Sebi plans to give up powers to regulate ponzi schemes

Mumbai: India’s market regulator wants to relinquish powers to regulate collective investment schemes (CIS) which involve illegitimate pooling of public money after failing to successfully close even a single case, although the very presence of a regulator to investigate such schemes has to some extent acted as a deterrent to their launch.

Four years ago, the Securities and Exchange Board of India (Sebi) was empowered to act against Ponzi schemes and other illegal money pooling and deposit-taking activity.

“Sebi has been actively passing orders against illegal money-pooling activities,” said a Sebi official who asked not to be identified. “The market has got the message that Sebi is closely monitoring all illegal CIS activities. So the number of fresh CIS cases reported to Sebi has gone down. But it has been difficult to identify and recover the assets from the owners of such CIS firms.”

There are agencies that are better equipped to do this, added this person—state governments and local police departments, monitored by a “central body” created for this purpose. “So Sebi has sent its recommendations to a parliamentary committee and asked the government to transfer the powers from Sebi. It can assist any central body if created for this purpose.”

Even though Sebi has passed orders against at least 300 illegal money-pooling entities and initiated asset seizure and recovery proceedings against them, not one has filed a winding and repayment report (WRR)—a declaration by a banned CIS entity that it has wound up all money-pooling schemes and repaid all investors. Sebi rules require all banned CIS firms to discontinue their schemes, repay investors within three months and file a WRR.

The number of CIS cases before Sebi has piled up along with the pressure related to regulating CIS, investigating illegal schemes, passing ban orders and initiating recovery proceedings, said the second person, who also spoke on condition of anonymity.

This could well be affecting Sebi’s ability to do its work well, Mint said in a January report citing unnamed people. In 2016, one out of every three Sebi orders that was challenged at the Securities Appellate Tribunal (SAT) was referred back to the regulator by the appellate body.

“It (Sebi) is not sufficiently equipped to regulate all deposit taking activities. It cannot go to all the small locations in the country and understand the varying nature of fund-raising and ponzi scheme businesses,” Sandeep Parekh, founder of Finsec Law Advisors and a former executive director at Sebi, was quoted as saying in that report.

Sebi has suggested that all CIS cases pending with it be transferred to a new central body, under the finance ministry, which will make state governments oversee CIS activities, supervise inter-state CIS activities and monitor the compliance of state governments in regulating such schemes, said the second person.

In October, Mint reported that Sebi was finding it tough to refund investors in ponzi schemes. One such case related to PACL Ltd, which ran India’s largest illegal money-pooling scheme and allegedly duped 58 million investors of Rs49,100 crore. On 1 November, SAT set aside Sebi’s order imposing a Rs7,296 crore penalty on the company and four directors.

“...it makes sense for Sebi to exclude CIS from its jurisdiction because a lot of its resources are currently being used for something that can be regulated better by state governments,” said Kumar L. Desai, a senior Bombay high court advocate.