Citizens' Issues
Deliberate Obfuscation

Savers will continue to lose money in chain money schemes because the regulators are pretending not to understand the core issues

Over the past year, the Securities & Exchange Board of India’s (SEBI) war with the Sahara group has, at least in the public eye, imbued the market regulator with a sense of heroism. SEBI has gone after Sahara with remarkable tenacity—but only on the issue of synthetic convertible debentures issued by two Sahara group companies; it has also made a push to check MPS Greenery and sundry goat-rearing and emu farming frauds, categorised as ‘collective investment schemes’. Once the collapse of Saradha chit fund blew up into a major scandal, SEBI rushed to issue a flurry of orders against the promoters, after pussyfooting on it for three years. 
The lack of clarity over regulation of chit funds and chain schemes is clear from a reply to the Rajya Sabha by Sachin Pilot, minister of state for corporate affairs. On 4th March, Mr Pilot said that these scheme were liable for action under The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (the Act) administered by the ministry of finance (department of financial services) through the state governments; those that can be classified as ‘collective investment schemes’ would come under SEBI.
An Act, administered by the finance ministry through state governments (read local police) to regulate schemes, which may or may not be registered under the Companies Act, but the minister of corporate affairs answers questions about it? What can be more confusing? There is more.
The finance ministry had also set up an inter-ministerial group comprising RBI, SEBI, MCA, ministry of consumer affairs and the central economic intelligence bureau to prepare draft model rules to give teeth to the Act of 1978. The draft—‘The Money Circulation Scheme (Banning) Rules, 2012—has finally been put in the public domain for discussion, after the Saradha debacle. 
Mr Pilot, having identified broad regulatory responsibility for pyramid schemes said, he had “written to the Finance Minister to increase surveillance by RBI over unauthorised NBFCs (Non Banking Financial Companies).” Finally, he said that his ministry had initiated action against 87 companies that had floated ‘fraudulent investment schemes’. There is no clarity on how these ‘fraudulent’ schemes were identified, but Mr Pilot says, various state governments had been asked to initiate ‘vigorous’ action under the Prize Chits Act. 
Mr Pilot’s answer is a succinct iteration of the confused regulation of these dubious money circulation schemes. I suspect that the confusion is deliberate because it allows all ministries and regulators to evade direct responsibility for the frequent chain scheme collapses that destroy people’s savings. The SFIO (in 2012) and SEBI chairman UK Sinha (in recent weeks) had another idea. They want a central regulatory agency for implementing the Act. This is probably because the draft model rules leave the flawed regulatory structure untouched, but only update various definitions to try and include disguised money circulation schemes (any scheme where returns depend on enrolling new subscribers in various pre-specified formats) that pretend to sell a product or service.  
The demand for an independent regulator is another piece of obfuscation. The Andhra police, led by DIG VC Sajjanar, the lone crusader against chain money schemes, has once again scored by arresting the founder of NMart, a chain money scheme that initially proliferated in Gujarat. There is nothing to stop the government or its agencies from acting against highly publicised schemes, such as SpeakAsia or QNET or a Rose Valley or Alchemist, long before they collapse. 
As we write, a convicted Russian fraudster, Sergey Mavrodi, is luring tens of thousands of people into a fictional cult with its own fictional currency, but can be bought only for Rs5,000 deposited in a member’s account. A quick look at the hysterical comments by members of this cult to Moneylife’s exposé of this fraud ( reveals how dangerous this is. The government has refused to act even though EAS Sarma, a former Union secretary and a person of unimpeachable integrity, has written to every ministry and regulator as well as the prime minister about the dangers of these schemes. Mr Sarma pointed out that, far from stopping these dubious schemes, the Foreign Investment Promotion Board (FIPB) was planning to allow foreign direct investment in MLM companies. Global MLMs, like Amway, Avon, Tupperware and others, which fall foul of the Act, entered India in the 1990s through FIPB approval which apparently operates independently of all other laws!
Ironically, the only specific response that Mr Sarma has received so far is from SEBI which, in August 2012, told him, “The subject matter of complaint does not fall under purview of SEBI. You are requested to take up your complaint with appropriate authority.” Yes, the same SEBI which has issued several hurried orders about Saradha chit fund, after its collapse and whose officers are under a cloud, after Saradha promoter Sudipta Sen told the police that he had paid large sums of money to Sajjan Agarwala, an intermediary, to buy up the SEBI officials. SEBI, in turn, claims that its officials were manhandled when they tried to inspect the then-powerful Saradha group in 2012. But do recall that CBI had arrested a SEBI general manager Rajesh Pratap Singh in Kolkata for taking a Rs25-lakh bribe from Gautam Kundu, chairman of another notorious pyramid scheme Rose Valley.
Clearly, we do not need yet another regulator. We need the finance ministry and MCA to show the gumption to act decisively to squash pyramid schemes. Many of them are not even registered in India or come under the MCA’s purview but it is easy to initiate action on them, as Mr Sajjanar has repeatedly done, over the past decade. We also need a clear policy about raising public deposits. On page 20, our columnist R Balakrishnan points out how India is one of the rare countries that allows all kinds of entities—from builders to manufacturing companies to jewellers—to raise public deposits. 
Consider this. The blue-chip Titan Industries had a gold deposit scheme, called Annutra, with over 2.5 million investors. They deposit a small amount each month for 11 months; the 12th instalment is paid by the company (interest) and the scheme has to be redeemed by purchasing gold jewellery. Now, Titan is a rock solid blue-chip company—but the government is allowing it to run a tax-free recurring deposit scheme, with exit restrictions. 
What’s worse, jewellers in every street are offering similar schemes to lure people. So long as gold prices moved steadily northward, everybody was happy. What happens if this cheerful boat is rocked by turbulence in gold prices? What are the tax laws that govern these deposits? There are no answers. Probably because the wives and daughters of our netas and babus are all invested in such schemes. 
Last week, Sumit Bhatia, a Moneylife reader, wrote to say that Big Bazaar had advertised a scheme calling for deposits of Rs10,000 from the public and would offer them goods worth Rs12,000 in a year, with some caveats. He asks, doesn’t this amount to deposit-taking? Shouldn’t it be regulated by RBI? Who governs this fund collection by a company already burdened by heavy debt from banks? And, if a citizen can spot this, aren’t regulators sleeping?
This is really the key issue. While regulators are looking to fine-tune the already regulated legal financial sector (banks, insurance, finance companies, mutual funds and broking companies), they are completely unconcerned about the ever-expanding shadow financial sector that is allowed to have a free run for savers’ wallets, especially those of the poorest.


