Beyond SEBI

The Securities and Exchange Board of India has been on a regulatory overdrive in recent months, using its newly won powers to crack down on dozens of illegal fund-raising schemes across the country, the latest one being real estate developer PACL. One set of entities have been making so-called ‘private placements’ of hybrid instruments, as Sahara did, to retail investors, promising a ‘guaranteed’ return. Others are collective investment schemes masquerading as public ‘deposits’, that promised returns of anywhere between 12 and 24 per cent from ventures engaged in everything from plantations to developing parcels of land.

The clarity provided by the Sahara case has armed SEBI with the legal backing to pursue these cases. The judgment settled that the issue of financial instruments to more than 49 persons constituted a public issue, which is then subject to the disclosure and listing requirements of the Companies Act and SEBI’s Investor Protection guidelines. This has helped SEBI order unlisted firms issuing hybrid instruments to stop such fund-raising and refund proceeds to investors. Likewise, the Saradha case prompted the Centre to more sharply define collective investment schemes in the new SEBI Act, and establish SEBI as their regulator. While SEBI has no doubt been zealous in identifying and pursuing such Ponzi schemes, it is by no means certain that aggrieved investors in these cases will manage to get a refund of their monies. If these firms fail to comply with SEBI’s orders as they did in the Sahara and Saradha cases, the regulator will again face the onerous task of tracking down the promoters of these entities, and attaching and disposing of their assets.

This suggests that if policymakers are really serious about putting an end to the proliferating Ponzi schemes, they must take lessons from the modus operandi of these informal fund raisers. They take advantage of the failure of the formal financial system (consisting of the vast post office network, banks, mutual funds and insurers) to reach out to and cater to the financial needs of investors outside the cities. As the Centre embarks on its newest financial inclusion initiative — the Jan Dhan Yojana — it should take note that the financial needs of Bharat aren’t confined to cheap agricultural loans and banks overdrafts. Savers in small towns, just like city folk, desperately seek savings products that deliver inflation-beating returns. But equally, the sheer number of schemes that SEBI has been unearthing (PACL has apparently raised ₹49,100 crore from 5.85 crore investors) suggests that mere regulatory activism may not put a stop to them. What small savers seem to lack is the basic financial knowledge to assess the risks and rewards of the financial products that are peddled to them. So, sophisticated seminars that create ‘investor awareness’ in the cities about mutual funds, insurance and derivatives, can probably wait. Basic financial literacy, ideally integrated into the school or college curriculum, is imperative for true investor protection.

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