Proposed Law To Keep A Check On Ponzi Schemes Could Also Hurt Crowdfunding For Startups In India

Proposed Law To Keep A Check On Ponzi Schemes Could Also Hurt Crowdfunding For Startups In India

The mass may forget a catastrophe after some time but the victims do not and the ruling party should not. It was not long ago when CBI had confirmed that the West Bengal-based Rose Valley group chit-fund scam(R17,000 crore) was seven times bigger than the Saradha scandal that led to a lot of political heat in the eastern state in the past.

Rose Valley

©The Hills Times

Due to such unfortunate events the Banning of Unregulated Deposit Schemes Bill, 2018, which aims to check unscrupulous entities from cheating gullible investors, was introduced in the Lok Sabha in July last year. This proposed legislation to check Ponzi schemes can make crowdfunding illegal and financing for startups more difficult unless the concept of an “unregulated deposit” is explicitly defined in the bill, according to M Veerappa Moily, chairman of the parliamentary standing committee on finance, that submitted its recommendations on the bill to the Parliament earlier this month, on January 3.

Crowdfunding For Startups In India

©crowdfunding.com

Even though the panel appreciated the intent of the bill, it expressed its concern over unbridled powers the proposed law gives to enforcement agencies by not defining “unregulated” deposits explicitly.

According to the proposed bill, except deposits that are regulated by regulators, all other fund-raising activities will fall within the definition of “unregulated” deposits.

SEBI

©sebi.gov.in

As per the bill, legitimate deposits, are overseen by the Securities & Exchange Board of India (SEBI), National Housing Bank, Pension Fund Regulatory and Development Authority, Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), Employees’ Provident Fund Organisation, the ministry of corporate affairs and other schemes offered by state governments.

“There are also financing arrangements and channels of financing, involving entities in the informal sector including startups and small entrepreneurs, which may by ‘default’ fall under the ambit of ‘unregulated scheme’ due to absence in the Bill of a coherent, clear-cut definition of ‘unregulated’,” the report said.

“We have submitted our recommendations. Now, it is up to the government to apply its mind and accept or reject our recommendations,” Moily said.

This is what Subhadeep Bhattacharyya, co-founder, jubi.ai, a Mumbai-based tech startup has to say on the subject

Subhadeep Bhattacharyya, Co-Founder- jubi.ai

Subhadeep Bhattacharyya, co-founder, jubi.ai
©TOI

Subhadeep said, “In India, the angel ecosystem is not well defined. Their funding cheque-sizes are often very small. Most of the investors are now consolidating their investments instead of funding more number of startups. The global ecosystem is well ahead of us. At this point in time, a bill in its present form can have a negative impact on startups. This is the time for India to nurture startups.”

Shruti Rajan, a partner at the law firm Cyril Amarchand Mangaldas remarks and shares her suggestions on the bill.

Shruti Rajan, Aisa Business Law Journal

Shruti Rajan on the left
©Asia Business Law Journal

Shruti said, “The solution to that could be to introduce exceptions based on ticket size, nature of the investor, etc in this bill. But as and when SEBI introduces a regulatory structure for crowdfunding, one would have to go back to this legislation and bring in necessary amendments as well.”

She further added, “A law like this, therefore, only reinforces the importance of protecting that last-mile investor/depositor. Once it becomes law, the bill does not prohibit fund-raising from NBFCs (non-banking financial companies), MFIs (microfinance institutions), etc, even where formal banking channels are not available. In a way, this will also encourage small ventures to seek formal lines of credit rather than unorganised pools of capital for funding. All this serves the larger financial inclusion goal very well.”

Sources:

Proposed law on ponzi scheme to hurt crowdfunding for startups: Panel

Main Image: © Indian Express, file photo

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