Parliamentary Committee express concern over SEBI’s inaction against Ponzi schemes
The Moily Committee, in its report said, SEBI needs to become more transparent, vigilant and accountable in their regulatory action, showing the same level of alacrity as in the case of Sahara while dealing with Ponzi companies
The Parliamentary Standing Committee on Finance while expressing concern over Securities and Exchange Board of India (SEBI)'s inaction on Ponzi or chain-money schemes since 2010, said that the market regulator should show same level of alacrity while dealing with these companies as in the case of Sahara.
The Committee headed by Congress leader M Veerappa Moily says over the past one year, SEBI has initiated action against 200 Ponzi, fraudulent, bogus and deemed public issues under section 67 of the Companies Act, 1956. "The Committee also observe that after receiving complaints, SEBI initiated enquiry, but the interim order took two to three years, whereas the final order took more than five years and during this interim period the Ponzi company's promoters one way or the other collected thousands of crores of additional amounts from the small investors. The Committee would now expect SEBI to become more transparent, vigilant and accountable in their regulatory action, showing the same level of alacrity as in the case of Sahara," the Committee said in its report presented to the Lok Sabha Speaker on 7 October 2015.
Need for a nodal department to deal with Ponzi, MLMs
The Moily Committee noted that there are several cases relating to unauthorised financial schemes pending at different levels for investigation, prosecution, adjudication or compliance. It said,"...a nodal Department of the Central Government, say Department of Economic Affairs under Ministry of Finance should compile and consolidate updates on these cases and facilitate coordinated action with concerned agencies like SEBI, Reserve Bank of India (RBI), Ministry of Corporate Affairs (MCA), Department of Financial Services (DFS), Department of Agriculture & Cooperation and Ministry of Consumer Affairs through digital backbone. The Central investigative agencies like the Central Bureau of Investigation (CBI), Enforcement Directorate (ED), and Investigation Wing of Income Tax as also the enforcement agencies from the concerned States may also be involved in this exercise."
The Committee also directed the follow-up action initiated on this count along with a status note should be submitted before it within three months of the presentation of this Report.
In its submission before the Committee, the DFS stated that around the promulgation of SEBI (CIS) Regulation, 1999, the market regulator had information about 664 companies collecting money illegally under CIS. Over the past three years, SEBI had passed orders against some of the large companies. Here is the list of additional nine companies against which SEBI had passed order.
SEBI told the Committee that it has received references or complaints against 292 companies for carrying on activities of CIS. So far activities of 46 companies with respect to applicability of SEBI (CIS) Regulations have been examined and complaints or references against 37 companies were closed as they were not CIS. In addition to the above SEBI is also dealing with prosecution proceedings initiated against 553 entities as on 31 March 2013. In view of the above, SEBI may require more man power in future to deal with the challenges ahead, the market regulator said.
SEBI said it has also written to the Finance Minister seeking power of attachment of bank accounts, sale of movable and immovable property similar to Income Tax Act for enforcement of its orders.
Expressing displeasure over judicial interventions, SEBI Chairman told the Committee that "It is very clear in the SEBI Act that an order passed by us can be appealed to Securities Appellate Tribunal (SAT) and against that an appeal can be filed on with the Supreme Court. The High Court has no jurisdiction on appellate side so far as SEBI Act is concerned. Nobody can contest their writ powers but under the appellate jurisdiction and under the SEBI Act, they have no powers. But we have dozens of examples where the High Courts are interfering...So obviously a District Court has no role. Here in case of MPS Greenery, five district courts of West Bengal Hooghly and Barasat-have given injunction orders. The SEBI had to go to the High Court. We did not get relief from the High Court. We went to the Supreme Court which directed the High Court to pass an order. But in the process, they went on collecting money...."
The Parliamentary Committee was told by SEBI that multi-level marketing (MLM) and online money collection activities did not come under its purview. "So far SEBI has come across two cases involving schemes collecting money from investors through internet. In one case, the entity was not offering any units or securities to the investors and was found to carry out MLM activities. Hence, it did not come under the purview of SEBI. The same was informed to the Ministry of Finance vide letter dated 5 August 2011. In the other case, it is seen that the entity claims to be a Mutual Aid Fund and it is a voluntary informal network of millions of people across the earth….Prima facie, the activities of the company do not fall within the purview of SEBI”.