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Pradeep Gaur/Mint
Pradeep Gaur/Mint

Ponzi schemes RIP; SAT to widen

The move was welcomed by distributors of financial products as well as industry experts

Budget 2016 has resolved to tighten the noose over illegal deposit taking schemes. Finance minister Arun Jaitley said in his budget speech that the government will set up a comprehensive central legislation in 2016-17 “to deal with the menace of such schemes." He said that “the worst victims of these schemes are the poor and the financially illiterate."

The move was welcomed by distributors of financial products as well as industry experts. “These laws are much needed because the investment culture is minimal in rural India. Even banking penetration is low," said Pradeep Jain, a Ranchi-based distributor of mutual funds (MFs) and other regulated financial products. “The people who lose their money in such dubious schemes then, get, trapped in additional debt that they take on to meet their losses," added Rajeev Misra, a Dehradun-based MF distributor.

The fine print, however, is awaited. “First we have to see which regulator will regulate these schemes, whether it is the Securities and Exchange Board of India (Sebi) or the Reserve Bank of India (RBI)," said D. Muthukrishnan, a Chennai-based MF distributor, adding that he knew investors who have lost money in schemes like teak plantations in Tamil Nadu some years back.

How and when such a regulation will come and in what form, remains to be seen. At the moment—effective August 2014—Sebi has the powers to regulate any investment scheme with a corpus of 100 crore or more. “The law is already quite broad. So we don’t know how much broad based the new law would be and what else it would cover," said Sandeep Parekh, founder, Finsec Law Advisors. Also, implementing these norms—and allowing investors, especially the weaker sections of the society who are generally the victims of such schemes—will be crucial.

The existing procedure is complex. “At present, investors are first compelled to approach the Collective Investment Scheme of the company itself. If investors get no satisfactory response, they have to write to Sebi. Another remedy would be to approach the District Consumer Redressal Forums in case entities fail to honour their commitments or for any deficiency in service. In case the cheques are dishonoured, investors can file criminal proceedings under Section 138 of the Negotiable Instruments Act 1881," said Ashish Bhakta, Founding Partner, ANB Legal, a national law firm.

Bhakta said that what’s missing presently, however, is investor confidence. “It would be ideal if there is a special cell to deal with the grievances of small investors, notwithstanding the amount involved, as it would go a long way in collecting capital from the root of the financer base of our country," he said.

The finance minister also announced expanding the Securities Appellate Tribunal (SAT). This is the appellate agency where appeals can be made if the entities against whom Sebi have made rulings or passed orders, aren’t satisfied with Sebi’s rulings. Presently, there is only one bench of SAT; in Mumbai. The minister said more SAT benches would be set up. “This move is good as the pendency of cases in the past two years has gone up. There are 400-500 cases pending at SAT. Till just 3-4 years back, there were zero cases pending at SAT," said Parekh. Overall, this is a welcome step.

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