SEBI’s Bark, Bite and Leash

Who will ensure that SEBI does not misuse its powers?


The capital market watchdog is, finally, set to get a sharper set of teeth when the president signs the Securities Laws (Amendment) Bill 2014, already cleared by both houses of parliament, as we go to print.  The good news is the unfettered powers that were granted to the regulator have been somewhat diluted by introducing some checks. Whether this works in practice remains to be seen.

The amendments essentially cover mainly two issues. Power to act against unregulated ponzi schemes, or collective investment schemes, in different garbs which have already collected over Rs100 crore. It gives search and seizure powers to SEBI, including the power to call for information and call records even from those not connected with the capital market.

However, SEBI will first have to get the action cleared by a special designated court in Mumbai. Member of parliament, Rajeev Chandrasekhar, has asked for SEBI’s power to attach assets to be similarly ‘moderated’ through a magistrate because its actions can shut down a business, affect unrelated entities and lead to job losses.

SEBI has certainly done well in going after some chain money schemes in different parts of the country. Its big image-boosting victory has been over the two Sahara group companies’ massive fund collection through so-called optionally full convertible debentures. Its actions against high-profile but dodgy schemes such as Pancard Clubs, MPS Greenery, Rose Valley, Green Touch Projects, realty schemes and a host of others have also been commendable. But the job is tough and the proliferation of shady schemes is huge.

Rajeev Chandrasekhar, in his speech in parliament, said that the definition of collective investment schemes under the Bill is too broad and drew attention to the fact that only one scheme (Ahmedabad-based Gift Collective Investment Management Company Limited) had registered itself under SEBI’s 1999 guidelines and has yet to launch a single scheme.  

At the same time, thousands of ponzis have been operating unchecked, of which a score or more have been barred by SEBI. It is also unclear whether SEBI, after the amended Bill receives presidential assent, will go after large multi-level marketing companies and direct-sellers that are also collective investment schemes with physical products that provide some cover for the operations.

Some of these, like Amway, fall foul of the Prize Chits and Money Circulation Act, says the police.  Unfortunately, the SEBI Amendment Bill has made no attempt to offer any clarity. Mr Chandrasekhar too has touched upon this issue only in passing.

However, he was emphatic on the issue of transparency in the functioning of SEBI itself, without which “there will always be temptation to misuse and corruption,” he said. Mr Chandrasekhar urged the finance minister to ensure that “all consent agreements and cases are transparently disclosed, along with SCORES (online complaint registration site), on the SEBI website. This must be made legal and binding on SEBI as a part of its obligation to be transparent.”

The lack of transparency on the part of the regulator is an issue that Moneylife Foundation has been advocating for a long time. A right to information (RTI) application led to a central information commissioner (CICI) order asking SEBI to put data on portfolio management service online. But SEBI has complied with the order in a manner that defeats the purpose of giving investors an opportunity to compare data and make sensible investments. In fact, even that information seems to have been taken off the website. This writer did not find the link, despite a detailed search of the sitemap of SEBI’s website.

As for SCORES, SEBI’s complaint redressal mechanism, SEBI and the two national stock exchanges continue to put out glowing reports about their successful redressal of complaints. Yet, inexplicably, investors are extremely unhappy, partly because their complaints go into a black hole and partly because the SEBI Act simply does not allow for it to provide damages or grant compensation, even by recovering the amounts from defaulting or fraudulent entities.




3 years ago

Besides the regulation of Collective Investment Schemes (CIS) and attachment powers to SEBI there are two more amendments which are important.

They relate to “Settlement” whereby SEBI can settle any violation on payment of such sum by the defaulter or on such other terms as may be determined by SEBI. Investors have been debarred from the entire proceedings under the settlement process! In my humble view, this is a violation of their fundamental right.“

Second amendment relates to overhaul of penalties under SEBI Act, SCR Act & Depositories Act. Excepting 3 defaults, it has laid down a minimum penalty of rupees one lakh for each default. It is a retrograde step.

