The Serious Fraud Investigation Office (SFIO) has red-flagged over a dozen ‘mutual benefit’ and vanishing companies that have been found indulging in illegal money raising schemes from small investors in West Bengal, Orissa, Assam and other north-eastern states.
Sources said such entities came to light during SFIO’s ongoing investigations into the West Bengal chit fund scams involving 63 companies belonging to five groups, including Saradha and Rose Valley.
Mutual benefit companies are non-banking financial entities which are kept outside the ambit of certain key sections of the Reserve Bank of India Act like exemption from the RBI provisions on registration, net owned fund, maintenance of percentage of assets and reserve funds.
This is because the government wants to encourage access of bank-like-services to small investors residing in remote areas which are otherwise outside the ambit of nationalised banks.
“However, these entities take advantage of the gaps in various laws to make quick money from innocent investors. Detailed report will mention the inter-linking network of mutual benefit, chit fund and vanishing companies,” said a senior government official.
According to MCA, the interim SFIO report notes that there has been evidence of financial mismanagement, diversion and siphoning off funds by the promoters of these chit fund and other entities.
“Extensive use of the internet has also contributed towards marketing of such dubious financial products to investors promising higher returns in short duration. MCA has also initiated steps to check these entities,” the official said.
An interim SFIO report in the matter has also pointed to the pressence of multiple agencies at both central and state level leading to lacunae in the enforcement of relevant laws to check these illegal money making schemes.
MCA has classified cheating of investors by unscrupulous companies through vanishing companies, illegal collection of deposits, sham collective investment schemes, entities posing as a NBFC and resorting to money circulation schemes among others.
“Such financial fraud attract provisions from across different laws including violation of Section 58A of Companies Act, Sebi Act, RBI Act and the Prize Chits and Money Circulation Schemes (Banning) Act among others. Government is taking several measures to enhance inter-agency cooperation to check frauds,” the official said.