Deliberate Obfuscation

Savers will continue to lose money in chain money schemes because the regulators are pretending not to understand the core issues

 
Over the past year, the Securities & Exchange Board of India’s (SEBI) war with the Sahara group has, at least in the public eye, imbued the market regulator with a sense of heroism. SEBI has gone after Sahara with remarkable tenacity—but only on the issue of synthetic convertible debentures issued by two Sahara group companies; it has also made a push to check MPS Greenery and sundry goat-rearing and emu farming frauds, categorised as ‘collective investment schemes’. Once the collapse of Saradha chit fund blew up into a major scandal, SEBI rushed to issue a flurry of orders against the promoters, after pussyfooting on it for three years. 
 
The lack of clarity over regulation of chit funds and chain schemes is clear from a reply to the Rajya Sabha by Sachin Pilot, minister of state for corporate affairs. On 4th March, Mr Pilot said that these scheme were liable for action under The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (the Act) administered by the ministry of finance (department of financial services) through the state governments; those that can be classified as ‘collective investment schemes’ would come under SEBI.
 
An Act, administered by the finance ministry through state governments (read local police) to regulate schemes, which may or may not be registered under the Companies Act, but the minister of corporate affairs answers questions about it? What can be more confusing? There is more.
 
The finance ministry had also set up an inter-ministerial group comprising RBI, SEBI, MCA, ministry of consumer affairs and the central economic intelligence bureau to prepare draft model rules to give teeth to the Act of 1978. The draft—‘The Money Circulation Scheme (Banning) Rules, 2012—has finally been put in the public domain for discussion, after the Saradha debacle. 
 
Mr Pilot, having identified broad regulatory responsibility for pyramid schemes said, he had “written to the Finance Minister to increase surveillance by RBI over unauthorised NBFCs (Non Banking Financial Companies).” Finally, he said that his ministry had initiated action against 87 companies that had floated ‘fraudulent investment schemes’. There is no clarity on how these ‘fraudulent’ schemes were identified, but Mr Pilot says, various state governments had been asked to initiate ‘vigorous’ action under the Prize Chits Act. 
 
Mr Pilot’s answer is a succinct iteration of the confused regulation of these dubious money circulation schemes. I suspect that the confusion is deliberate because it allows all ministries and regulators to evade direct responsibility for the frequent chain scheme collapses that destroy people’s savings. The SFIO (in 2012) and SEBI chairman UK Sinha (in recent weeks) had another idea. They want a central regulatory agency for implementing the Act. This is probably because the draft model rules leave the flawed regulatory structure untouched, but only update various definitions to try and include disguised money circulation schemes (any scheme where returns depend on enrolling new subscribers in various pre-specified formats) that pretend to sell a product or service.  
 
The demand for an independent regulator is another piece of obfuscation. The Andhra police, led by DIG VC Sajjanar, the lone crusader against chain money schemes, has once again scored by arresting the founder of NMart, a chain money scheme that initially proliferated in Gujarat. There is nothing to stop the government or its agencies from acting against highly publicised schemes, such as SpeakAsia or QNET or a Rose Valley or Alchemist, long before they collapse. 
 
As we write, a convicted Russian fraudster, Sergey Mavrodi, is luring tens of thousands of people into a fictional cult with its own fictional currency, but can be bought only for Rs5,000 deposited in a member’s account. A quick look at the hysterical comments by members of this cult to Moneylife’s exposé of this fraud (www.moneylife.in) reveals how dangerous this is. The government has refused to act even though EAS Sarma, a former Union secretary and a person of unimpeachable integrity, has written to every ministry and regulator as well as the prime minister about the dangers of these schemes. Mr Sarma pointed out that, far from stopping these dubious schemes, the Foreign Investment Promotion Board (FIPB) was planning to allow foreign direct investment in MLM companies. Global MLMs, like Amway, Avon, Tupperware and others, which fall foul of the Act, entered India in the 1990s through FIPB approval which apparently operates independently of all other laws!
 
Ironically, the only specific response that Mr Sarma has received so far is from SEBI which, in August 2012, told him, “The subject matter of complaint does not fall under purview of SEBI. You are requested to take up your complaint with appropriate authority.” Yes, the same SEBI which has issued several hurried orders about Saradha chit fund, after its collapse and whose officers are under a cloud, after Saradha promoter Sudipta Sen told the police that he had paid large sums of money to Sajjan Agarwala, an intermediary, to buy up the SEBI officials. SEBI, in turn, claims that its officials were manhandled when they tried to inspect the then-powerful Saradha group in 2012. But do recall that CBI had arrested a SEBI general manager Rajesh Pratap Singh in Kolkata for taking a Rs25-lakh bribe from Gautam Kundu, chairman of another notorious pyramid scheme Rose Valley.
 
