The capital market watchdog has asked the government to empower it to carry out search and seizure operations, to attach properties and to ask for information and records for all relevant entities
Pitching for a major overhaul of the powers it has got to deal with market manipulators, the Securities and Exchange Board of India (SEBI) says there is an urgent need to carry out these changes to ensure speedier probes and fast-track prosecution of the culprits.
The capital markets watchdog has asked the government to empower it to carry out search and seizure operations, to attach properties and to ask for information and records for all relevant entities.
Besides, SEBI has also asked the government to streamline the procedures involved in execution of its existing powers.
“At times it has been difficult for us in many cases to move forward in absence of these powers.
“Also, there are long procedures involved in executing many powers that we already have and we want those processes to be streamlined,” SEBI chairman, UK Sinha, said.
“The expectation is that once we get these powers, then we would be able to move really fast on the investigations that we undertake, and on the actions we need to take against the culprits and in bringing to book all the manipulators and others defrauding the investors,” Sinha said.
Noting that SEBI has come a long way since it was set up 25 years ago in 1988 as an independent regulator, its eighth chairman said that the time has come for an overhaul of the regulations governing SEBI’s powers and other functions.
“Now we have found that there are certain lacunae in the regulations and there are certain areas where more clarity is required.
“There are some powers that we already have, but the procedures to execute those powers are very difficult,” Sinha said.
“We don’t have the direct powers to recover the dues, the powers to attach properties, etc. Many such powers are already there with some other regulators and the agencies such as the Competition Commission of India and the tax departments, among others,” the SEBI chief said.
“Another area where we face difficulties is while seeking information or records from various entities in the process of our investigations. What happens is that these entities tell us that they do not fall under SEBI jurisdiction and, therefore, they are not required to provide information to us.
“We face lots of difficulties in getting these details.
“There is also the issue of call data records that we need to establish that two parties have been talking to each other and could be related entities.
“We also do not have search and seizure powers, which is there with some other agencies,” he added.
Experts say that the lack of these powers was felt in a big way during some of the recent cases, including the high profile Sahara case, where SEBI could pass attachment orders only after a Supreme Court directive.
Besides, hundreds of entities have managed to avoid paying penalties imposed by SEBI, as the regulator does not have any direct powers to recover these penalties.
During her examination by the CBI prosecutor, Radia told the court that at the time of grant of licences, dossiers were in circulation which said Swan Telecom Pvt Ltd belonged to Reliance Communications
Appearing in the court for the first time, former corporate lobbyist Niira Radia today said she felt that Swan Telecom Pvt Ltd “was not eligible” to get the 2G spectrum licences as it was said to belong to Reliance ADAG group company Reliance Communications.
Testifying as a prosecution witness in CBI court in the case, she said that during the time of grant of spectrum, there was a very strong public perception that Swan Telecom Pvt Ltd (STPL) was not eligible.
STPL’s promoters Shahid Usman Balwa and Vinod Goenka are facing trial in the case.
“During the time of grant of spectrum, there was a very strong public perception created by the media of eligibility and non-eligibility. Through the public perception and advice of Tata advocates, I came to know that this company (Swan Telecom) was not eligible,” Radia told Special CBI Judge OP Saini.
During her examination-in-chief by the CBI prosecutor, she told the court that at the time of grant of licences, dossiers were in circulation which said Swan Telecom Pvt Ltd belonged to Reliance Communications.
“At that time, there were dossiers in circulation that the company (Swan Telecom) belonged to Reliance Communications, though I do not have any authentic or personal knowledge,” she said.
Radia said her public relations company was advising Tatas on telecom matters and Tata Teleservices (TTSL) had applied for dual technology licences in 2007.
Crime Branch officials of the Kerala police arrested Amway India’s managing director and chief executive William Scott Pinckney and two directors, Anshu Budhraja and Sanjay Malhotra of the multi-level marketing (MLM) company for alleged money laundering and breach of trust. The arrests were made under the Prize Chits and Money Circulation Schemes (Banning) Act 1978 (PCMCS Act), which only goes to prove that the Act is not as toothless as various state governments have liked to claim. Moneylife and Moneylife Foundation have always said that Amway and several other multinational chain-schemes do fall foul of the PCMCS Act and there are clear high court judgements to this effect.
Last month, after the collapse of Saradha group, the ministry of corporate affairs (MCA), in a face saving measure, has decided to hand over probe of such chit-fund, MLM, Ponzi and pyramid scheme operators to the Serious Fraud Investigations Office (SFIO). The ministry said the probe has been ordered in view of a larger public interest involved in the issues, although the state governments are the appropriate authorities for regulation of such chit fund companies and schemes under the Chit Fund Act, 1982. Since then dozens of schemes in Kolkata, which claimed to be chit funds have collapsed. Over 18 people have committed suicide out of despair over the loss of their life savings in Saradha alone.
