Sebi faces hurdles in ponzi scheme money recovery

Over 700 cases are pending before special court

Despite the constitution of special courts and swift adjudication of collective investment schemes (CIS) cases by them, market regulator Securities and Exchange Board of India (Sebi) has been facing issues in recovering the monies invested by people in the unauthorised CIS schemes.

These courts were exclusively set up to expedite the process of bringing those guilty of illicit money-pooling activities across the country. According to sources, so far special courts have received 700 cases from various other criminal courts and are pending for clearances.

In an e-mail response, a Sebi spokesperson said: "Currently,15 orders against CIS companies are under challenge in Securities Appellate Tribunal (SAT) and in all cases tribunal has either stayed or directed that no further actions including recovery be initiated. As a result of which Sebi's further action including recovery cannot be proceeded in such cases."

"The final orders passed by Sebi are subject to appeal in SAT and Supreme Court. In SAT, there is no separate treatment for fast track disposal of CIS cases. Sebi would like to clarify that prosecution cases before the special courts and recovery proceedings before recovery officers of Sebi are two different proceedings, independent of each other, said the Sebi spokesperson.

One of the primary reasons for such delay is due to the fact that majority of the unauthorised CIS schemes had deployed the money in purchasing lands/properties in various parts of the country, and land being a State subject becomes amenable to various state and local laws. For instance, laws pertaining land ceiling, agricultural and tenancy laws, town planning laws, development regulations etc. are administered by various state executive bodies.

"Initiation of enforcement proceedings by Sebi (which has been facing the employee band-width issues), in various parts of the country for disposal of land/properties and realisation of monies is marred by operation of local laws and the bureaucratic approaches that come along with it," said Tejas Chitlangi, partner, IC Legal.

In addition to it, the language barriers also arise due to the title and other documents pertaining to such lands being in local language and proceedings before the land revenue authorities and district courts being conducted in local language, added Tejas.

"Difficulties in auctioning assets especially real estate in small town across India is a challenge which Sebi is not fully equipped with. Therefore, it faces challenges in terms of ability and bandwidth and also compliances with local landlord regulations to be actually sale real estate at local level," said Sandeep Parekh, founder, Finsec Law Advisor.

Second major issue is with the verifying title deed, which is among the biggest challenge before regulator, said source cited above.

"There could be power of attorneys and other complications with these properties. It is quite possible that some of these owners come up with the objection," said a real estate consultant on condition of anonymity. Besides, valuation of each and every assets spread nationwide is a cumbersome task. The entire process takes 6-8 months time while some properties need detailed due-diligence and negotiations as well, he added.

"While Sebi has power to punish the wrong-doers, it may not have power to compensate anyone. To be fair to Sebi, it has passed various orders though investors do not get their money back and cases keep lingering on in litigation also due to allied proceedings under State Protection of Depositors Act, Prize Chits & Money Circulation Schemes (Banning) Acts, Land Ceiling laws, tax and money laundering laws." said Sumit Agrawal, ex-Sebi official and Founder, Suvan Law Advisors, a law firm specializing in regulatory affairs.

Perhaps the entire regulation of CIS needs a relook. When an appeal from Sebi goes to appellate tribunal, it cannot direct and control the actions of authorities other than Sebi. In such case it is not clear that whose attachment and recovery stand in terms of priority.

It has learnt that when becomes aware of any illegal activities regulator swiftly bans such companies and its directors from securities market. So when at times investors are identifiable and company wants to pay them back the regulatory ban act as a hindrance.

So far only four special courts have been constituted, of which special bench for New Delhi is yet to be notified, while the existing courts are yet to get total territorial jurisdiction. For instance, Mumbai court cannot deal with cases of other states other than Maharashtra.

Special Courts are established under Section 26A of Sebi act for speedy trial of offences under Sebo Act, depositories act and Securities Contracts (Regulation) Act including violations by Collective Investment Scheme(CIS) companies. Actions against CIS companies are taken as per SEBI Act. All actions by SEBI may not lead to prosecution, said Sebi.

The act is part of the government and regulators' efforts to crack down on fraudsters in the wake of several cases of CIS activities.