Sebi may get more powers to regulate money pooling

The Securities and Exchange Board of India or Sebi may get additional powers to regulate money-pooling activities that currently do not come under any other financial sector regulator and those where states have limited powers to act, said three people familiar with the development.

The government is in advanced stages of drafting a new legislation to this effect, confirmed the people cited above, requesting anonymity.

While the ultimate power to control all types of money-pooling activities (except collective investment schemes or CIS) will remain with the central government under the proposed law, Sebi will be given specific powers to regulate those that currently escape the purview of any other financial regulator.

An e-mail sent to Sebi on Friday remained unanswered.

“Ideally, all those entities which currently act as chit funds or by any other name that come under state government’s jurisdiction, should be brought under Sebi and mandatorily be registered under CIS norms, irrespective of the amount mobilized by them or the number of investors under them. This will ensure a better scrutiny of the exact nature of their money-pooling activities and curb illegal fund-raising or deposit-taking to a large extent,” said the first person on condition of anonymity.

“Currently, many entities may be pooling money from the public like CIS (without a licence) but Sebi cannot catch them since they work in the name of chit fund or some other name that fall under the state government’s jurisdiction. Also, there have been several instances where due to multiplicity of regulators and overlap of provisions a clear action could not be decided and taken against illegal deposit-taking firms,” the first person added.

Sebi currently has powers to regulate CIS activities, while entities such as chit funds and so-called Nidhi companies come under the jurisdiction of state governments or under different laws. The government and the market regulator fear that entities may be taking advantage of regulatory loopholes and pooling public money illegally.

Citing these concerns, finance minister Arun Jaitley in his budget speech on 29 February had proposed to bring in comprehensive central legislation in 2016-17.

In order to curb illegal money-pooling and further restrict any misuse of existing laws, the government has drafted a bill, with the consultation of Sebi and Central Bureau of Investigation (CBI). The bill named “Banning of unregulated deposit scheme and protection of depositors interest bill, 2015,” will bring all types of deposit-taking and potentially ponzi schemes, including CIS and chit funds, under one umbrella Act.

According to a Sebi report, which was discussed with the government a few weeks before the Union budget, the existing framework of having different regulators for different types of money-pooling schemes has left room for a number of entities to continue with illegal money-pooling activities.

“The new bill, which is expected to be tabled in Parliament in the second half of the budget session or the monsoon session, will attempt to track down any possible illegal money-pooling activity by creating a centralized intelligence mechanism,” said the second person cited above requesting anonymity.

“Ponzi schemes and chit funds come under jurisdiction of state governments,” said the second person.

Over the last three years, Sebi has examined more than 1,400 complaints of illegal money mobilization and passed on this information to the ministry of finance.

“The finance secretary would write to all chief secretaries to step up action against the referred cases,” the second person added.

The second person said the market watchdog has prepared a national intelligence mechanism in collaboration with the CBI and other agencies in the matter.

“It proposes a two-tier intelligence structure under CBI to detect illegal fund mobilization. This has been approved by the finance ministry,” he said.

Kirit Somaiya, a Member of Parliament from Bharatiya Janata Party, who has worked with a number of government-appointed committees for drafting legislation on money-pooling activities, says that the government is trying to bridge any gaps and remove any grey areas in legislation.

“In the current situation, there are instances when regulators are helpless in acting against certain type of money-pooling and deposit taking schemes due to lack of jurisdiction and powers. The new legislation will ensure that the appropriate regulator has adequate power to crackdown on these illegal schemes and protect interests of investors,” said Somaiya.