In early March, the Supreme Court of India (SC) disposed of a 2013 petition filed by a non-government organisation (NGO) called Humanity Salt Lake, asking for a proper investigation into chain-money schemes or illegal chit funds or Ponzi schemes. The Court took on board a submission by the Securities & Exchange Board of India (SEBI) that it has referred over 1,000 cases to other appropriate agencies for further probe, since the investigation did not fall under its purview. The petition made it to newspapers, mainly because the SC bench headed by the chief justice took exception to celebrated advocate Prashant Bhushan (who appeared for the NGO) attempting to keep the public interest litigation (PIL) pending.
Earlier, the SC had issued a notice to the Centre and SEBI asking for the status of 1,538 cases, based on the charge that the government, specifically SEBI, was not doing enough to protect people from unscrupulous Ponzi operators. In response, SEBI told the Court that it has passed interim orders against 299 entities, and over 1,000 cases that did not fall under its regulatory purview were transferred to other regulatory agencies.
First, let us get some perspective on this issue. Indians lose the maximum money to unregulated multi-level marketing (MLM) firms, Ponzi schemes, dubious collective investment schemes (CIS), chain-money schemes and fake chit funds. The sums are staggering—they range from Rs49,000 crore in the case of PACL (Pearls), to thousands of crores in the case of Saradha, Rose Valley and other schemes and a few hundred crore even in unknown companies. Financial literacy in India is abysmal and people are quick to part with hard-earned savings to ‘trusted’ friends and relatives who themselves are conned by the glib and rehearsed sales pitch of dubious finance schemes. Once the Ponzi has played out and the marketer has siphoned all the money, recovery is almost impossible. There are multiple state and Central laws that deal with the issue. Multiple regulators and the economic offences wings (EOWs) of the police at various states end up handling these cases without enough manpower or training. This is true even after SEBI was asked to regulate CISs that have raised over Rs100 crore (or from 50 persons).
Thousands of Ponzis are proliferating in every Indian state and their victims run into tens of millions. The EOWs usually rely on depositor protection legislation promulgated by various states which combine civil and criminal remedies. But litigations last well over a decade or two; a lot of time is wasted on the maintainability of petitions under such state Acts. States also try to bring Ponzi and MLM schemes under the Prize Chits and Money Circulation Schemes (Banning) Act of 1978, but with little success, except in Andhra Pradesh.
Moneylife Foundation is pushing hard to give more teeth to the Maharashtra Protection of Interest of Depositors Act (MPID) and has received a very positive response from the chief minister’s office. In fact, work on the amendments to the Act has already been undertaken.
While the problem is gigantic, it is a fact that regulators continue to play pass-the-parcel. Even the Reserve Bank of India (RBI), which regulates chit funds and non-banking finance companies (NBFCs), systematically pushes all cases of companies that are not registered with it to the state EOWs when it ought to crack down on such companies as soon as they are brought to its notice. It has also studied the various statutes to come up with best practices.
The apex court itself has set up a committee under Justice RS Lodha to direct the liquidation and distribution of PACL’s assets; but it is unclear if even a fraction of the Rs49,000 crore raised by this Ponzi and transferred overseas will be recovered. In this case, it is the judicial system that allowed Nirmal Singh Bangoo to amass wea and the north-eastern states.
In this context, it is a pity that a PIL that made it to the Supreme Court and had a celebrated activist advocate representing it, did not lead to a macro assessment of the situation and concerted action to crack down on fraudulent schemes before they cheat people. I received a whistleblower’s letter, apparently written by a SEBI insider, with a detailed account with internal memos and file notings of how there is considerable pressure on regional directors at the regulator to conclude investigation in just two months under ex-chairman UK Sinha.
There were verbal instructions to close cases or refer them to other agencies in large numbers. The letter provides data to show 88.9% increase in closed cases in 2015-16. The documents show that Kolkata alone closed as many as 698 cases in the first 11 months of 2015-16 and had just eight officers in charge of CIS along with other work. Similar numbers, tables and charts are provided for all regional offices of SEBI. At the same time, the number of cases taken up for action is woefully small. The whistleblower alleges that after 2014, SEBI’s top brass quickly delegated responsibility for deciding to lower level functionaries and closures are, often, based on verbal instructions and impractical deadlines.
These are serious allegations which, at the very least, suggest a great reluctance to take on dubious Ponzis and CISs, most of which have powerful linkages with politicians and celebrities who endorse their products. According to this whistleblower, SEBI has been at pains to dispose of cases as being outside its jurisdiction following the SC’s stinging observations in the Alok Jena vs Union of India case (order dated 9 May 2014) in connection with a massive Ponzi scheme that flourished in Orissa.
The Court said, “There is yet another aspect to which we must advert at this stage. This relates to the role of the Regulatory Authorities. Investigation conducted so far puts a question mark on the role of regulatory authorities like SEBI, Registrar of Companies and officials of RBI within whose respective jurisdictions and areas of operation the scam not only took birth but flourished unhindered. Suffice it to say, that the scam of this magnitude going on for years unnoticed and unchecked, is suggestive of a deep-rooted apathy if not criminal neglect on the part of the regulators who ought to do everything necessary to prevent such fraud and public loot.”
It is extremely heartening that some officers inside SEBI are agitated enough about the ‘public loot’, to have compiled a detailed analysis of how SEBI is systematically dumping nearly 1,500 plus cases. These are passed off to agencies that have nowhere near the resources or powers of investigation, search, seizure and action that SEBI has. With the SC having summarily disposed of the PIL filed by Humanity Salt Lake, we have lost a huge opportunity to ensure that the victims of such dubious schemes have a fighting chance for recovering some money through timely investigation. Worse, thousands of new scamsters will continue to rob millions of new victims every year and literally walk away free.