and more members from whom hefty subscription fees are taken. It is incumbent upon all members to enrol more members, and a portion of the subscription amounts so collected is distributed among the members at the top of the pyramid. Any break in the chain leads to the collapse of the pyramid, and the members lower in the pyramid are the ones that are affected the most.

Ponzi schemes are those schemes that collect money from the public on promises of high returns. As there is no asset creation, money collected from one depositor is paid as returns to the other. Since there is no other activity generating returns, the scheme becomes unviable and impossible for the people running the scheme to meet the promised return or even return the principal amounts collected after a certain size. Such schemes inevitably fail and the perpetrators disappear with the money.

11. Whether acceptance of money under Money Circulation / Pyramid structured schemes is allowed?

No. Acceptance of money under Money Circulation / Pyramid structured schemes and Ponzi schemes is not allowed as acceptance of money under any scheme is a cognizable offence under the Prize Chit and Money Circulation (Banning) Act, 1978 and are hence banned. Collecting money under such schemes are prohibited under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The Act prohibits any person or individual to promote or conduct any prize chit or money circulation scheme or enrol as member to its schemes or anyone to participate in it by either receiving or remitting any money in pursuance of such chit or scheme.

The concerned State Governments are responsible for initiating action for violation of the provisions of this Act

12. What if someone operates such a scheme as above?

Any information/grievance relating to such schemes should be given to the police / Economic Offence Wing (EOW) of the concerned State Government. If information on any such scheme is brought to the notice of this forum, the same will be informed to the concerned State Government authorities.

13. Companies registered with MCA but not registered with any other Regulator also sometimes default in repayment of deposit/ amounts kept with them? What is the recourse available to the investors in such an event?

The companies registered under the provisions of the Companies Act and not registered with any other Regulator, may accept deposits under Companies (Acceptance of Deposit) Rules, 2014 prescribed by MCA. The cases of default in repayment of deposit by such companies are dealt with by the concerned Registrar of Companies (RoC) and National Company Law Tribunal (NCLT). The complaints relating to irregularities of such companies should be promptly lodged with RoC concerned for initiating corrective action. The affected persons could also approach the Consumer Fora or Civil Courts or file a police complaint.

14. What precautions should be taken by the public when someone offers a Scheme that offer high rates of interest / return?

Before investing in any scheme/ financial products, the investors must ensure that the entity offering such returns is registered with one of the financial sector regulators and is authorized to accept public deposit, whether in the form of deposits or otherwise. Investors must generally be careful if the interest rates or rates of return on investments offered are very high. Typically, such entities will either indulge in high risk business (to generate higher returns) or they have fraudulent intention from the beginning. As such, the public should forewarn themselves that the likelihood of losing money is high in schemes that offer very high rates of interest / return.

15. Who can the Depositor/Investor turn to in case of grievances?

The two Charts given at Annex I and II show activity wise regulatory jurisdiction. The complaints may accordingly be addressed to the concerned regulator. If the activity is a banned activity, the aggrieved person can approach the State Police/Economic Offences Wing of the State police, and lodge a complaint.

16. There are cases of unscrupulous entities cheating public time and again. How can members of the public bring such instances to the notice of the Regulators / Law Enforcement Authorities?

Members of public can contribute a great deal by being vigilant and providing information immediately if they come across any entity accepting deposits unauthorisedly. They can provide information here. The Regulators / Law Enforcement Authorities examine the references which are received through complaints or market intelligence by them.

17. What is the role of National Company Law Tribunal (NCLT) in protecting the interest of depositors? How can one approach it?

When a company fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the National Company Law Tribunal (NCLT) either on its own motion or on an application from the depositor, directs by order the Company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order.

18. What is the purpose of enacting “ State Protection of Interest of Depositors in Financial Establishments Act” (PID) by the State Governments?

The purpose of enacting this law is to protect the interests of the depositors in Financial Establishments as mentioned in the Acts. The PID Acts, wherever enacted and notified, have the provision to effect recovery by attachment and sale of assets of the defaulting companies, entities or their officials. The Acts make wilful default of non-repayment of deposit or accrued interest or failure to provide service as promised etc. an offence. Under the Act, the State Governments have been given vast powers to attach the property of such entities, its promoter, director, partner or manager or member and dispose them off under the orders of designated courts and distribute the proceeds to the depositors.

19. What is a Non-Banking Finance Company (NBFC)? Which are the NBFCs specifically authorized by RBI to accept deposits?

An NBFC is a Financial Institution, which is a company or a non banking institution for Lending or Investment but does not include any institutions which carry on its principal business as agriculture activity, industrial activity, trading and purchase or sale of immovable properties.( Pl. refer to section 45IA(f) of the RBI Act. Only a few NBFCs are authorized to accept deposits from public. Please click here for the list of the NBFCs which are authorized to accept deposits. At times, some companies are prohibited from accepting public deposits. click here for the list of the Deposit taking NBFCs which are prohibited from accepting deposits from the public. The Reserve Bank keeps both these lists updated. Members of the public are advised to check both these lists before placing deposits with NBFCs.

20. What is the rate of interest and period of deposit which NBFCs can offer?

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

21. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

1. Only select, specifically authorised NBFCs can accept deposits.

2. NBFC cannot accept demand deposits;

3. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

4. Deposits in the Bank are insured by Deposit Insurance and Credit Guarantee Corporation under its deposit insurance facility. However, the same facility is not available to deposits with NBFCs.

5. NBFCs cannot accept deposit and offer interest beyond the limit prescribed by RBI.

22. What precautions should a depositor take before placing deposit with an NBFC?

A depositor wanting to place deposit with an NBFC must take the following precautions before placing deposits:

1. To ensure that the NBFC is registered with RBI and specifically authorized by the RBI to accept deposits. A list of deposit taking NBFCs entitled to accept deposits is available at www.rbi.org.in → Sitemap → NBFC List. The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits, which is available at www.rbi.org.in → Sitemap → NBFC List → NBFCswho have been issued prohibitory orders, winding up petitions filed and legal cases under Chapter IIIB, IIIC and others.

2. NBFCs have displayed the Certificate of Registration (CoR) issued by Reserve Bank of India on its prominent place. This certificate should also reflect that the NBFC has been specifically authorized by RBI to accept deposits. Depositors must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits.

3. The maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%.

4. The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount.

5. In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.

6. The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.

7. The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

23. Does RBI guarantee the repayment of the deposits collected by NBFCs?

No. The Reserve Bank does not guarantee repayment of deposits by NBFCs even though they may be authorized to collect deposits. As such, investors and depositors should take decisions while placing deposit with an NBFC.

24. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors?

If an NBFC defaults in repayment of deposit, the depositor should immediately approach the Reserve Bank of India. Please click here to lodge a complaint. (This should take the complainant to the Complaints page) The complainant can also approach National Company Law Tribunal (NCLT) or Consumer Forum or file a civil suit in a court of law or file a police complaint.
Source http://sachet.rbi.org.in/InvestorAwareness/Investor#

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