Parliament is unlikely to take up the Bill giving search and seizure
powers to the Securities and Exchange Board of India (SEBI) in the
current session.
Even though the draft for the legislation is ready with the Parliament’s
Standing Committee on Finance, it was not included in the agenda of the
Committee which met prior to the Parliament session.
The Bill gives powers to SEBI to initiate recovery proceedings against
unscrupulous promoters. Since the promulgation of the Ordinance, in July
last year to tackle unregistered collective investment schemes (CIS),
SEBI has initiated proceedings to recover an amount in excess of
Rs.1,700 crore. Even though it lapsed in September last, the government
re-promulgated it as the Parliament was not in session. It lapsed again
on January 15, this year, as it was not passed in the winter session.
Technically, as the session is on, the Ordinance cannot be
re-promulgated. The amendments bring in any investment scheme above
Rs.100 crore, other than those exempted under Section 11AA of SEBI Act
like Nidhi funds, chit funds and non-banking finance companies (NBFCs),
under the regulatory purview of SEBI and such schemes would have to get
registered with the SEBI.
Several crores have been raised by various unauthorised schemes across
the country. Investors in such schemes have been mostly gullible people
from the lower strata of society who are attracted by the promise of
high returns.
Further, there are various investment schemes regulated by different
regulators. While NBFCs come under the Reserve Bank of India (RBI),
company fixed deposits come under Ministry of Corporate Affairs,
insurance under Insurance Regulatory and Development Authority (IRDA)
and collective investment schemes come under the regulatory purview of
SEBI.
In the case of ponzi schemes, it is difficult to determine under which
regulator they fall as companies try to exploit the existing loopholes
in the law. While each regulator has powers to deal with unauthorised
schemes coming under their purview, not much visible action is seen. In
many CIS orders, SEBI has requested the Ministry of Corporate Affairs to
initiate winding up of unregistered CIS companies.
CIS schemes
SEBI has been given the mandate to regulate CIS schemes under the SEBI Act in the late 1990s. Since then SEBI had launched prosecutions in more than 550 cases, out of which courts have convicted the guilty in more than 130 cases. While investment schemes of Nidhi funds, chit funds and NBFCs were exempted from the definition of CIS, this has been exploited by some unscrupulous companies which have been raising money from the public in different names, but schemes similar to CIS. The Saradha Group financial scandal is a case in point where SEBI has passed an order asking the company to wind up its schemes. However, this is not enough. While SEBI continues its crackdown, perhaps there is a need for a concerted effort by all financial sector regulators so that gullible investors are not duped. The state governments also need to be more vigilant in tackling such schemes. Non-passage of the Bill will now curtail the effectiveness of SEBI’s actions while unscrupulous promoters will continue to dupe gullible investors.
SEBI has been given the mandate to regulate CIS schemes under the SEBI Act in the late 1990s. Since then SEBI had launched prosecutions in more than 550 cases, out of which courts have convicted the guilty in more than 130 cases. While investment schemes of Nidhi funds, chit funds and NBFCs were exempted from the definition of CIS, this has been exploited by some unscrupulous companies which have been raising money from the public in different names, but schemes similar to CIS. The Saradha Group financial scandal is a case in point where SEBI has passed an order asking the company to wind up its schemes. However, this is not enough. While SEBI continues its crackdown, perhaps there is a need for a concerted effort by all financial sector regulators so that gullible investors are not duped. The state governments also need to be more vigilant in tackling such schemes. Non-passage of the Bill will now curtail the effectiveness of SEBI’s actions while unscrupulous promoters will continue to dupe gullible investors.
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