Parliamentary panel slams finance ministry and Sebi for ponzi proliferation

Economic Times, September 24, 2015

A parliamentary panel has slammed the finance ministry and stock markets regulator Sebi for not doing enough to curb so-called ponzi schemes, and called for these fraudulent operations to be treated as “offences committed against the State” and made non-bailable.

In a report submitted to Lok Sabha Speaker Sumitra Mahajan on Tuesday, the Standing Committee on Finance headed by former law minister Veerappa Moily criticised the finance ministry’s Department of Financial Services for remaining just a “reticent bystander” to “erupting scams depriving millions of their lifetime savings”. ET has learnt the panel has also sought an explanation from the department about its “inaction” as well as its future plans to contain the ponzi menace.

The 30-member committee, which has representation from various political parties including BJP and from both houses of Parliament, has also ticked off Sebi for failing to act decisively against ponzi companies since 2010.

Noting that while Sebi initiated action in some 200 cases, its interim orders took 2-3 years and the final orders took more than five years. “During this interim period, the ponzi company’s promoters one way or the other collected thousands of crores of additional amounts from the small investors,” the panel noted, adding that in the future it expected Sebi to be “more transparent, vigilant and accountable” in its actions and show the same degree of alacrity demonstrated in the case of Sahara.

On Tuesday, Sebi imposed a penalty – its biggest ever – of Rs 7,269.5 crore on a company called PACL Ltd and its four directors for illegal and fraudulent mobilisation of funds from the public, saying the company deserves “maximum penalty” for such large-scale duping of the common man. The penalty follows another order by Sebi last year wherein PACL was asked to refund Rs 49,100 crore it had collected through illicit schemes over a 15-year period.

Regulators in the country have been slow to crack down on so-called collective benefit schemes and ponzi operations that are rampant across the country and usually dupe the poor of their hardearned savings. Offering the promise of dizzying returns, these schemes often exploit the financial illiteracy of the poor and their lack of access to formal financial channels.

The standing committee has also suggested framing a “model central law” and the setting up of “special economic offences courts” to ensure the enforcement of the law. It has recommended that the proposed model central law should be “comprehensive and all-encompassing, including in its ambit collective investment schemes, chit funds, direct-selling schemes and such other activities”.

The panel’s report calls for the law to have a separate section on non-permissible schemes that clearly spell out the nature of prohibited activities with its penal consequences. It has recommended that the model law should have provisions such as “attachment of property, recovery and distribution of proceeds in a stipulated time frame, deterrent penalties with imprisonment, time-bound repayments/compensation”.

The panel has also proposed the creation of a minimum capital reserve to be maintained with the regulator to serve as a “safety valve against default”. Banks should, its report said, be instructed to inform the income tax department and regulators such as RBI or Sebi whenever cash deposits by suspected persons or entities exceed a certain limit.

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