Before investing make sure that your money is protected

Before investing, especially with companies promising high returns, investors must ensure that the entity is registered with the Reserve Bank of India, Securities & Exchange Board of India or any other financial sector regulator and is authorised to accept funds — in the form of deposits or otherwise. Raising public money does not necessarily mean acceptance of deposits. A deposit is acceptance of money with a promise to return it with interest. Raising money by way of share capital, money raised as security deposit, earnest money and advance against goods or services and subscriptions to chits are not treated as deposits.

Entities that can raise public deposits

RBI allows banks, cooperatives and some non-banking fi nance companies (NBFCs) to accept deposits. RBI issues special licences to these NBFCs including housing fi nance companies for raising deposits up to a certain limit. Some companies are authorised by the ministry of corporate affairs to raise deposits from the public.

Cooperative credit societies and salary earners' societies can accept deposits only from their members. Others are not legally allowed to raise deposits. NBFCs registered with the RBI are not allowed to raise deposits unless by way of a deposit accepting certificate. Unincorporated bodies like individuals, partnership fi rms and other association of individuals cannot raise deposits, even if they do fi nancial business.

RBI follows a restrictive policy in allowing companies to raise deposits. Protection of depositors' interest is the RBI's supreme concern. Banks are the most regulated fi nancial entities and therefore the safest as far as your money is concerned. The maximum interest rate that an NBFC can pay to a depositor is 12.5% a year.

But, banks can fail too. The Deposit Insurance and Credit Guarantee Corporation insures deposits up to Rs 1 lakh. This means depositors' money up to Rs 1 lakh is safe and they will get back anything up to this limit even if a bank fails.

NBFCs Permitted to Raise Deposits

There are some 257 NBFCs that are allowed to raise deposits. The list is available on the RBI's website (www.rbi.org.in — sitemap — NBFC list — list of NBFCs allowed to accept deposits).

Collective investment schemes are not deposits

Collective investment schemes are schemes where companies raise money as advance for delivering goods or services at a future date. RBI does not regulate them and does not treat this collection of money as a deposit. The Securities & Exchange Board of India does.

RBI bars chit funds from accepting deposits

Chit funds are legal under the Chit Funds Act, 1982, which is a central act but administered by state governments. Chit funds can raise money from their members. RBI barred these entities from accepting deposits from the public in 2009 and can prosecute them in case they violate the law. Violation of deposit-accepting rules is a criminal offence.

If unincorporated entities are found accepting public deposits, they are liable for criminal action. Further, NBFCs are prohibited by RBI from associating with any unincorporated bodies. If NBFCs associate themselves with proprietorship/partnership firms accepting deposits in contravention of the RBI Act, they are also liable to be prosecuted.