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Sahara to Saradha spur Sebi’s Rs64,000 crore Ponzi schemes crackdown

The stock markets regulator is extending its reach into mango orchards, timeshare resorts and goat farms in a crackdown on unregistered investment funds to root out suspected Ponzi-like schemes. Photo: Abhijit Bhatlekar/Mint
The stock markets regulator is extending its reach into mango orchards, timeshare resorts and goat farms in a crackdown on unregistered investment funds to root out suspected Ponzi-like schemes. Photo: Abhijit Bhatlekar/Mint

The regulator has issued orders against 39 companies since May, more than four times the number it censured in previous 12 months

Mumbai: India’s stock-markets regulator is extending its reach into mango orchards, timeshare resorts and goat farms in a crackdown on unregistered investment funds to root out suspected Ponzi-like schemes.

The Securities and Exchange Board of India, known as Sebi, has issued orders against 39 companies since May, more than four times the number it censured in the previous 12 months. The firms are instructed not to collect any money from the public or start new funds, according to documents on the regulator’s website. They must return investors’ money or cooperate with investigators to avoid criminal charges, the orders say.

“Where there is money, there are bound to be some sharks," finance minister Arun Jaitley told the Lok Sabha in August before it passed an amendment to the Sebi Act giving the agency unprecedented enforcement powers.

Sebi is targeting financial scams, such as those by Kolkata-based Saradha Group, which imploded last year leading to dozens of suicides by investors, according to a person at Sebi familiar with the crackdown who asked not to be identified because he isn’t authorized to speak publicly. The regulator also is seeking to close legal loopholes used by shadow financier and New York Plaza Hotel owner Subrata Roy and his Sahara Group, which contested Sebi’s authority and said it had obtained approval from another regulator as part of a continuing wrangle in the Supreme Court.

Sebi orders

The orders make no determination about whether the funds pay their investors, only whether they collect and pool money from the public and therefore require regulatory approval. Not all the targeted companies are Ponzi-like, the person said, referring to schemes that promise high rates of return to investors by attracting new funds.

Sebi has issued orders against 47 companies since May 2013, with funds totaling at least 64,000 crore. Its directives include a refund order of 49,100 crore on 22 August against PACL Ltd, a New Delhi-based real estate developer with interests including mango and cashew farms, resorts in Goa and a travel-booking website—the watchdog’s biggest catch yet. PACL in an e-mail response denied its investment options constitute collective-investment funds requiring Sebi approval and said it would appeal.

The enhanced powers give Sebi the authority to conduct searches, confiscate assets such as property and bank accounts and detain suspected violators.

“This will make it one of most powerful regulators in the world," said Sandeep Parekh, a former Sebi executive director from 2006 to 2008 who founded a legal consulting firm and now is representing PACL in its dispute with the regulator. “Even the Securities and Exchange Commission in the US doesn’t have all of these powers."

Beehives, jatropha

While funds investing in real estate projects are mentioned most often in Sebi’s orders, the regulator also has taken action against dairies, animal breeders, beehive sellers and tea, fruit, jatropha and peanut plantations.

“More checks and balances mean more fraud can be curtailed," said Amit Tandon, Mumbai-based founder of Institutional Investor Advisory Services, a corporate-governance consulting firm. “Sebi’s investigating and chasing down these firms will create pressure points, and that’s good."

Curbing financial fraud and tapping rural savings is a centerpiece of Prime Minister Narendra Modi’s plan to alleviate poverty in a nation where the World Bank estimates 65% of adults don’t have access to a bank account, forcing them to rely on potentially risky methods of saving money. Modi last month said India needs “to lift the poor out of financial untouchability" as he inaugurated an initiative to open bank accounts for every adult.

‘Pygmy sums’

“If we are able to reach a large section of the population," Jaitley told Parliament, “the need for people to be attracted to such Ponzi schemes itself will go down."

In January, Sebi made it compulsory for firms to register collective-investment plans and disallowed collecting cash from investors and depositors. Only bank checks or drafts can be used, according to the new rules, requiring all participants to have bank accounts.

“It is a good thing that Sebi has finally woken up," said S. Ananth, an independent researcher based in Andhra Pradesh who specializes in rural financing. “These schemes have smartly tapped a population that saves through daily deposits of pygmy sums. The more underbanked a region is, the more is the presence of such elements."

Many investment firms employ agents who earn as much as 10% commission for collecting amounts as tiny as 20 every day from rural depositors, he said.

Sahara suit

Sahara collected such savings from street-food sellers, auto-rickshaw drivers and other workers over 30 years, allowing Roy to build an empire that includes the Plaza and London’s Grosvenor Hotel, as well as dairy farms, television channels and retail shops.

In 2011, Sebi issued a $4 billion refund order to Sahara for raising money from 30 million people without the agency’s approval. Sahara said in court that it had received approval from the ministry of corporate affairs and didn’t require Sebi registration. It also said it returned the entire amount. Sebi said it was unable to track down investors to verify Sahara’s claims, escalating the case to the nation’s top court, which in February ordered Roy’s arrest for failing to refund depositors. He remains jailed and is currently negotiating the sale of his overseas hotels to pay his bail of 10,000 crore .

