Millennium Post

Lure of lucre

For Ravi, the only earning member of his family, who was already struggling hard to arrange two square meals a day for his paralytic parents, wife and son, the crumbling of Saradha Group of Companies was end of the world. He went into acute depression and ended his misery by hanging himself. He had invested his life’s savings of Rs 1 lakh with Saradha after being promised that he will be paid Rs 2 lakh after 12 months.

Misery of those affected by Saradha’s collapse did not end with investors but also inflicted injury to the agents of ponzi scheme companies. Sixty-year-old father of a similar company’s agent too committed suicide in December last year at his house in Balasore in Odisha. Reason — his son Bismoy owed more than Rs one crore to the depositors. The old man was distressed over his son’s inability to repay money to the investors.

Increasing number of such ‘fly-by night’ companies mushrooming in the country, vanishing with crores collected mainly from rural India, has forced the government to come out with some stringent laws to deal with the menace.

In October 2003, in the backdrop of major failure of non-banking financial institutions, plantation companies and the stock market scam, the central government had set up Serious Fraud Investigation Office (SFIO), a multi-disciplinary organisation to investigate corporate frauds. Over the years, experts have come to feel that due to lack of autonomy and teeth - SFIO is finding it difficult to tackle the problems effectively. It took another 10 years for the union government to come out with more stringent norms and on 18 July, 2013 it promulgated the Securities Laws (Amendment) Ordinance, 2013 aiming to give more power to the Securities and Exchange Board of India (SEBI) to initiate action against such ‘dubious’ schemes.

However, that too failed as large number of cases were reported from all over the country of unregulated deposit through ponzi schemes. Subsequently, the Securities Laws (Amendment) Bill 2013 was introduced in the Lok Sabha in August 2013 for some amendments.

Now, with cases of Saradha and Nirmal Bhangoo’s Pearl Group’s alleged ponzi scheme – currently under investigation by the Central Bureau of Investigation (CBI) – hitting headlines and even rocking Parliament, the Lok Sabha finally passed the new SEBI Bill on 7 August, 2014.

The government statement introducing the bill said, ‘The objective and reasons for the Bill is to protect the interests of investors and to ensure orderly development of securities markets, it has become necessary to enhance the powers of the board. The Bill aims to protect investors as well as curb fraudulent investment schemes thriving at the expense of gullible investors.’

The Bill proposes various amendments which inter-alia includes empowering SEBI to call for relevant information and records from any person. The Bill provides that any pooling of funds in any unregistered scheme or arrangement, having corpus of Rs100 crore or more, shall be deemed to be a collective investment scheme.

So far, under Section 15A-HB of the SEBI Act, only penalties could be imposed for various offences. However, these sections only provide one level of penalty with no minimum level or range and without giving any discretion to the adjudicating officers.

Once notified as Act, the SEBI Bill will provide for additional powers (to SEBI) for the settlement (compounding), establishing special courts, powers of recovery of money and empowering the board to enhance the penalty imposed by an adjudicating officer. It will also empower capital market watchdog Securities and Exchange Board of India (SEBI) by giving powers such as authority to seek call data records. The Bill would give more teeth to SEBI to crackdown on fraudulent investment schemes, seek information from any entity related to a probe and also provide for setting of special courts to ensure speedy trial.

SEBI would have powers to call for information ‘not only from the people or entities associated with the securities market but also from persons who are not directly associated with the securities market’. Earlier, only a first class judicial magistrate was empowered to issue an order ‘for the seizure of books, registers, other documents and records’ of such companies. But now with the amendments, magistrate or judge of such designated court — as notified by the central government — would have jurisdiction to issue the same order.

Only time would tell how effective the new law would be. Despite crash of companies like Saradha, such entities have continued to grow. According to statistics, more than 100 such companies started functioning in Andhra Pradesh alone in 2013. In New Delhi, the figure was 29 and so far more than 2,500 such companies are active across India.

In the context of difference between chit fund companies and schemes offered by companies like Saradha, TS Sivaramakrishnan, general secretary, All India Association of Chit Funds, said, ‘You could say the same as between the Reserve Bank of India and an illegal money lender. Chit funds are governed by The Chit Funds Act, 1982, regulated by the state governments under the rules framed therein, with policy advisory role entrusted to RBI. However, companies like Saradha were running what is called an unregistered collective investment scheme (CIS).’

He said, ‘These are typically ‘ponzi’ schemes where new deposits are used to pay high returns to investors, luring others into investing in these schemes. When the rate of deposits slows down or the promoters bolt with the collection, the music stops and most depositors are left with their savings gone.’

While elaborating more on to Saradha and Pearl Group’s recent debacles, which is presently under CBI investigation, he said, ‘Frankly, there is no similarity between ‘Saradha, Pearl and Chit Funds’ and for that reason, there cannot be any logical comparison between them. We, however, do feel it has, ironically, aided our cause to the extent that the regulators, administrators and concerned departments had to think afresh about what exactly is termed as chit fund. The spotlight thrown at our industry by the media, in hindsight, seems to be a blessing in disguise.’

‘Undoubtedly, the perpetrators of the Saradha scam have to be brought to book and punished strictly, but to target the guns on chit fund industry that is more than 100 years old, carrying on their business in an impeccable manner, an industry that is in fact over-regulated with no room for any manoeuvre of any nature is just not fair. We sincerely hope and pray that the CBI probe throws light on the truth,’ he added.

Defending registered chit fund companies and its advantage, Sivaramakrishnan said, ‘The best thing about chit funds is that it inculcates a habit of saving. It is a saving cum borrowing instrument, which is unique when compared to other financial systems. When you invest in chits you get more return as compared to other financial intermediaries and when you borrow you pay less interest? Chit funds have the advantage both for serving a need and as an investment. Money can be readily drawn in an emergency or could be continued as an investment.’

The chit fund, which is also known as chitty or kuri in India and ROSCA (Rotating Savings and Credit Association) internationally, occupies an interesting position in the Indian financial market. Such, activities were in practice even before the evolution of banking system in India with its origin in Southern part of India.

As per the Asian Development Bank report, the turnover of some 1066 chit fund companies, during 80s was Rs 81.6 billion. Currently, the estimated turnover of registered chit companies all over India exceeds Rs 35,000 crore per annum. Expert claims that there are several advantages of chit funds because it is a borrowing cum savings instrument where the rate of borrowing is determined by the participants themselves and not by an external agency.

They also said that one should not confuse  registered chit fund companies with Multi-Level Marketing (MLM) schemes started by several dubious companies. They claimed that Saradha was not a chit fund company as it was MLM or Ponzi scheme.

The main reason behind driving a large segment towards these attractive ponzi schemes are exclusion of these people from the formal banking sector. ‘The government should think on these lines even after they have passed the SEBI Bill. Also, financial literacy in India is very poor and people are not able to discern the genuine financial instruments from bogus ones. Knowledge is a good antidote to greed, and in the absence of the former, people are driven solely by the
latter,’ he said.

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