Clearly, we do not need yet another regulator. We need the finance ministry and MCA to show the gumption to act decisively to squash pyramid schemes. Many of them are not even registered in India or come under the MCA’s purview but it is easy to initiate action on them, as Mr Sajjanar has repeatedly done, over the past decade. We also need a clear policy about raising public deposits. On page 20, our columnist R Balakrishnan points out how India is one of the rare countries that allows all kinds of entities—from builders to manufacturing companies to jewellers—to raise public deposits. 
 
Consider this. The blue-chip Titan Industries had a gold deposit scheme, called Annutra, with over 2.5 million investors. They deposit a small amount each month for 11 months; the 12th instalment is paid by the company (interest) and the scheme has to be redeemed by purchasing gold jewellery. Now, Titan is a rock solid blue-chip company—but the government is allowing it to run a tax-free recurring deposit scheme, with exit restrictions. 
 
What’s worse, jewellers in every street are offering similar schemes to lure people. So long as gold prices moved steadily northward, everybody was happy. What happens if this cheerful boat is rocked by turbulence in gold prices? What are the tax laws that govern these deposits? There are no answers. Probably because the wives and daughters of our netas and babus are all invested in such schemes. 
 
Last week, Sumit Bhatia, a Moneylife reader, wrote to say that Big Bazaar had advertised a scheme calling for deposits of Rs10,000 from the public and would offer them goods worth Rs12,000 in a year, with some caveats. He asks, doesn’t this amount to deposit-taking? Shouldn’t it be regulated by RBI? Who governs this fund collection by a company already burdened by heavy debt from banks? And, if a citizen can spot this, aren’t regulators sleeping?
 
This is really the key issue. While regulators are looking to fine-tune the already regulated legal financial sector (banks, insurance, finance companies, mutual funds and broking companies), they are completely unconcerned about the ever-expanding shadow financial sector that is allowed to have a free run for savers’ wallets, especially those of the poorest.
 
Sucheta Dalal is an award-winning journalist and the managing editor of Moneylife. She can be reached at [email protected]

 

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    COMMENTS

    R Balakrishnan

    7 years ago

    Our governments seem to encourage financial fraud at every level. The lack of deterrent punishment is one of the prime drivers of financial frauds. And regulators pretend to chase the crooks after the money has vanished. Wonder if things will ever change?

    shailesh gandhi

    7 years ago

    I think you are actually exposing muddled thinking in the Government as to who should be responsible. I hope your continuous and committed efforts will bring results.
    I agree we do not need more regulators.

    nagesh kini

    7 years ago

    The multiplicity of Regulators, with the MOF and State Governments joining the band wagon makes money multiplying schemes a game of ducks and drakes. This must be put an end to with a single more comprehensive enactment encompassing collecting of monies or deposits by any name called. The present lack of clarity has been exploited by the unscrupulous operators that is why we have blade companies in Kerala and the Saradhas and others a free hand to cheat with impunity.

    Food security for labourers and people at the lower economic strata, a new twist!

    If we cannot export or do not want to export our foodgrain at cheap prices, can we at least divert a reasonable quantity of the available surplus to meet the needs of millions of workers, who are in the lower rung of the society?

    Due to the poor conditions prevailing in the Parliament, the presiding officers of both Houses had to declare sine die as the efforts earlier to get the Food Security Bill passed was in vain.
     
    The Opposition had waged relentless battles on the need to dismiss the ministers concerned, and in the end, both Pawan K Bansal and Ashwani Kumar tendered their resignations, as the investigations by CBI continued. It would be a couple of days before the work can commence again.
     
    In the meantime, the BJP lost its bastion in the South and the people of Karnataka, fed up with the corrupt administration, brought in the Congress by a simple majority vote.  Siddaramaiah took over as the chief minister, on the Akshaya Tirtya day and the ceremony was attended by over one lakh people in the Kanteevara Stadium.
     
    The very first act of the chief minister as to make an announcement of various schemes that he had promised in the manifesto, which would start with the benefit being extended to 98.17 lakh people below the power line (BPL) by making available rice at Re1 per kg, with a maximum of 30 kg per family each month, effective from 1st June.  It may be remembered that earlier, BJP government had distributed 20 kg of rice per family at Rs3 per kg through the PDS.
     
