Investor Issues
SEBI directs Sun-Plant Agro to wind up collective schemes

The latest order confirms an earlier interim ex-parte order on 21 October 2010 against Sun-Plant Agro directing it not to collect any money from investors, or to launch any scheme, and not to dispose off any of the properties or delineate assets of the scheme

The Securities and Exchange Board of India (SEBI) passed an order on 3 May 2011 directing Sun-Plant Agro to wind up its existing collective scheme(s) and refund the money collected by it under the scheme(s) with returns to the investors within three months of the order.

The latest order confirms an earlier interim ex-parte order on 21 October 2010 against Sun-Plant Agro directing it not to collect any money from investors or to launch any scheme or not to dispose off any of the properties or delineate assets of the scheme, or not to divert any fund raised from public at large kept in bank account and/or at the custody of the company, till further directions in this regard.

The market regulator further stated that in the event of the company failing to act as per the order, SEBI will initiate prosecution under the Securities and Exchange Board of India Act, 1992, against the company, or persons in charge of the business of its scheme(s).

Sun-Plant Agro was raising funds in the name of 'sale of plants'. It allegedly sold plants to purchasers, maintained the plants and thereafter provided returns on the amounts invested at the end of the scheme in the form of wood, even though no identity or marking of the particular plant which was sold, was provided to purchasers.

 SEBI said that such activities of the company carry the features of a Collective Investment Scheme (CIS), specified under Section 11AA of the SEBI Act read with Regulation 3 of the SEBI (CIS) Regulations.

 The company ought to have wound up the scheme in 2003 pursuant to rejection of the application for provisional registration by SEBI and the filing of the 'Winding Up and Repayment Report' by the company. However, the activities of Sun-Plant Agro and the details of amounts received by it against cost of trees during 2003 to 2010 prima facie indicate that even after submission of the Winding Up and Repayment Report in 2003, the company has been carrying out activities of a CIS without obtaining a Certificate of Registration from SEBI, the market regulator said.

 Interestingly, the company, which calls itself 'ISO:9001:2008 certified eco-friendly organisation', has partnered with the West Bengal Wasteland Development Corporation (WBWDC). Sun-Plant Agro, with WBWDC, plans to plant the jatropha crop over about 30,000 acres in the arid districts of Bankura, Birbhum, West Midnapore and Purulia over the next 15 years.

The SEBI order dated 3 May 2011 has further stated that for the specific purposes of the repayment/refund of the moneys to the investors as directed above, those directions as mentioned in the ex-parte order dated 21 October 2010 in as much as it relates to disposal of properties of the scheme, the operation of the Order is modified to allow Sun-Plant to meet the liabilities of the refunds to the investors in accordance with these directions.


Money-lending laws not applicable to NBFCs, holds Gujarat High Court

The ruling comes as a great respite for non-banking financial companies; but the judgment leaves several unanswered questions on usurious money lending in India—like the rates charged by microfinance companies

In Radhey Estate Developers vs Mehta Integrated Finance Co Ltd, a Division Bench of the Gujarat High Court (ruling dated 26 April 2011) ruled that the Bombay Money Lenders Act, as applicable to the State of Gujarat, does not apply to non-banking financial companies (NBFCs) which are regulated by the RBI (Reserve Bank of India). While the ruling may come as a great respite to NBFCs, it opens up several questions which go to the very heart of regulation of the financial sector in India.

Money lending laws

Many may not even know that something called money-lending laws, other than the RBI controls, exists. Lost somewhere in the dark alleys of state legislations, money-lending laws are enactments made by the States that are supposed to regulate moneylenders. One of the earliest, the Bengal Moneylenders Act, was enacted before Independence, in 1940. Several other states, over a period of time, enacted money-lending legislation. Note that the Constitution, in Item 30 of Part II of the Seventh Schedule, grants power to the state governments to enact legislation for money-lending, moneylenders and agricultural indebtedness.

Money-lending laws typically require licensing of moneylenders, impose a ceiling on rate of interest that moneylenders can charge, and generally provide that a court shall not take cognizance of a matter filed by an unlicensed moneylender.

