Early warning system to detect Ponzi schemes on the anvil

K Ram Kumar Mumbai | Updated on January 20, 2018

Corp Affairs Ministry, SEBI, ICAI join hands to protect investors

With millions of investors losing tens of thousands of crores of rupees in deposit schemes floated by dubious companies in the past few years, the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs and the Institute of Chartered Accountants of India are planning to develop an early warning system to ensure that investors don’t fall prey to such schemes.

The system will be based on certain financial parameters from the balance sheet of the suspected entities and enquiries could be initiated against them, according to sources close to the developments. The flow of funds into group companies, other income, abnormal gains/losses, change in accounting mechanism, and related-party transactions (such as sale of shares to group companies or deposits taken from another group company) are some of the parameters that could be looked at in a deposit-taking company’s balance sheet.

Smoke signals

Further, a sharp rise in debtors and large-scale write-off of debtors could also be smoke signals that can be detected.

S Ravi, a practising chartered accountant, said an increase in unsecured loans, inter-corporate loans, unsecured advances, and related-party transactions are indicators that need to be closely watched.

The move to establish an early warning system is aimed at zeroing in on companies that have taken deposits from the public whose balance sheet parameters show that they may renege on payment of interest and/or repayment of the principal.

It comes in the backdrop of the Central Bureau of Investigation probing Ponzi schemes involving funds of over ₹1.20 lakh crore. The Company Law Board (CLB) is empowered to take cognisance of any case of non-repayment of deposits on maturity, and direct the company to repay such deposits. Non-compliance with CLB orders may lead to imprisonment up to three years, and a monetary penalty.

The CLB has formed Hardship Committees to help small and needy depositors who have invested in fixed deposits with firms that have defaulted on refunds.

The investors/depositors can lodge their complaints with the concerned Registrar of Companies online through the Ministry of Corporate Affairs website.

Published on March 06, 2016

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