Crores being blown up, while aggrieved investors don’t get redress
Financial literacy is as much a fad today as corporate governance was after the global accounting fraud had engulfed top multinationals, at the turn of the century. In the past decade, we have seen regulators pooling investors’ own money (in the form of unclaimed dividends and interest on various financial instruments as well as bank and corporate deposits) into large funds which are spent on conducting financial literacy seminars and issuing advertisements on how to be smart with money.
The amounts available for this exercise are huge; but significantly, investors’ money is being spent without any tangible outcomes. The ministry of corporate affairs (MCA) and the Reserve Bank of India (RBI) have several thousand crores of rupees in their kitty for investor education and protection. Stock exchanges and financial regulators have a few hundred crore rupees each. In most cases, there is no real effort to trace the investors who have not claimed their financial benefits or to ensure that their heirs receive the funds due to them.
RBI had, at least, asked banks to publish the list of bank account-holders who had not claimed their deposits, before the money was transferred into a fund-pool that will be used for investor education. MCA, with over Rs1,000 crore in the Investor Education & Protection Fund (IEPF), has a clunky and rather difficult process for tracing if a person’s unclaimed financial benefits have been transferred to the IEPF. But those who were unable to claim dividends or benefits due to litigation that invariably exceeds seven years are left high and dry.
MCA has unilaterally cancelled the accreditation of all investor groups and prefers to work only with professional institutes under its regulatory ambit. While the IEPF website lists a few financial literacy seminars that have been conducted around the country, there is no clarity about the basis on which it decides to dole out funds. The ministry is now busy setting up a permanent IEPF authority that will give it greater flexibility in spending investors’ money.
Meanwhile, financial consumers, who are struggling to get dozens of companies (such as Neesa Leisure, Helios & Matheson, Elder Pharma, Unitech Constructions and Plethico Pharma) are being made to run from pillar to post without redress. The ministry, in fact, scrapped an investor helpline, funded out of the IEPF funds that used to be run by Midas Touch Investor Association without providing any reason for its action. Despite a new government in place, there is no indicator that the ministry will be made accountable for ensuring that these funds are correctly spent.
The key question is: Do endless financial literacy seminars work? Research, based on behavioural economics, shows that the rational economic person does not exist. Most people are simply not wired to understand financial products and tend to translate their experience of buying consumer goods to financial products.
A study published in the Journal Management Science found that almost everybody who has taken a financial literacy class, forgets what has been learnt in 20 months. So, the impact on their future financial behaviour is negligible. An article by Helaine Olen, author of Pound Foolish on Slate.com, has a title that says it all. “Stop trying to make financial literacy happen. It is a noble distraction from actual consumer protection. That is why financial services industry loves it.” We agree. In fact, our regulators love it even more. And, they have figured out a way to get access to a large pool of investors’ own money to spend without any accountability. Regulators use this money power effectively to dole out advertisements to friendly media; those who ask uncomfortable questions are left out. This probably explains why little media attention is focused on the pathetic grievance redress record of financial regulators, despite setting up online redress systems. Moneylife finds that investors with resources manage to have some investigation initiated by filing complaints with the economic offices wing of the police. However, this rarely helps them recover their money. Often, it is more good money spent to recover what is lost.