    So far, so good for the BPL families in the state. And what about the national level?  What is the foodgrain situation in the country, and what are the prospects for the ensuing monsoon which is around the corner?  Let's take a look.
     
     Last year, despite drought conditions in parts of Maharashtra, Gujarat and Karnataka, the country's foodgrain output reached 254 million tonnes. Food stocks in the central pool stood at 59.67 million tonnes (MT), consisting of 35.46 MT of rice and 24.20 MT of wheat. This was after our exports.
     
    Last year, rice exports reached 10 MT but this year, it is unlikely to reach 6 MT due to serious price competition from Vietnam and Thailand. Likewise, after exporting 5 MT of wheat, due to cheaper supplies from Ukraine, Indian export can not make much headway unless the price is reduced or matched. Such delays in deciding the export quantum or price level is detrimental to our exports.
     
    A similar situation is likely to be faced in the export of corn to 3 MT against 4 MT last year due to shipments from larger producers like USA, Brazil, Argentina and Ukraine.  Only in the case of soya meal, India is in a better wicket due to higher prices obtainable from Iran but this can change at short notice, because of the political developments in that country right now.  The elections are around the corner in India and we need to watch the political climate with great care and interest.
     
    The fact is, when prices globally fall or rise, exporters need to be able to take the decision without delay in order to maintain our customers abroad. In the long run, it is cheaper to accept a loss in the falling market rather than trying to maintain perishable commodities like foodgrain, when new arrivals are expected in the months ahead.  Or otherwise, plan alternative uses for the same!
     
    No doubt, there is the urgent need to secure supplies for consumption locally. So far, the monsoon predictions are favourable, but the actual rainfall alone will determine the farm output—right time and in right quantities.
     
    Meanwhile, grains stored both in the open areas and closed warehouses, are subject to natural rot, rodents, and other forms of damage on which we have little or no control.
     
    So, this issue will take us to the innovative canteen scheme of Tamil Nadu chief minister Jayalalithaa, who has sponsored these canteens, initially with 73 centres (target of 2,000) by supporting women's self-help groups. The corporation makes available suitable housing locations from where these women make and supply the popular breakfast dish of idli at Re1 a piece, sambhar rice at Rs5 and curd rice at Rs3, from seven in the morning till 10 pm. Such centres will cater to the needs of mainly daily manual labourers, slum dwellers and people from the lower economic strata. Already, these centres are overflowing with people who form early queues even before these are open for business.
     
    The question now, therefore is, if we cannot export or do not want to export our foodgrain at cheap prices, which are currently available due to intense international competition, can we at least divert a reasonable quantity of the available surplus to meet the needs of millions of workers, who are in the lower rung of the society?  Farm labourers, daily wage earners and others in this category can be fed by introduction of this scheme all over the country, with each state providing for basic infrastructure facilities and encouraging women's self-help groups, and these are healthy and good quality food that can sustain their work?
     
    Such a move to popularize the idea will be a boon to a lot of workers all over the country, avoid waste in foodgrain rotting in the warehouses, permit export when international prices stabilize and when new harvest comes in, there is adequate space available for storage for a rainy day?

    While the concept of idli, sambhar and curd rice may be workable in the Southern region, a suitable alternative or modification may be in order when it comes to the North, where food consumption is wheat-based. Some food/nutrition experts may have to work out suitable alternatives, but what is important is work on this innovative idea to use our foodgrain in the granaries, and meet the needs of the hungry people.
     
    (AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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    Investors lost Rs1 lakh crore due to poor regulation. Will there be a CBI probe?

    Investors are paying the price for companies’ failure to follow listing norms and the companies are allowed to get away scot-free by the exchanges and regulators. A PIL is seeking probe by the CBI into this gross mischief

    It is estimated that as much as Rs1 lakh crore of savings have been flushed down the drain because of poor supervision and regulation. This attitude continues to be evident in the regulators’ stand on public interest litigations (PILs) filed by investor rights groups.

    Midas Touch Investors' Association has filed a PIL in the Delhi High Court alleging, among other things, that stock exchanges have failed, as first line regulators, to ensure compliance of the listing agreement by companies and take action in the event of non-compliance. How did the Securities Exchange Board of India (SEBI) react? Its affidavit in response says, the PIL is “devoid of merit”and has been filed by the petitioner “without appreciating the fact that the interest of the investors have duly been taken care of and protected” by SEBI.

