Govt eyes stronger norms to tackle fraudulent investment schemes

To curb the menace of fraudulent money pooling activities, the government is looking to strengthen existing laws governing various types of investment schemes.

The move comes against the backdrop of Kolkata-based Saradha group defrauding the public by running a fraudulent investment scheme in the garb of chit funds.

A source said that the newly set up Inter Ministerial Group (IMG), that includes representatives from the Finance and Corporate Affairs Ministries, could discuss the possibility of having stronger rules to tackle ponzi schemes.

The IMG  has been set up to ensure proper enforcement of regulatory framework for multi-level marketing companies, non-banking finance companies and companies running collective investment schemes. It is scheduled to hold its first meeting on May 16.

According to the source, the group could discuss possible amendments to laws such as those related to chit funds and collective investment schemes.

However it could be a "long haul" before bringing in amendments to existing laws, the source added.

The IMG would also look to strengthen the existing co-ordination mechanisms for regulation and supervision of the financial sector.

While collective investment schemes come under capital market regulator Securities and Exchange Board of India (Sebi), certain class of investments such as chit funds are out of its purview.

The panel, headed by Department of Financial Services' Additional Secretary, also has representatives from the Corporate Affairs Ministry, Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi).

Many entities have registered themselves as chit funds but are found to be raising money illegally through ponzi schemes by promising high returns. In many cases, people in the rural areas easily fall prey to such schemes, sources had said.

Ponzi schemes involve collection of money from investors with a promise of huge returns, which are paid from the deposits taken from new investors.

Last month, the government had said that entities suspected to be engaged in running ponzi schemes were  being probed by Sebi, RBI and the Corporate Affairs Ministry, among others.