Sebi finds it tough to refund investors in Ponzi schemes

Mumbai: After getting the power to regulate so-called collective investment schemes (CIS) in 2013, the Securities and Exchange Board of India (Sebi) has passed ban orders on at least 150 entities, but not been successful in refunding money to investors. Not even one CIS company has filed a winding-up report with the regulator, said three people with direct knowledge of the matter, including a Sebi official.

Sebi has ordered CIS firms to discontinue their schemes, repay investors within three months and file a winding-up report. That has not happened even in the case of PACL Ltd, which owes Rs49,100 crore to 58 million investors.

One such investor is Mahendra Yadav, a 50-year-old door-to-door salesman in Mumbai, who has been waiting for a refund of Rs3 lakh locked in PACL’s schemes.

“I haven’t got any money back. I have applied for a refund at Sebi. Many months have passed but I have received neither money nor a reply,” Yadav said as he waited outside Sebi’s headquarters at Mumbai’s Bandra Kurla Complex, seeking an appointment with officials at the regulator.

Sebi usually acts promptly—in banning the companies, usually on the basis of investor complaints. Many of these orders are passed in the absence of the accused; there is no clear way of identifying assets of these firms and recovering them.

“It is a wild goose chase,” said one of the three persons mentioned in the first instance.

“In most of the cases, the number of investors and the amount collected through CIS schemes are either based on some complaints or merely the information gathered from the Registrar of Companies. The complete information about the illegal fund raising process and the assets of the CIS promoters are missing in most of the cases,” added this person, who asked not to be identified.

In several instances, the promoters disappear once Sebi acts against their firms. Often, these are shell companies that don’t maintain proper records with the Registrar of Companies. Sebi typically follows up by initiating recovery proceedings by attaching the bank and demat accounts of promoters and related entities. But that is usually insufficient, said the second of the three people who, too, asked not to be identified.

“There is a huge uncertainty about the locations of the properties and assets, the value of the assets, disputes over the identifiable assets of the promoters and the whereabouts of the genuine investors,” this person added.

On 14 October, Mint reported that a multi-agency probe into PACL has revealed that the group barely has assets worth about Rs10,000 crore.

As of 31 March, at least 148 legal cases related to CIS were pending in various courts, according to Sebi’s latest annual report.

“Sebi deals in the securities market, not land or plantations or animal farms (that are usually at the heart of most Ponzi schemes),” said Kumar L. Desai, advocate in the Bombay high court, who has experience in dealing with CIS cases. “It is not an easy task to conduct investigations and ascertain the genuineness of the schemes, the investors, the assets bought with the money collected, the nature of repayment, the promoters involved and so on.”

According to Desai, there should be a separate regulator for regulating such schemes. In this year’s Union Budget, the government talked about bringing a new law for regulating money-pooling schemes. A draft Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests bill was floated in April, but nothing has happened since.