Roy’s lawyer, Gautam Awasthi, said in a statement that the company was working to pay Roy’s bail “only to honour" the top court’s order. He declined to comment on the crackdown.

Saradha collapse

Saradha collapsed last year after collecting small deposits and promising payouts of land or cash, with interest rates as high as 24%. The firm defaulted on thousands of deals, and 1.74 million customers saw their savings vanish. Saradha’s demise led to turmoil across six Indian states as mobs ganged up on its collection agents, police initiated criminal probes and regulators tightened rules. At least 34 people, including 13 Saradha agents and investors, committed suicide.

The Central Bureau of Investigation (CBI) is investigating the money trails, and Saradha founder Sudipta Sen is being held in custody. The company was dissolved. Sen’s lawyer in Kolkata, Naresh Balodia, said he couldn’t comment on the case because the investigation is still under way.

“It is because of Sahara and Saradha that Sebi got onto this," said Ananth. “And it is because of these two cases that Sebi is now being given new powers."

‘Unauthorized manner’

PACL, the real estate developer, had collected 49,100 crore “in an unauthorized manner," according to a 92-page order issued on 22 August. The money was pooled into purchases of land promising high returns, meaning PACL was running an investment fund, the order said.

The regulator had deemed PACL’s property sales an investment fund as early as 1997, a designation the developer fought for 16 years. In 2013, a court decided that Sebi had jurisdiction and asked it to determine again whether the purchases constitute collective-investment funds.

The agency’s August order directed the firm to return all funds within three months to 58.5 million customers, almost as many people as live in Italy. PACL said in its e-mail response to Bloomberg News that it planned to appeal Sebi’s order to a tribunal rather than refund investors.

“Sebi has unfortunately failed to recognize the submissions of the company, that it can’t be treated like" a collective-investment fund, PACL said in its statement.

Holiday plans

Sebi also acted against Mumbai-based Pancard Clubs Ltd, a gaming company and recreation-club operator that had collected almost 3,100 crore selling “Holiday Plans," or hotel timeshares, to about 2.5 million investors, according to a 31 July order. Threatening legal action, the regulator ordered Pancard to cease collecting new funds and submit its records for investigation. The company didn’t return a phone call or an e-mail requesting comment.

In June, the regulator blocked a goat-keeping investment fund run by Beetal Livestocks and Farm Pvt. Ltd on the outskirts of New Delhi. The firm was soliciting investments from the public to invest in the goats, offering guaranteed returns of as much as 2% monthly on a minimum investment of 6,000, without properly registering, according to the order. It said the company must refund investors, without specifying a sum.

Three of Beetal’s eight directors told Sebi they were illiterate or unemployed, had no relations with the company and were fraudulently put on the board, the order said. Sebi’s report said no one responded to newspaper advertisements seeking the other directors or to legal notices issued to them directly.

Beetal couldn’t be reached for comment. It has no website, and eight land-line and mobile numbers obtained from a phone directory were disconnected or invalid.

Media campaign

Sebi is running a 13-language media campaign across radio, print and television warning against unregistered investment plans, spokesman N. Hariharan wrote in an e-mail. “It’s the first time the regulator is using so many languages across various media," he said. Sebi also has conducted awareness seminars in about 400 districts across India, attended by 1.2 million participants, according to Hariharan.

A committee of officials from five Indian regulators overseeing unlisted companies, banks, financial-services firms, insurers, the securities market and individuals committing financial crimes meets regularly to discuss and plan action against illegal money collection, Hariharan said.

Regulators will need to liaise with local authorities and police to curb such activities, according to researcher Ananth.

“Sebi cannot police the countryside," he said, given that India has more than 640,000 villages. “They need state, local governments and even the police for last-mile connectivity."

‘More innovative’

Apart from curbing fraud, the regulatory action may end up discouraging legitimate firms that collect deposits and provide safe investment options, said Parekh, the former Sebi director.

“For a majority of people, collective-investment schemes and gold are the only investment options," he said.

India is the world’s third-fastest growing market for shadow banking, or financial activity outside the banking system, behind China and Argentina, according to a Financial Stability Board report in 2013.

“People keep getting more innovative," said Tandon of Institutional Investor Advisory Services. “Most of these projects are launched by people looking to make a quick buck."

Village bankers

“There are inadequate means to pool small savings into traditional banking channels," according to K.C. Chakraborty, a former deputy governor of Reserve Bank of India (RBI).

“There is a gap which our traditional institutions haven’t been able to reach," Chakraborty said in a phone interview.

Since a programme to increase financial services through village bankers began in 2006, more than 100 million Indians have been brought into the banking system, according to the central bank.

Almost 200,000 traders, shopkeepers and small-business owners are working as outpost bankers providing cash-deposit and withdrawal services to customers on behalf of banks. The regulator’s measures would need to be complemented by the outreach efforts of the banks, according to Ananth.

“If Sebi starts getting on with its no-nonsense attitude and makes it more expensive and embarrassing for those breaking the rules, then it will set an example for everyone," he said. Bloomberg

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