Tightening regulatory noose around Ponzi schemes

Written by Indu Bhan | Indu Bhan | Updated: Sep 12 2014, 08:03am hrs
The Securities Laws (Amendment) Bill, 2014, which was cleared by Parliament last month and gives Sebi sweeping powers to crackdown on Ponzi schemes, will go a long way in tightening the regulatory noose on such fraudsters that use newer methods to take gullible investors for a ride.

The Bill gives powers to Sebi to act more effectively against fraudulent investment schemes across the country and market manipulators through search and seizure, attachment orders and recovery proceedings with access to call data records to check insider trading. The Bill also gives the securities watchdog power to act against all illegal money-pooling schemes involving R100 crore or more and pass disgorgement orders for ill-gotten money and facilitate refund to identifiable investors, besides setting up of a special Sebi court in Mumbai to fast-track prosecution proceedings against defaulters. But the high threshold could lead to several small schemes slipping through the net, say experts.

Though the Bill, which brings in amendments to the Sebi Act, would clear the air over regulatory gaps and overlaps, the legal framework needs to keep pace with such hybrid investment arrangements and methods of raising funds.

Multiplicity of regulators, lack of accountability and coordination between the states and central agencies complicate matters as different investment schemes are being regulated by different regulators. The need to bring such schemes under one principal regulator that will oversee all cases where pooling of money is involved and investments are being made cant be ruled out.

The proposed Bill comes in the wake of massive public outrage witnessed in the recent chit funds scam perpetrated by Kolkata-based Saradha group, Pearls Agrotech Corporation and others that raised illegal public funds and defrauded thousands of investors with dubious schemes. Even the Sahara group has been making the headlines for wrong reasons for a while with its jailed chief trying hard to raise funds to secure his bail.

The menace of illegal investment schemes has grown big in recent years. Experts say over 30,000 registered chit funds in the country are regulated by state registrars under the 1982 Chit Funds Act. Several states including Kerala, Maharashtra and Odisha have cracked down on unregistered funds. Tamil Nadu alone has over 2,000 registered chit funds companies with an annual turnover of R4,000 crore.

Even the Supreme Court took serious note of such illegal schemes and ordered CBI probe against Ponzi operators. Sebi has also passed orders against Rose Valley, MPS, Sumangal, Sunplant Agro and a few others for alleged violation of collective investment scheme (CIS). Most of the cases are pending before different high courts or the Securities Appellate Tribunal (SAT).

Pearls Agrotech case has so far emerged as the mother of all get-rich-quick rip-offs and is, at least, 20 times bigger than the West Bengals infamous Saradha group scam. While Sebi has banned Pearls Agrotech from accepting deposits from investors after finding that it had failed to register its agricultural land investment scheme and ordered the company to refund at least $8.1 billion raised from 58.5 million investors across 20 states, the companys appeal is pending before SAT. Even media conglomerate Saradha, which has allegedly mopped around R1,200 crore through its bogus operations, has been asked to return the money last year after running an unlawful collective investment scheme in the guise of a chit fund to circumvent the more stringent CIS regulations.

The Pal brothers Speak Asia Online has also allegedly duped over 12 lakh investors, also called as panellists, to the tune of R1,300 crore. The Singapore-based online survey companys case is also pending in the apex court. The Enforcement Directorate early this year registered a case against it under the Prevention of Money Laundering Act in connection with multi-level marketing scam.

Attempts should also be made to give powers similar to regulators such as the Competition Commission of India to recover dues and take action against deposit-taking firms illegally raising public money. While regulatory measures may offer some relief to investors, but the best way to avoid the mess is to be alert at the time of investing.

indu.bhan@expressindia.com