While the intent of the money-lending laws, as apparent from the social setting in which they were enacted as well as the wording of Item 30 of Part II of the Seventh Schedule, clearly shows that these laws were designed to protect borrowers from usurious indigenous moneylenders, in actual sweep of their language, they have not been limited to lending by such moneylenders only. In fact, some of the laws clearly say that they apply even to a commercial loan, and even to a loan given on a one-off basis. There is no exemption for loans given by companies to companies either. For instance, in the Bengal Moneylenders Act, there are express provisions dealing with commercial loans.

With the advent of organised banking and institutional lenders such as NBFCs, both the state and the subjects over a period of time, almost forgot about these laws. In some cases, people approached the State government for a new license-it was not even possible to find which department or official actually dealt with such licenses. Once in a while, a borrower who fails to repay a loan takes a defence that the lender in question is not a licensed moneylender-that is where the legal alleys discuss the interesting subject of money-lending laws. This is exactly what has happened in the Gujarat High Court ruling discussed in this article.

RBI's review of money-lending laws

It is not, however, that money-lending laws have been completely forgotten. However, the issue in India is that unless some farmers somewhere commit suicide, we do not think that the issue is politically sensitive enough to demand attention. In May 2006, the RBI constituted a Technical Group that submitted a report on reforms of money-lending legislation. The Group highlighted the need to have protection against usurious money-lending, and in fact, proposed a model legislation for States to adopt. The Report has been on the website of the RBI since July 2007, and nothing has been done on it, until farmer suicides catapulted the issue of microfinance regulation. Of course, now we are discussing a topical problem-microfinance regulation, and usurious money-lending by anyone other than a microfinance lender is not causing us worry at all, possibly until the next round of suicides.{break}

Are NBFCs covered by money-lending laws

The question whether NBFCs are covered by money-lending laws or not has been discussed in several court rulings. The Kerala High court has in Link Hire-Purchase and Leasing Co. (Pvt.) Ltd and Premier Kuries And Loans (Private) Ltd vs State of Kerala And Ors103 Comp. Cas 941 (Ker)held that the money-lending laws of the State are applicable to a company even if the company is a financial company. However, in Vellanki Leasing & Finance Pvt Ltd vs. Pfimex Pharmaceuticals Ltd and two others ( the Andhra Pradesh High court dealing with a case under Sec 138 of the Negotiable Instruments Act refused to give consideration to the fact that the plaintiff was not a registered moneylender, holding that the Act applied only to "professional moneylenders".

In the litigation before the Division Bench of the Gujarat High court, several NBFCs had joined. The argument pressed was one of repugnancy of laws-that if there is a Central law and a State law, operating in the same field, in situations such that there is an inconsistency between the two, the Central law will override. Also, a legal dictum called "occupied field" was used, implying that where a field of regulation was already occupied by a regulator, another legislation cannot make an ingress into the same. In the present case, the RBI that regulates NBFCs has already "occupied" that field.

Usury unregulated

The court obviously answered the technical question that came before it. However, it is not for the courts to fill the policy gap that the ruling leaves behind. There are several points one must note, pertaining to the Gujarat High Court ruling:

  •    First, since every State has its money-lending law, with difference of language, the ruling is limited to Gujarat only.
  •   Second, as the essence of the ruling is that an NBFC which is regulated by the RBI cannot face overlapping regulation from the State law, the ruling will operate only in respect of such NBFCs which are registered with the RBI. There are tens of thousands of companies that carry NBFC business, though without any registration. There are at least equal amount of entities that are unincorporatedhence, outside the RBI jurisdiction. LLPs (Limited Liability Partnerships) are incorporated, and yet outside the RBI jurisdiction. None of them can claim the benefit of the Gujarat High court ruling.
  •    Third, the key point of repugnancy of a law may, with respect, be discussed further. One is not sure whether the case will be taken further up in the process of appeal, but there are several rulings of the Supreme Court on when is a law 'inconsistent' or 'repugnant'. If two laws can be complied with simultaneously, without one destroying the other, the same cannot be said to be repugnant. The purport of State control on money-lending is completely differentit is regulating/eliminating usury. That is surely not the purpose of the RBI regulations on NBFCs. The RBI nowhere controls lending practices or rates of interest that lenders can charge. In fact, the RBI in one of its circulars says NBFCs may charge rate of interest decided by themthey just have to disclose the rate of interest being charged. Hence, the contention that there is a conflict between the State laws and RBI regulations does not seem well-founded. Even the RBI Technical Group did not conclude that there was a conflictof course, the Group did recommend that NBFCs may be exempted from the regulation. But exemption is a different issue-the question of exemption would not even arise if NBFCs were not covered by the State laws in the first place.