    How true is this? Well, consider some facts. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) told a committee chaired by MS Sahoo in 2010-11, that 1,845 companies listed at BSE and 203 companies at NSE were not in compliance of the listing agreement terms. Trading in securities of most of these 2,048 companies (out of 5,000 companies listed on the BSE and NSE) has since been suspended leaving small shareholders holding illiquid shares. In effect, investors pay the price when companies do not meet listing norms—the companies themselves get away scot free. The table provides the number of companies that are suspended by the BSE each year since 1995.

    Midas Touch estimates that the total value lost to investors due to these suspensions is a high as Rs1 lakh crore due to their investment in around 3,000 such companies listed on the BSE, NSE and 14 regional exchanges.

    What action has SEBI taken against these companies? Its counter affidavit filed in the court provides the answer. SEBI claims to have initiated action against 23 companies for failure to redress investor grievances. Of these, it proposes to start adjudication proceedings in 19 cases. It is important to note that the MS Sahoo Committee itself was constituted by SEBI only on Midas Touch’s insistent demand, as a accredited investor association, to initiate action against companies that forget about investors once they have raised public money and are no longer interested in staying listed and following onerous compliance and disclosure rules.

    Do SEBI and the bourses have other powers that could have been invoked against these companies instead of suspending trading, which only hurts investors? The petition documents that too.

    According to Midas Touch, the Securities Contracts (Regulation) Act (SCRA) gives plenty of scope for regulatory action.
    * Under Section 23A, the failure to furnish information, returns or report to stock exchange within the time specified in the listing agreement is liable to be punished with a penalty of Rs1 lakh per day or Rs1 crore, whichever is lower.
    •  Section 23E provides for a penalty of up to Rs25 crore for failure to comply with provisions of listing conditions.


    Failing to comply with the listing agreement is also liable for prosecution u/s 23(2) of Securities Contracts (Regulation) Act, 1956 (SCRA). Stock exchanges can initiate this prosecution and the law provides for imprisonment that may go up to 10 years with or without a fine, which may be as high as Rs25 crore.

    As Midas’s writ petition points out, SEBI’s failure to invoke these powers and perform its statutory duties, “has enabled thousands of listed companies, their promoters and directors to get away with unfair practices and violation of listing agreement terms”. It says “Small investors are the biggest losers due to such inaction. Resultantly, their estimated investment of over Rs1 lakh crore has been blocked, is in suspended animation for years and perhaps gone down the drain with all its ramifications on the health of securities market and economy.

    The number of affected small investors may be one crore. They have lost heavily and withdrawn from the securities market, severely affecting fund-raising by companies for speedier development of the economy.”


    The petition also points out what Moneylife has harped upon with monotonous regularity. “During two decades of enactment of SEBI Act, 1992, the number of retail investors has gone down from two crore to 80 lakh; Share of household savings deployed in the securities market has gone down drastically, during first half of 1990s over 10% of financial household savings were deployed in the securities market which has dropped to around 4% currently”.

    Midas goes on to expose SEBI’s track record. It says, SEBI ought to have initiated “Prosecution/Penalty proceedings against more than 12,000 promoter and directors (an average of six directors and promoters per company) and 2,000 compliance officers/company secretary of  2,048 companies u/s 23 A, for each year, starting from the year 2004.

    It ought to have started adjudication proceedings against over 20,000 entities for penalty u/s 23E and filed criminal complaints u/s 23(2) against defaulting companies and the persons responsible.”

    Instead, SEBI was more occupied with disposing off 1,755 cases in four years through the consent mechanism rather than start direct adjudication action even in a dozen cases over the past eight years.


    Midas Touch concludes that this smacks of an unholy nexus between unscrupulous corporates, stock exchanges and SEBI to loot ordinary investors. Its petition has asked for direction to the Central Bureau of Investigation (CBI) to investigate, fix accountability for dereliction of duty by SEBI and stock exchanges officials and take appropriate action against them. It also seeks a write of mandamus directing SEBI to act on the recommendations of the Sahoo Committee in a time-bound manner and to start adjudication proceedings against promoters of all the suspended companies under the SCRA provisions.
     