Interestingly, the PCMCS Act, 1978, was promulgated only after large-scale loot by these dubious companies and a report by the James Raj Committee (1974) called for a total ban on such schemes arguing that they were prejudicial to public interest. Over the past 35 years, the Prize Chits Act has been rendered ineffectual because of the refusal by state police to act quickly enough—the only exceptions to this have been exceptional police officers like VC Sajjanar from Andhra Pradesh (AP) and sporadic action in Kerala.
The fact is there has been plenty of litigation on the issue, precisely because various authorities consider that the operations are illegal under the PCMCS Act of 1978. Moneylife Foundation, an NGO working towards spreading financial literacy, has repeatedly warned people about falling for MLM and pyramid companies with innumerable examples of losses incurred. Moneylife Foundation sent a representation to the prime minister, finance minister, governor of RBI and SEBI.
A set of powerful MLMs, which are part of an exclusive closed club, called the Indian Direct Selling Association or IDSA (on the lines of the Direct Selling Association of the US) has been lobbying hard to make a distinction between their operations and those of others, who they call, fly-by-night operators such as Speak Asia and Ad Magnet. In fact, the tens of thousands Ponzi/double-your-money schemes that exploit poor financial literacy cause the biggest losses to Indians across the economic spectrum today.
Amway can be at best a source of pocket money
Senior Amway representatives had met Moneylife to clarify their views on Amway. Richard N Holwill and Rajat Banerjee , who met us, admitted that although some distributors tend to go overboard in pitching the scheme, income from being a distributor of Amway can, at best, be a source of additional income or pocket money for most people. It is not the pathway to riches as MLM companies make it out to be. However, Amway also insisted that there is no longer any joining fee and the model does not necessarily require enrolment of distributors. However, there was no answer to expensive nutraceuticals being prescribed by doctors, whose wives or relatives were Amway agents.
In India, AP was the first state to enact a law to ban money circulation schemes in 1965. Both the Supreme Court and several high courts have passed landmark judgements against the operation of these schemes as they violate the law of the land and are detrimental to the interests of the public. There are on-going cases against Speak Asia and Amway, to cite two examples.
After the decision of AP High Court, a spokesperson for Amway India had said that the company had filed a special leave petition (SLP) before the Supreme Court. The HC in its ruling observed that the company's business model may come within the mischief of money circulation scheme under the PCMCS Act.
VC Sajjanar, a former superintendent of police, Economic Offenses Wing, Andhra Pradesh, who was involved in the investigation of Amway, said this (the comment of the spokesperson) was nothing but a propaganda used by the company to continue its MLM operations. “Section 3 of the PCMCS Act prohibits any entity from promoting, conducting any prize chit or money circulation scheme, enrolling any member of any such chit or scheme, or participating in it otherwise, or from receiving or remitting any money in pursuance of such chit or scheme. This is the provision we used to ban Japan Life, Amway and GoldQuest,” said the officer, who is now DIG at Hyderabad.
Moneylife has been writing about the menace of MLM schemes, including GoldQuest, QuestNet, Stockguru.India, Japan Life, Amway, Speak Asia, NMart, AdMatrix and so on. On the other hand Moneylife Foundation is helping people to become aware about money circulation or MLM schemes and is actively involved in making changes in the government policies through representations, memorandums etc.
Moneylife had been the first to flag Speak Asia as a fraud, way back in October 2010. In December 2010, Moneylife had reported about the dubious modus operandi of Stockguru.India and advised investors to stay away from investing in the company. It collapsed much later. Similarly, in August 2011, we informed our readers, how Surat-based NMart Retails, a division of Newlook Multitrade Pvt Ltd, is running a collective investment scheme (CIS) based on MLM model, under the guise of selling products through its retail chain. Needless to say all the three mentioned above duped lakhs of people. There are scores of other such examples.
EAS Sarma, former secretary to the Government of India (GoI), has written several letters to the prime minister, ministry of corporate affairs, ministry of finance, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and others, on MLM menace.
“Many of these (MLM) companies are not even registered under the Companies Act. Even those registered evade regulation. Those booked regroup under different names and continue to cheat the people. All these companies and those that promote them should be dealt with an iron hand and be prosecuted effectively,” he said.
Kerala, said to be the country’s most literate state, is flooded with numerous “get-rich-quick” or “earn-huge-return” schemes offered by money swindlers. While the state director general of police has admitted noticing frauds amounting to over Rs1,000 crore, the worrying factor is that even a few policemen have been found to be involved in these MLM schemes.
