New Companies Act may sound death knell for disguised ponzi plans

KOLKATA: Companies using real estate and travel agencies as surrogates to run money circulating schemes may no longer be able to do so.
As per the Companies (Acceptance of Deposits) Rules, 2014, introduced by the ministry of corporate affairs, funds raised by any entity with a promise to refund with or without interest at the end of the specified period will be treated as a deposit. Experts say the new provision will suffocate the operators raising funds in the disguise of booking of land or flats, or for obscure reasons such as emu farming. Several entities such as Saradha had thrived in West Bengal and other eastern states using such surrogates .

The Rose Valley Group, which has interests ranging from real estate to films and fashion, and raises money from public as advance, feels the rules will not affect them. “We have not read the MCA rules. However, we are not a deposit-taking company. We will not be affected by the new MCA guidelines,” a company spokesperson said.

Financial consultant Vinod Kothari, however, said no non-banking non-financial entity would dare to raise public funds under the new set of rules as they would have to follow stringent norms. Companies intending to raise public deposits need to have a minimum net worth of Rs 100 crore or turnover of Rs 500 crore and provide insurance back-up for deposits.

The maximum interest rate they can offer is 12.5% a year.

“The MCA rules regarding public deposits add a definition of ‘deemed deposit’, whereby any scheme through which returns are given to investors, whether in cash or kind, will be deemed a deposit. This is a very important provision filling up a huge gap in the earlier regulatory structure,” Kothari said.

Gold jewellery purchase schemes will also become illegal as jewellers offer gold or ornaments of higher value than what customers pay in 11 installments, he added. Jewellers appeared unfazed by the new rules, though. “We enter into an agreement with the customer and he pays EMI for 11 months to purchase gold at the end of the 12th month,” said Rajiv Popley, director of Mumbai-based Popley & Sons. “The agreement says that the customer will get a discount or bonus which is equal to a monthly installment . This is not at all a financial transaction.”

Customers, who fail to pay the installment for the required period, can leave the scheme mid-way and buy gold exactly equal to the money they have deposited without any bonus. There is an escape from the definition of “deposits” – advances for purchase of goods or services where the supply happens within one year.

Therefore, advances against sale of property will remain exempt from the new set of rules. However, no entity taking advances can offer any benefit to customers either in cash or kind.