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R Balakrishnan

4 years ago

Our governments seem to encourage financial fraud at every level. The lack of deterrent punishment is one of the prime drivers of financial frauds. And regulators pretend to chase the crooks after the money has vanished. Wonder if things will ever change?

shailesh gandhi

4 years ago

I think you are actually exposing muddled thinking in the Government as to who should be responsible. I hope your continuous and committed efforts will bring results.
I agree we do not need more regulators.

nagesh kini

4 years ago

The multiplicity of Regulators, with the MOF and State Governments joining the band wagon makes money multiplying schemes a game of ducks and drakes. This must be put an end to with a single more comprehensive enactment encompassing collecting of monies or deposits by any name called. The present lack of clarity has been exploited by the unscrupulous operators that is why we have blade companies in Kerala and the Saradhas and others a free hand to cheat with impunity.

Govt ratifies 8.5% interest on PF deposits for 2012-13

The Central Board of Trustee of the EPFO, on 25th February had decided to pay interest at 8.5% to subscribers for 2012-13. The CBT’s decision is required to be notified by the finance ministry, only then the interest is credited into the accounts of the subscribers

The finance ministry has approved payment of 8.5% interest rate for 2012-13, up from 8.25% in the previous fiscal. The move will benefit over 5 crore EPFO subscribers.

“Finance ministry has notified 8.5% interest rate for 2012-13. It will be implemented with immediate effect,” EPFO’s Central Provident Fund Commissioner Anil Swarup informed the media.

The notification, he further said, “will enable EPFO to settle claims at 8.5% and also credit interest into the accounts of subscribers for 2012-13.”

The Employees Provident Fund Organisation’s (EPFO) apex decision making body, the Central Board of Trustee (CBT), on 25th February had decided to pay 8.5% rate of interest to subscribers for 2012-13.

The CBT’s decision on interest rate is required to be notified by the finance ministry. Only after notification, the interest is credited into the accounts of subscribers.

As per the norms, EPFO is expected to announce rate of interest on PF deposits before the beginning of a financial year. However, for the past few years, there has been delay in announcement of the rates. This time, the rate of interest is being notified after the end of the financial year.

In the absence of the notification, the claims are settled at the interest rate approved for the previous fiscal and subscribers can claim the differential after the notification of rates by the finance ministry.


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