The Kerala police have also warned hotels, restaurants and convention centres across the state, not to allow money-chain companies to hold any meetings on their premises.
MLMs, chain companies or networking companies—also known as chit funds or blade companies—have turned very powerful in several states, which are ruled by regional parties and have strong political connections. Their political funding protects them from any action. Also, as Mr Sarma has pointed out, “Many of these promoters have political links and they approach various ministries in the guise of marketing companies and make overtures to protect themselves. They know that they can play one ministry against the other and get away with their loot.”
Independent regulators are all IAS officers who owe their jobs to being compliant or their willingness to act as hatchet persons for politicians (barring the singular exception of Vinod Rai as Comptroller & Auditor General of India, (CAG). Nobody in the system is under pressure to prevent wrongdoing; hence, no regulator, bank chairman or union minister has lost his job in the past 20 years, despite the sharp increase in the size and number of scams. If this is true of massive scams and misappropriation of funds unearthed by the CAG (2G, coalgate, irrigation, aviation, mining, defence procurement, disbursement of government subsidies, etc), where is the question of holding anyone accountable for failing to go after MLMs, Ponzis and chit funds?
Remember, Saradha chit fund from West Bengal? Millions of people were connected to the chain-money or chit fund companies in West Bengal. These created the wrong kind of jobs and dubious economic growth, which is under threat with no new businesses coming up and chit funds unravelling.
There are more than 50 major schemes operating in the eastern India, commonly called chit funds, but really in the 'business' of paying old deposits with the new ones, thriving on the potent cocktail of illiteracy, greed and regulatory inaction. There are a few thousand smaller schemes that are also conning people with the same modus operandi. And, they are now imploding.
After the Saradha case blew up mid-April, the flow of money has completely stopped. The collapse of Saradha, with ostensible businesses in automobiles, cement, media etc., has claimed several lives.
The media too will be deprived of an important source of revenue. The Bengali print and TV media and the hoardings, thrived on advertisements from Rose Valley and MPS Greenery. Rose Valley has set up its own TV channel now but continues to advertise in popular media outlets like ABP’s Ananda channel. In a last burst of that cosy relationship, the print media is now getting huge ads from the surviving several chain-money schemes which are asserting that they are different from Saradha.
While the RBI has maintained that the deposit-taking companies does not fall under its jurisdiction, market regulator SEBI tried to rein in such companies in the past under its collective investment schemes (CIS) regulations. However, these companies managed to subvert the SEBI orders and continued to flourish with political patronage.
Another interesting aspect of all deposit-taking companies is the source of money. Nobody knew exactly where the money was coming from for these companies, but everybody suspected that it was some kind of a pyramid marketing scheme, made infamous 30 years ago by the failed Sanchaita Investments. Sanchaita Investments went bust in 1980s leaving behind a long trail of ruin and suicides by number of agents and depositors in West Bengal.
So far, all deposit-taking companies, chit funds and CIS operators have received patronage from politicians across the party lines. Especially in West Bengal, the ruler got changed but patronage has remained the same. The CID and state finance department officials had once raided Rose Valley’s office in Tripura, but to everyone's surprise, no arrests were made. Many people had attributed the outcome to Rose Valley's cosy relations with the Left Front.
The Saradha group is reportedly known to be close to Trinamool Congress leaders and the government.
According to Robert FitzPatrick, President of US-based Pyramid Scheme Alert, schemes like Amway, QNet or GoldQuest are an “endless chain”, or a “pyramid scheme”.
“I believe this form of fraud is a clear danger to national economies. They subvert efforts to accumulate wealth. They divert energy and funds from real businesses. They often divert people from seeking more education with their promises of fast wealth. They destroy savings and equity of lower income people. They confuse people as to what a legitimate value-based business is. Unless the regulators and analysts recognize and are willing to assert that this form of business is ‘inherently’ fraudulent and harmful, it is rather difficult to stop any one particular company. Such a fraud, whether the products are soaps, gold coins, vitamins or air in a box, will always cause 90%-99% of the investors to ‘fail’. Whether some of the people engage in retail selling or not, the income promise that relies on continued expansion is deceptive, that is, it is a lie. The financial harm to the vast majority is predetermined. Calling it a business does not make it so. A real business requires an exchange of value,” wrote Mr FitzPatrick to us. He is actively exposing several pyramid, Ponzi and MLMs.
