Battling the Ponzis

Having won exceptional powers to crack down on illegal money-pooling schemes a year ago, the Securities and Exchange Board of India has aggressively wielded them. In the past year alone, the regulator has unearthed 200 entities engaged in illegal fund-raising, concluded preliminary investigations, and issued cease-and-desist orders against 180 of them. But whether such action will prove effective in deterring other scamsters or providing relief to aggrieved investors is doubtful. Significantly, SEBI has so far managed to recover only ₹25 crore of the estimated ₹60,000 crore mopped up by these entities.

One reason for SEBI’s limited success with Ponzi investigations is the continuing lack of clarity about its jurisdiction over these entities. Yes, the Supreme Court judgment in the Sahara case has clarified that SEBI can proceed against unlisted firms floating securities (such as debentures and preference shares) without its approval. But this form of fund-raising makes up a small proportion, about 5 per cent, of the Ponzi pie. Larger operators have adopted other business models — ranging from instalment schemes to buy agricultural land, to unregistered chit funds — to cheat the unsuspecting public. In such cases, SEBI has found it difficult not only to get the companies to comply with its orders but also to prove that they are out to defraud investors. Putting a stop to these scams calls for a greater degree of vigilance from regulators other than SEBI. The Reserve Bank of India, which is tasked with deposit regulation, local registrars of co-operative societies, as well as the registrars of companies who regulate chit funds and companies need to display greater activism. The Sahara case appears to be evidence that not all money-pooling schemes are about small investors; quite a few are vehicles for laundering ill-gotten wealth, which would make them a fit case for investigation by the Enforcement Directorate. In such cases, there is a need to quickly identify the underlying nature of the scam so that it can be handed over to the appropriate investigative agency. Time is of the essence here, both to prevent a fraudulent scheme from snow-balling to epic proportions and to ensure that the deposited money is not siphoned off by scamsters.

To bolster investor confidence in India’s financial system, regulators must act proactively to nip financial fraud in the bud rather than swing into action after complaints pile up. Here, the idea of using State and local government machinery to gather market intelligence about incipient scams is sound. Dedicated desks should be set up for citizens to lodge complaints about financial scams. Given India’s abysmal internet reach, it is unreasonable to expect scam victims across the length and breadth of the country to log on to SEBI or RBI’s online investor complaint forums to make themselves heard.

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