Due Diligence. Lessons from the Nathella episode

Last week, the news of Nathella Sampath Jewellery, a seven decade old company in Tamil Nadu shutting shop and refusing to honour payments on saving schemes of customers, created panic. It began after a customer filed a complaint against one of the store’s managers asking for refund of money.

The customer had enrolled in a gold saving scheme with Nathella and approached the showroom after the maturity period to buy ornaments. The floor-in-charge as well as the manager did not respond to her request.

Over the last week, more than 50 customers of the jewellery retailer have lodged a complaint against the store. The Managing Director of Nathella Sampath Jewellery, Prapanna Kumar, says the company is facing liquidity crunch. They are likely to sell ancestral property to settle the dues to customers.

Gold saving schemes of jewellers seem attractive for benefits such as no wastage (which would range from 3-12 per cent) on gold ornaments and the small gifts that are promised at the end of the scheme tenure.

Some jewellers even waive off the last instalment or receive payment of only 55-75 per cent of the last instalment. But these schemes are not good for the simple reason that a customer may have no recourse if the jeweller defaults and doesn’t honour his commitment.

Investors in gold saving schemes are not protected either by the Reserve Bank of India or SEBI. There are provisions in the Companies Act, to protect people from losing money in various deposits and schemes. But this is only for those entities registered as companies. Also, even if the entity raising deposit is a registered company, it can be put under lens only if it raises money for a tenure of over a year.

There is a loophole in the Companies Act which many jewellers are using to their advantage.

Payments are considered advances, not deposits, if the supply of goods or services takes place within a year. So most jewellers have made use of the loophole and created 11-month saving schemes that mature by the end of the 12th month when the customer can purchase gold. If the amount is unclaimed, it is moved under the head sundry creditors.

Effectively, these companies circumvent the Companies Act provisions. Since the money collected from the public is considered as advance, it is not regulated by the RBI either. As the scheme does not come under the collective investment scheme, it is not regulated by SEBI.

In case the jewellers’ default, the customers of these gold saving schemes can’t do much.

The customers can take the complaint to the consumer court with proof (cash receipts or email from the jeweller) of the payment they have made to the jeweller. If the jeweller is registered as a company (private and public), the customer can also file a complaint with the Registrar of Companies for not delivering the promise as per the policy document.

According to the regulations, any scheme offered by a company in which the contributions by investors are in excess of ₹100 crore and are pooled and managed on their behalf with a motive of earning profit/income, is construed a collective investment scheme and requires SEBI’s registration and approval says Sumit Naib, Associate Director Nangia & Co LLP, but most of these gold savings schemes may not have done this.

You can’t take your problems to the banking ombudsman either as these jewellers are neither banks nor NBFCs.

It is time to look at smart ways of saving in gold. Gold ETFs, gold mutual funds (fund of funds) and sovereign gold bonds of the Government of India are regulated by SEBI and the RBI. Investments in these products are safe, and the process transparent.

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