Here are some of the important stories written and representations made by Moneylife over the years…
In May 2011, following the exposé by Moneylife on Speak Asia Online Pte Ltd and its MLM scheme, Moneylife Foundation sent a representation to prime minister Dr Manmohan Singh, (the then) finance minister Pranab Mukherjee, finance secretary Sushama Nath and Reserve Bank of India (RBI) governor D Subbarao urging them to ban all MLM companies and their schemes in the country, or to bring all MLM companies under the regulation of either the RBI or the Securities and Exchange Board of India (SEBI), to stop them ensnaring gullible people.
The massive money, which is raised surely shows somewhere on the balance sheet of the company, filed regularly with the MCA. The primary recipient of the information about these companies is the MCA, and surprisingly the MCA is the least proactive in the entire process of bringing these perpetrators to regulatory focus, sooner before tonnes of money vanish.
Dubious pyramid schemes or money-circulation schemes are looting Indians across economic strata, finds Sucheta Dalal. This will continue since Central and state governments seem unconcerned.
Pyramid marketing companies are looting the public easily, while the government watches. Many countries have banned them outright.
A strange deposit scheme that is proliferating in the states of Orissa, Chhattisgarh, Karnataka and Maharashtra has already collected almost Rs1,000 crore and is expanding virtually unchecked. The scam has elements of money-laundering and possibly the use of fake and forged currency as well; however, the banking regulator would like to pass off the investigation to the respective state governments for investigation under the antiquated Prize Chits and Money Circulation Schemes (Banning) Act.
An international network marketing scheme hawking expensive limited edition coins is attracting a huge following. Sucheta Dalal examines this strange quest.
Moneylife readers know how MLM schemes ensnare lakhs of people by promising extraordinary returns. We learn from the ministry of consumer affairs that the government is now waking up to the need for better regulation of MLMs and Ponzis. At the same time, the powerful Direct Selling Association of the US is lobbying hard for an amendment.
Pyramids are pure fraud. Their business is unsustainable-they promise payment for goods or services of dubious value. The hallmark of these schemes is the promise of sky-high returns in a short period of time, for doing nothing other than simply handing over your money to them, and getting others to do the same.
Even as India bans pyramid schemes under a statute called the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, the country continues to be a happy hunting ground for pyramids because our legislation is deliberately unworkable.
Investors losing money, or falling for dubious Ponzi schemes, is not a recent phenomenon; this has been happening for decades and it is not restricted only to India. Why is it that people repeatedly fall prey to such schemes in spite of being aware of the frauds perpetrated by conmen under different guises?
EAS Sarma, former power and finance secretary, said the ministry of finance, RBI, SEBI, and the investigating agencies should collectively tackle this problem without any delay, as every day of procrastination will only result in thousands of hapless families cheated by the promoters of these schemes.
Spokespersons and dealers of MLM schemes or network marketing schemes respond to questions about their legitimacy by brandishing a 2003 letter issued by the then secretary, ministry of corporate affairs (MCA). What they omit to mention is that the letter was subsequently annulled following complaints about its misuse. This means, the letter used by these scamsters is no more valid.
While there are existing laws such as Indian Penal Code (IPC), the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (PCMCS Act) and others under which concerned agencies could prosecute the culprits, there is no effective mechanism in place to ensure a coordinated approach to identify the fraudulent operators in advance and book them well before they destroy the livelihoods of thousands of households and launder the ill-gotten funds to unknown destinations.
A set of powerful MLMs, which are part of an exclusive closed club, called the Indian Direct Selling Association or IDSA (on the lines of the Direct Selling Association of the US) has been lobbying hard to make a distinction between their operations and those of others, who they call, fly-by-night operators such as SpeakAsia and Ad Magnet.
QNet, the controversial Hong Kong-based multi-level marketing (MLM) operator with multiple names (GoldQuest, QuestNet, QNet, QI Ltd and QI group are the better known names) refused to answer simple questions like how much money their independent representative (IR) earns on an average every month and why their products are priced so highly. Instead, it sent us a threatening and defamatory mail that raises more questions as to their real motive.
If 2010 was the year of great Indian scams, 2011 was rather of Ponzi and MLM frauds. SpeakAsia managed to top the chart, but soon many others joined the bandwagon, duping gullible investors for several thousand crores.
Nothing comes free in this world, especially money. The universal truth is you need to earn your money by hard labour all the time and there are no shortcuts to double it in the shortest span of time. Therefore, even if your near and dear ones tell you he/she will double, triple, quadruple your money within a few days/months, politely reply to them that it is not possible and what they are advocating is a pure “get-rich-quick” type of scam.
Herbalife, a global MLM scheme also prevalent in India, is believed to be worthless according to hedge fund manager Bill Ackman, who made a detailed presentation on why consumers should avoid buying the company’s products and stay away from the MLM.