As the Centre, the West Bengal government and Sebi grapple with the Saradha collapse, a close look at the way such collective investment schemes are being regulated suggests it is only a matter of time before another Saradha goes belly-up
What is the main reason behind Saradha-type fiascos?
Market regulator Sebi handles collective investment schemes (CIS) and state governments monitor chit funds, while the Reserve Bank of India (RBI) regulates non-banking financial companies (NBFCs). Regulation is simple when the deposits accumulated by an entity can be clearly defined as coming under one of these categories. However, when deposits cannot be easily classified under any of these, it creates uncertainty over which regulator will tackle the entity in question.
Look at the Saradha case. After receiving information from the state government?s economic offences wing, it took three years for Sebi to establish that the Saradha scheme was a CIS and pass an order restricting it from raising money. Saradha attracted deposits offering real estate (land or flats) or a high rate of return (12-24%). Many other fly-by-night operators try similar tricks. Some of them even offer holiday packages while regulators stand helpless, even when it is clear from their modus operandi that depositors are going to lose money.
What kind of violations are involved?
Many collections are illegal under the Companies Act. Some companies float sham CIS violating Sebi norms. Others collect money by posing as NBFCs and resorting to Ponzi or money circulation schemes, breaking RBI rules on the way. Many promoters vanish after collecting money from the public.
How successful is Sebi action against such operators?
Even in cases where Sebi took action, there has been little headway. Despite the regulator?s orders under the SEBI Act against some companies in West Bengal, several have continued to raise money, aided by injunctions from district courts and stay orders from the High Court. Sebi has also issued advertisements in newspapers against companies like MPS Greenery raising unauthorised money. Under the SEBI Act, appellate power is with the Securities Appellate Tribunal and then, the Supreme Court. The whole framework beginning from regulation to action and its implementation seems to be far from achieving concrete results.
What does the central government do to stop them?
The ministry of corporate affairs has ordered an enquiry by the Serious Frauds Investigation Office (SFIO) in the Saradha case, but the agency cannot make much progress without help from the state government. However, SFIO is finding it difficult to get information as state government officials handling the case do not want a central agency to handle it. Saradha is a case where investors have already been duped. In other cases under the notice of the central government too, not much has been done as yet. In reply to a question in the Lok Sabha on March 14, minister of state (independent charge), corporate affairs, Sachin Pilot informed that complaints of cheating by companies which promised high rates of interests to investors were received in 87 cases?out of which 73 were from West Bengal?which have been brought under investigation. The list included several companies belonging to the Saradha Group. It also names many companies from Rose Valley and MPS Greenery groups.
How did so many such schemes mushroom in West Bengal?
Traditionally, West Bengal has seen higher deposits in small savings schemes like post office deposits. In 2011, the government withdrew commissions paid to agents to mobilise small savings. As a result, many agents turned to selling chit funds.
What is the way forward?
Sebi has asked the government to hand over regulation of all deposit schemes to a single regulator. If it agrees, it will have to either create a new regulator or entrust Sebi or RBI with the job. The Financial Sector Legislative Reforms Commission has suggested such a structure, but this will take time even if the government decides to do so. In the current circumstances, action may be taken against companies already in the list, but there are question marks on whether even such a move will protect those who have already invested in their schemes. A single regulator or strengthening of Sebi powers to handle such companies may also have limited impact if state governments are unwilling to crack the whip. Regulators must focus on investor education rather than locking the stables after the horses have bolted.
What are the lessons for investors?
The administrative and regulatory systems in the country are grossly inadequate to ensure safety of money deposited in these schemes. It is your money and the responsibility of any losses due to investments in get-rich-quick schemes is entirely on you. Always be cautious before making any investment, especially when the returns promised are abnormally high.