SC questions regulators' role in Saradha scam

Says its attention was drawn to at least two Sebi orders directing winding up of Ponzi schemes

The Supreme Court, which has given its go-ahead for a Central Bureau of Investigation (CBI) probe in the Saradha chit-fund case, has also questioned the role of regulators - the Securities and Exchange Board of India (Sebi), the Reserve Bank of India and the Registrar of Companies - for their inaction in the multi-crore scam.

The Court order, which came on Friday, said: "Investigation conducted so far puts a question mark on the role of regulatory authorities like Sebi, Registrar of Companies and RBI, within whose respective jurisdictions and areas of operations the scam not only took birth but flourished unhindered."

While making it clear that the proceedings were not aimed at looking into whether Sebi had the jurisdiction to act in the matter, the apex court said "it was at one stage argued on behalf of Sebi that companies involved in the scam were doing chit-fund business and, since chit-funds were not within its jurisdiction, it could not have taken cognisance of it. Our attention was, however, drawn to at least two orders passed by Sebi directing winding up of such Ponzi schemes and refund of the amounts received by the companies concerned to the depositors", the order said.

The order does not mention the companies against whom Sebi acted, but it is known that orders against MPS Greenery and Rose Valley were issued in 2011 and 2012, respectively, for running collective investment schemes (CIS) without Sebi certificates. The Saradha scam had come to light in April 2013.

Among the laws that allow dubious companies to raise public deposits are the Companies (Acceptance of Deposits) rules, 1975, and the CIS regulations. While the first is under the Companies Act, the latter is under Sebi's purview.

Legal experts said cracking down on unauthorised money collection schemes wasn't easy for the authorities, as these typically operate in a regulatory grey area. The regulators have to establish whether or not a scheme falls under the CIS regulations, which is in Sebi's ambit. But Sebi did order a forensic audit of Saradha.

In the case of CIS schemes, Sebi had discontinued issuing licences for these about a decade ago, but several companies continued to operate schemes on old certificates.

Technically, though Saradha was raising money by means of advances and might not qualify as a CIS, it came under the broader aspect of raising money from a large number of people, making it a public issue.

Under Section 67 of the Companies Act, 1956, any issue of preferential shares to more than 50 people is deemed as a public issue, requiring Sebi clearance. In the Sahara case, the Supreme Court had observed that the issuance of optionally fully-convertible debentures (OFCDs) to millions of investors was indeed a public issue disguised as private placement.

Regulatory authorities - not just Sebi - have however, time and again, expressed their inability to act against deposit-taking companies, loosely called chit-fund firms.

"RBI has mostly cracked down on entities registered with it. Also, there haven't been many instances where RoC has come across as a proactive regulator," said a former Sebi official, who didn't want to be named.

According to Sebi data, the capital market regulator has launched a probe against more than 600 entities for collecting money from depositors. About 75 of these had to wind up schemes and repay investors. Sebi passed 12 final orders and 14 interim orders against 26 entities, which had together mobilised close to Rs 10,000 crore.

Market observers say, among all regulators, Sebi has been the most active when it comes to curbing unauthorised money-collection schemes.

In December 2012, when the Saradha scam was still in the making, former RBI governor, Duvvuri Subbarao, had sounded a warning bell. "The responsibility for checking the chit-funds and for prosecuting the violation of law is of the state government. We have written to all the state governments to be vigilant about this and to take appropriate action," he had said.

Four months later, the Saradha scam unfolded, leaving behind several thousands of duped investors. More than a year on, many such companies are still "flourishing unhindered".