The Financial Conduct Authority of the UK has banned the sale of a set of ‘risky’ investments to all but the super rich. When will Indian regulators act?

Ponzi and collective investment schemes (CIS) thrive all over the world because of powerful political backers. But a post-2008 shift in regulatory focus from caveat emptor (buyer beware) to vetting and restricting the sale of potentially harmful or toxic products is now turning the heat on these dubious schemes as well. The Financial Conduct Authority of the UK has banned the sale of a set of ‘risky’ investments to all but the super rich—people with an annual income of over £100,000 or investible funds of £250,000—from January 2014. The UK regulator classifies these as sophisticated investors who ought to understand the risks involved.

Interestingly, the CIS targeted by the regulator are investment in overseas property, fine wines and traded-life settlements. Investors in the UK had invested over £4 billion in such unregulated schemes and their losses run into millions of pounds. Interestingly, it turns out that UK investors were still being sold teak farms and bamboo plantations.

Unfortunately, the Indian situation is worse. Lakhs of people throughout India lost over Rs10,000 crore to plantation scams in the mid-1990s. Since then, there has been a string of high-profile failures, such as Citi Limouzine, SpeakAsia and Stock Guru, which raised Rs1,000 crore in a matter of months. Yet, our regulators and politicians refuse to initiate tough action. Dodgy companies, such as QNet and MMM India, are still luring the educated, but financially gullible, youngsters. More criminal is the refusal to rein in chain-marketing schemes, such as Saradha, MPS Greenery and Rose Valley, which have wreaked financial havoc among the low-income group in West Bengal and nearby states leading to 18 suicides so far. All these companies have enjoyed the patronage of powerful regional politicians.

Last week, former Union secretary EAS Sarma wrote to the ministry of corporate affairs (MCA) exhorting it to work with the financial regulator to evolve a way of tracking shell companies which are used to launder black money through a complex web of entities. He pointed out that every major scam in India uses a network of shell companies to evade detection. But this, too, has gone on for decades. The most famous of these were the shell companies of the Reliance group, exposed by the Indian Express in the mid-1980s—a decade before India embarked on its economic liberalisation programme. Using layers of shell companies to launder money through overseas tax havens and back into the Indian stock market has increased exponentially since then.

Consequently, we have no clear regulation, or legislation, to protect people from harmful and unregulated products. Only  a few large CIS manage to attract the attention of the market regulator.