    The above legal nitty-gritty apart, if the State laws do not apply to NBFCs or companies in general, there is no control on usury in India. Usury is a form of civilized exploitation  it has existed in all ages, and perhaps in all nations. It is this that inspired Shakespeare to write his alltime masterpiece; it is this that might have inspired Prophet Mohammed to give riba against money-lending itself. And usury continues to live in different forms even todaythe rates of interest being charged by microfinance lenders came under glare for political reasons, but variety of forms of such lending continue to thrive, right under the nose of the regulators. The socalled distressed debt funds do this very thing, in a disguised form. It is pitiable that even banks get into this business, calling it by such queer names as "debt-consolidation loan".

    (Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. He can be contacted at Visit his financial services website at


Private equity firms and broken-down model of broking firms–IV

Predatory selling tactics of producers and intermediaries alike, combined with erratic regulations, have combined to drive retail investors to the safety of bank deposits

Last month, Bloomberg UTV, supported by the MCX group, gave out awards to several "financial leaders". One of the leaders given an award was India Infoline (IIFL). Five months ago, Moneylife exposed how IIFL had put out a 'buy' on the Money Matters stock only a few days before the Money Matters scam was unearthed. (Read, "India Infoline put out a 'buy' on Money Matters a few days before the scam was broken by Moneylife; FIIs are livid. Stock down 15%" .) India Infoline has been in the news before that also. Mid-2009, the MiD-DAY newspaper reported that horrified clients from across the country had accused India Infoline of trading in their demat accounts 'without permission or authorization'. (Read, "In the line of fire" .) Following the newspaper exposé and a complaint filed on the matter, an India Infoline director was arrested. (Read, "India Infoline director arrested for fraud" .)

That's not a great recent record of leadership, and Bloomberg UTV and MCX should have known. Of course, leadership awards of globally renowned brands can easily go to financial firms embroiled in controversies. It is all part of the financial game, a game that market players make very rewarding for themselves. But it is not a win-win game. There are losers in the game too-the vast multitude of retail investors. Their story is in the macro numbers that we described in the previous part of this article on Tuesday. The fact is that the retail investor population has actually declined, despite a booming market and rising volumes. But if this was only based on bland macro data, something that one cannot relate to, it would not have been as shocking.

Of course, the picture of the diminishing investor population relative to rising prosperity is captured not just in macro numbers. It is evident also in the anguished emails that we receive, the grievances we redress and occasionally in the stories like the one in MiD-DAY. The stories of wrong-selling and wrong-buying are reflected in the macro trend and show how deep-rooted the problem is. Without finding a way to bridge the wide gap between the buyer and seller, a nationwide chain of distribution will work sub-optimally.

The problem starts with producers and manufacturers of financial products, which immediately gets transmitted to their distributors. (Some of the people we have dealt with can barely write correct English.) They all run operations with high overheads that can be funded only by sharply rising revenues and profits. This leads to steep sales targets. Then comes the problem with the products themselves. Most insurance products are extremely complicated. Mutual funds are sold like variants of shampoos. The less said about portfolio management services and structured products, the better. The only people who make money out of such toxic stuff are the banks, other distributors which sell them, and the the brokerages that churn them. An ophthalmologist we know walked into the PMS of JM Financial with Rs45 lakh and walked out with only Rs23 lakh! (For more on PMS, please visit our home page and read the stories under the section 'Portfolio Management Scheme'.)