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    COMMENTS

    ashwin bahl

    7 years ago

    CBI ? Probe? what good will that do for the aam aadmi IE investor ?

    shanti Patel

    7 years ago

    MIDAS TOUCH seems to be the only Investors' Association which is very active and has shown the way to others.
    All the investors should unite and take up the matter with the appropriate authority.
    In this country things move like CHALTA HAY. Laws are on paper and nobody bothers about it
    Unless ethics and moral values change and Educated people take up the matter collectively, it is difficult to change the atmosphere.
    Instead of TALKING, if people take ACTION and support person like BHAGVANJI RAYANI and such others, Officers of the Bombay Stock Exchange,National Stock Exchane and SEBI have to act.
    I am fighting a battle in corporate word know how difficult to fight single handedly. People are reluctant to support and do not bother till water comes to their home.
    I think investors should become a member of Shareholders Association and Managing committee members should take action like MIDAS TOUCH is taking. If the VOICE is RAISED from all parts of India, officers have to act.
    I request every reader to ACT and just not write and forget.

    Shanti Patel
    Chartered Accountant
    9892485457

    nagesh kini

    7 years ago

    While crowing about having 'initiated action' against n number of defaulting companies, letting go equal numbers off the hook, SEBI needs to tell the world how many prosecutions have been taken to their logical conclusion and how many given a burial by 'consent without admitting guilt. It leaves the poor investor gasping for breath!

    REPLY

    sachchidanand

    In Reply to nagesh kini 7 years ago

    I smell a fish in SEBI's Consent Order mechanism. It is an easy and inexpensive way out for those promoters and their directors, merchant bankers & Auditors who have cleverly avoided penal & criminal proceedings through the Consent mechanism. This must be probed . The connivance of SEBI officials needs to be exposed

    nagesh kini

    In Reply to sachchidanand 7 years ago

    The Consent Order mechanism needs to be put an end to with immediate effect as it is in deed the easiest way to get out. There is no need for any probes.

    nagesh kini

    7 years ago

    While crowing about having 'initiated action' against n number of defaulting companies, letting go equal numbers off the hook, SEBI needs to tell the world how many prosecutions have been taken to their logical conclusion and how many given a burial by 'consent without admitting guilt. It leaves the poor investor gasping for breath!

    arun adalja

    7 years ago

    very good job done by midas touch.we have lot of organisations but nobody takes any initiative in this respect.exchanges are not bothered about investors and they always favour company and no action only delisting or suspension they can do.sebi is another sleeping watchdog he never wakes up.

    sachchidanand

    7 years ago

    Midas Touch has really done best anyone can do for protecting Investors. All small shareholders of these companies who have taken Investors for a ride must be compensated by attaching properties of directors/ promoters. Some of the known persons , just name a few, H.P. Ranina, Sunil Gavaskar etc , have lured investors by lending their names at the time of public issues and later on conveniently resigning from the Board of Directors. Some of the Companies can be named . Topline Shoes, Atash Industries etc.I am a victim of this fraud & hope that Midas Touch will succeed in some action from judiciary.

    Ashok Visvanathan

    7 years ago

    Midas Touch is probably correct. However in the case of companies that are heavily borrowed, the banks step in and take the assets. In such cases the companies dont/wont/cant do voluntary liquidation. In some industries the debt equity ratio is high and this can happen. I am not sure what percentage of the companies fall into this bracket.

    REPLY

    NSriramamurty

    In Reply to Ashok Visvanathan 7 years ago

    Instead of Getting Nothing , better to get Some Amount, so that he can throw away Share Certificate.In Such situation, Banks also will be Careful in giving LOANs , instead of Presant Practice of taking Some Bank Manager's Individual Benefit and Granting Loans based on Increased Estimes/ Projections.Whole System gets Regulated. As SEBI calculates Interest also on Invested Amount - Investor's Due also will be Substatial,and their Percentage of Share on Liquidation of company will be High and Banks are taught Lessons.

    S BHASKARA NARAYANA

    7 years ago

    I lost Rs.2,25,000/- from my father's retirement benefits in the Harshad Mehata scam. I kept away from the market for a long time.

    But, the then FM's (Hon P. Chidambaram)assertion the India growth is glowing and the then SEBI Chairman's (Mr. Damodaram)innovative steps taken to revamp SEBI,(I got benefitted by Rs.27 with his such steps) lured me back to the Market. This time I lost Rs.10 lacs, (30 years accumulated savings in Govt. service), which prompted me to commit suicide, but immediately realised that I am far better than an un-organised Farmer, who are used to be at stake every time, and futher I thought that the markets are legalised gambling to level the rich with the poor. Hence, now, I strongly recommend any one not to get lured by any kind of reforms of the market.

    Vaibhav Dhoka

    7 years ago

    Collecting public money is the most easiest way to become RICH in INDIA.You Collect And Vanish NO Question asked.Because we have debilated regulator in SEBI and Stock exchanges.

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