Virendra Jain
President, Midas Touch Investors Association


3 years ago

Why would anyone want anything to do with Amway? It is the world's largest MLM scams:

Vaibhav Dhoka

3 years ago

Regulators are killers in India.No hope of recovery from SEBI NSE or BSE for retail investors.

Right moves by the RBI to help savers

RBI takes steps to create consumer protection code


At a recent public lecture, RBI governor, Dr Raghuram Rajan, said that workable financial inclusion requires products that “should be easy to access at low transactions cost” with a minimal regulatory burden. “Simplicity and reliability,” he said, “would be key,” and bank accounts could be more easily opened by providing only current address proof, including makeshift dwellings.

He also said that the Reserve Bank of India (RBI) would nudge banks to offer a simple suite of products based on the principle that “what one thinks one is paying for is what one should get, without hidden clauses or opt-outs to trip one up.”

A consumer charter of rights was in the works and RBI was working with the government at enhancing financial literacy and “strengthening the customer grievance redressal mechanism.” It was also looking to “expand supervision, market intelligence, and coordination with law and order to reduce the proliferation of fly-by-night operators.” In effect, Dr Rajan is promising achche din (good times) to savers.  

The Consumer Protection Code on customer charter of rights has been tightened over two months of discussions. Its latest version incorporates the following rights:

The right to equality will ensure that a customer is not discriminated against on the grounds of age, caste, religion, etc. Where an earlier version of the Code did not allow one consumer group to be favoured over another in selling, pricing and distribution of products and services, this has been modified to allow insurance products to be tailored to different age groups and health conditions.

The right to suitability of products requires banks to ensure that financial products offered to consumers are based on an assessment of the needs, financial circumstances and understanding of the consumer. This is bound to tame the reckless mis-selling by relationship managers.

The right to fair treatment, transparency, fair dealing and responsible marketing is a comprehensive clause. This will ensure that not only are financial terms clearly enunciated, but products are free of coercive contractual conditions and misleading representations. It also says that “financial services providers cannot threaten the customer with physical harm, exert undue influence, or engage in blatant harassment.”

The right to privacy will ensure that customer’s credit data is not shared without their permission, especially with telemarketers.

The right to grievance redress has been substantially improved. It allows banks to be held responsible for the sale (or mis-selling) of third-party products as well and will require bankers to spell out the customers’ right to compensation for mistakes, lapses in conduct and non-performance or delays. The earlier draft had only outlined the escalation process to the banking ombudsman.

A curious omission in the new version is the elimination of the right to choice. This would have stopped mortgage companies and auto-loan providers from bundling insurance products at a higher cost. But, to be fair, other clauses of the Code can still protect a consumer who rejects such bundling. The revised version has also dropped the right to special protection for poor and vulnerable customers.

The key to the Code’s effectiveness, of course, is its proper implementation. There is no point in framing a bunch of rights, if consumers, especially those who are new to formal banking, have no way of representing themselves or fighting to have their grievance redressed. What may help is a realisation in RBI that there is a non-adversarial role for consumer protection organisations in ensuring that a charter of rights translates into reality.




3 years ago

I dare to be a pessimist in saying that these 'paer measures' will not get translated in actual assistance to the consumers at large.
Especially , the fifth step said to be substantially improved in effective redressal of grievances to the Consumer; I am afraid the RBI or its redressal agency Banking Ombudsman ; are not yet ready for it to interpret the provisions of 'Ombudsman Scheme' rightly. It simply goes on what word is used in the scheme and not what was intended to protect the right of the consumer. I have order passed by the Dy. Governor RBI ( In late July)simply sticking to the anti - consumer approach on mere technical ground.
High time that instead of enacting the fresh rules in consumer interest ,then forgetting the deliverance is stopped by RBI .The crying need is to amend the existing Banking Ombudsman Scheme to be more consumer -centric and keeping an hawk's eye on any violation of consumer right or RBI regulation by he banks.

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