Kolkata: With the Saradha Group’s collapse threatening to wipe out other deposit-taking firms in West Bengal, the state’s proposed new law to protect depositors is aimed at deterring these companies from selling their assets and leaving customers in the lurch.
The West Bengal legislation could offer a model for initiatives elsewhere in the country as states seek to tweak and introduce laws to rein in similar pyramid schemes that fall between the regulatory cracks to protect depositors.
A provision has been added to the aborted 2009 Bill by West Bengal to enable the state government to seize even those properties that are sold by a defaulting financial enterprise in the run-up to its collapse, according to an official, who did not want to be identified.
Under existing laws, the state can only seize assets that a firm continues to own, but the administration is concerned that other deposit-taking companies could now start selling assets fearing that they could run aground, said the official.
This new law is expected to act as a deterrent, discouraging anyone from buying properties from deposit-taking companies because it will “jeopardize third-party interest”, according to a leading lawyer.
Chief minister Mamata Banerjee expects the revised Bill to be passed in a special session of the legislative assembly on Tuesday.
“Don’t panic,” Banerjee said on Friday, addressing depositors. “Brace for the storm… We will always stand beside devastated depositors.”
There are provisions that relate to the situation in the Companies Act as well. Under these, a court can review asset sales of a company being wound up if certain creditors are found to have been favoured by the ousted management, said Debanjan Mandal, a partner at Fox and Mandal, one of Kolkata’s leading law firms. Transactions concluded within six months in advance of the filing of a winding-up petition, on which a court eventually orders liquidation of a company, can even be declared null and void. The state’s proposed law appears to follow the same principle, Mandal added.
It is expected to be a very strong tool, particularly in West Bengal, because deposit-taking companies in the state such as Rose Valley Real Estates and Constructions Ltd and the now floundered Saradha Realty India Ltd have been investing in land.
These firms treat public deposits as “advance from customers” seeking to buy land.
Rose Valley says it has stopped taking fresh deposits under the said scheme after the Securities and Exchange Board of India said it was running a collective investment scheme without the necessary licence. The firm, however, remains in operation and continues to owe depositors in excess of Rs.550 crore.
“All these firms invest in real estate,” said the government official cited above. “Unless we are able to restrain them from selling their assets, there is no hope of recovering anything substantial.”
The police have so far managed to seize six trunk loads of property documents from the Saradha Group. None of its bank accounts appear to have any substantial deposits.
The new law is expected to have retrospective effect so that irregularities of the Saradha Group could also be dealt with under its stringent provisions, according to the state official.
As envisaged by the 2009 Bill, the state will set up a special court to deal with financial frauds, and as advised by the Centre, the maximum penalty for those found guilty will be increased from 10 years of rigorous imprisonment to life in jail.
The 2009 Bill could not be implemented for want of the Centre’s assent. Banerjee had said earlier this week that the Centre hadn’t returned it either despite the persuasion of the state government of West Bengal over the past few months.
Without a pending Bill being returned, a new law cannot be promulgated, according to Banerjee. She even discussed it with President Pranab Mukherjee on Sunday and asked him to return the 2009 Bill immediately, Banerjee said on Monday.
Another official said the state had lately received advice from the Centre that the 2009 Bill could now be “treated as withdrawn”, paving the way for the state to enact the new law and seek the Centre’s approval for it.
Even so, it could take six months to implement the new law, this person added, asking not to be named.