Use Sahara’s unclaimed funds for financial sector, not pre-election freebies

A report in The Economic Times on Monday said that the government was looking at the legality of transferring the funds to the consolidated fund with few investors coming forward to claim money even after a decade. These funds, which have now swelled to over ₹25,000 crore, after accumulating interest could be used for pro-poor programmes or for public welfare, the report said quoting officials.

Would that be a wise option? It would be tempting for any incumbent government to use such “windfall gains" to announce schemes, especially with elections around the corner. However, it is doubtful if any such scheme, unless it is well-targeted and executed, will provide medium and long-term benefits.

It may be easy to justify transferring these funds to the Consolidated Fund of India considering that only over 17,000 investors had applied for refunds with the outgo being just ₹138 crore.

In March this year, the Supreme Court, which had originally approved in 2012 the appropriation of funds after all refunds and if the securities market regulator was unable to find out details or whereabouts of the bond investors, allowed the transfer of ₹5000 crore from the refund corpus to the Central Registrar of co-operatives.

This was to refund depositors of the cooperatives promoted by the Sahara group. The deadline for providing refunds through this window too will end soon. And besides the Rs.25,163 crore Sahara refund corpus the regulator and agencies are still trying to reclaim over ₹60,000 crore from the group.

According to reports, Sebi has approached the Supreme Court for transferring the funds to the Consolidated Fund of India, which is dubbed as a “black hole" because the funds that flow into it are fungible. In the past, successive governments had promised to use the receipts from divesting the shares of state-owned companies and their assets for either retiring debt or building new assets. Over the years, proceeds from sell-offs of state-run firms have mainly been used to lower the fiscal deficit.

It is important to bear in mind the fact that the accumulation of this corpus has come about, thanks to the efforts of the Sebi leadership and the regulator’s team and lawyers starting a decade ago which fought a major legal battle and won. It will perhaps be apt then to sequestrate these funds to protect investors given the growing breath and width of the financial sector.

It is good that the government is now working on an integrated IT portal to allow investors to reclaim unpaid dividends and shares. But it is also the opportune time to debate or think of an integrated scheme for protection and compensation for financial investors cutting across all products in the financial sector.

Indian investors now have to approach several sectoral regulators – be it for banking, shares, commodities and debt, insurance and pension – with little relief from the ombudsmen appointed by the regulators. Equally, the government should review the working of the multiple investor protection, education and awareness funds of all the regulators.

The other option will be to use the corpus to build what finance minister Nirmala Sitharaman pitched for at the Global Maritime Summit a few weeks ago. The minister said that India needs to have a full-fledged and fully owned and locally based protection and indemnity entity which will help reduce the country’s vulnerabilities to any global sanctions and pressures in the future.

For an economy poised to emerge as the third largest in the world over the next few years, financial stability will be key to higher capital formation, allocation of this capital, and growth. To ensure greater trust and integrity in this sector, there is a strong case for better protection of investors. Using the Sahara refund corpus to promote long-term growth-enhancing initiatives will yield better rewards than handing out freebies.