The perils of the products and practices of the producers soon get transmitted to the sellers. All of them work for commissions, leading to even benign bankers becoming bhayanker.  (Read, "Customers need to be vigilant as bankers are turning 'bhayanker', says Ravi Subramanian", ) The incentive system in the stock market favours turnover/churn, and is therefore essentially anti-consumer. While selling a product, the intermediaries make it appear that these are easy to buy and do not require much expertise. The worst kind of mis-selling is done by bankers. They routinely sell unit-linked insurance policies as products with a "guaranteed return", persuading even retired people to move their money out of bank fixed deposits for the sake of quarterly or year-end commissions. Nothing is put in writing. In the event of a problem, your complaint will be heard by the call centre, but the bank official may have already left the job.

A relationship manager (RM) or a wealth manager (WM) working with a private bank has a 'target' to meet. Every bank customer with a sizeable deposit is a target for these managers. His (very often her) daily job is to sell an insurance product, a structured product or a PMS scheme to a depositor and earn commissions. Neither to they understand the product, nor do they care for customers.

One comment on our website says: "Relationship managers are the smartest tricksters moving and breeding on Indian banking soil (rather granite floors). They get their salaries from the banks and kickbacks (respectably named incentives or target bonuses, in various forms and hues) from the fund houses and ULIP companies. And when it comes to solving a problem (that is of their own making), it took me about three months of frantic persuasion thru emails (I reside overseas) to get it resolved by one of these banks, with at least four different persons from their so-called customer services cell appearing on the scene and driving me mad. Does one need further proof of the doings of this new breed, than the current fraud and swindling done by one of such smart asses in Citi Bank, Gurgaon? That is the stuff that this new breed called RMs is generally made up of."

Another person wrote: "A majority of the RMs and WMs can be painted with the same brush-carbon black! The reason? The same lot is hopping from bank to bank and the social net working among them is a potent weapon that they use to identify their prey… The way the banks and other institutions, working in concert with each other, are defrauding people, it has become impossible to take anyone or anything on its face value!" We can describe more of such cases, or you could read them yourself on our web site and other web sites like The stories are the same and so is the outcome-no redressal. That's where the role of the regulator comes in.

As we had highlighted in the third part of this article, financial products are different from durables. Durables are backed by science, are constantly improving and can be replaced if something goes wrong. In this case competition usually works. Financial products are not constantly improving, but they are backed by craft and commissions. So, here, competition does not work. For they all follow the same practices.

This is precisely why financial products are supposed to be closely regulated. But are they? Well, not when it comes to protecting the investors and weeding out mis-selling. There is a simple course open for the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI)-mete out exemplary punishment, such as suspending the licence to sell products for a period of six months to a year. Unfortunately, regulators have never taken such a step. Indeed, they have been mucking around about their territorial issues or bringing in half-baked solutions that can kill a business (mutual funds). Investor protection, promoting fair business practices and punishment that forces a fundamental change across the industry has not been on their agenda. (Moneylife is the only publication that has done extensive work on this, including a cover story. Read, "Hearing Aid for Regulators" )

Indeed, India Infoline could argue that what it does is exactly what most other financial firms do. Sadly, that is true. So, kicked around by the regulators, producers and intermediaries, there is little chance that a trusting saver would become a life-long customer of any other financial products except bank deposits. This is the essential truth that private equity investors, who have invested hundreds of crores in retail distribution businesses, missed. Or were they simply lemming-like and greedy? That is another story.

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Parmod Sachdeva

6 years ago


You are doing a good job in exposing the Bhyankers and their RMs. But the problem lies with investors also. They accept the things as told to them they never ask even the simple question even about ROI on which the said RM is giving the guaranteed returns.

Other problem is the myth that govt owned organizations provide better market linked products and there is no risk of capital. GOI will bail them out.

Any how continue your crusade.

Milind Chitnis

6 years ago

Excellant article. Sums the current scenario as it really is. Untill regulator steps in, only course of action available to investor is to be vigilant & knowledgeable.

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