Defending Sebi on Saradha scam

The CBI last week searched the residences of three officers of the Sebi in connection with the Saradha Ponzi scheme

The Central Bureau of Investigation (CBI), often termed a “caged parrot”, last week searched the residences of three officers of the Securities & Exchange Board of India (Sebi) in connection with the Saradha Ponzi scheme. The news passed off with barely a murmur, but the hapless Sebi officials concerned would be left with dealing with ignominy and stress. To us, the silly CBI action on a scam that erupted a decade ago seems laughable. But it is not only sinister and perverse, but the CBI’s raid raises several larger issues that the government ought to address urgently.

It is intriguing that the CBI has shown little interest in the most scandalous and biggest collective investment scheme ever, from the Sahara group. In August last year, Vivek Aggarwal, joint secretary, cooperatives and central registrar, wrote an extraordinary letter to the Ministry of Corporate Affairs that four multi-state cooperative societies of the Sahara group had raised an astounding Rs 86,673 crore over 10 years (from 2010, when Saradha was at its peak) from millions of depositors and was unable to make repayments. There are frequent demonstrations of depositors in front of Sahara offices for repayment and there have been cases of suicide as well, without attracting any serious action.

How does the Saradha scam compare with Sahara?

At its peak in 2011-12, Saradha had raised Rs 10,000 crore. In contrast, the Sahara group has picked up Rs 1.1 trillion without any fanfare, completely unaffected by a high-profile trial in the Supreme Court, which led to group Chairman Subrata Roy being sent to Tihar jail in March 2014. The Supreme Court order was part of a long and bruising battle with Sebi in connection with Rs 24,000 crore raised by two Sahara realty entities by issuing optionally fully convertible debentures (OFCDs) without Sebi’s permission. If the CBI targets three middle-level Sebi officials and stays away from something 10 times larger, its action will obviously seem motivated. For those who remember, Sahara had the temerity to put out large front-page advertisements, calling Sebi a “sarkari goonda” when it acted against Sahara for illegally raising money from the public.

Why allow collective investment schemes?

What does Sebi have to do with Saradha? Well, Sebi is supposed to regulate what are called collective investment schemes (CIS). Forget the official nomenclature, these are essentially chain-money schemes, which pay old investors high returns with the money raised from new investors. Since such a business model is unsustainable, they go bust after a while, often destroying the lives of the poor and the middle class. But by then, the allure of high returns would have caught on like a wildfire, allowing a scheme to raise billions of rupees very rapidly.

Saradha was one such scheme. As were Rose Valley, MPS Greenery, and hundreds of others across India, which are regularly destroying hundreds of billions of rupees. Some time ago, a reader alerted us to the Swiss Mutual Fund, which offered a stupendous 25 per cent return per month, “plus 10% Commission, 10% Bonus, 10% Revenue & 0.10 Daily Profit Payout!!! Guaranteed By Swiss Mutual Fund (1948)”.

Sebi is supposed to regulate these schemes as part of the Sebi (Collective Investment Scheme) Regulations, 1999, later extensively amended. But it is a useless piece of legislation. Here is why:

• When the amendments to the CIS were passed in 2014, Rajya Sabha member Rajeev Chandrasekhar pointed out that only one scheme (Ahmedabad-based Gift Collective Investment Management Company Ltd) had registered itself under Sebi’s 1999 guidelines and had yet to launch a single scheme, while at the same time, thousands of Ponzi schemes had been operating unchecked all over India.

• Section 36 of the CIS says the units of every CIS shall be listed within six weeks of the date of closure of the CIS on each of the stock exchanges. Have you seen any scheme listed on the stock exchanges? Right now, there are none. This is not a surprise. The fact is there is no evidence of any genuine business happening under CIS. Schemes such as Saradha thrive under a nexus of politicians and police in every state. All these have essentially been chain-money schemes, which are frauds and have to be dealt under the Indian Penal Code. There is no role for a securities regulator here. To expect Sebi to regulate them is laughable, but it has been asked to do it.

The 1999 CIS regulation came up because of the mid-90s fraud perpetrated by plantation schemes. The subsequent amendments came about in 2014 following scams such as Saradha and Rose Valley, since politicians needed to show some action although they were themselves deeply involved. By the way, there is another good piece of legislation called the Prize Chits and Money Circulation Act since 1978, supposed to be implemented by states. But politicians in states themselves support shady schemes and enjoy the money until they go bust. For years, policymakers debated whether the Reserve Bank of India, Sebi, or states should deal with such toxic schemes. When U K Sinha was Sebi chairman, P Chidambaram as finance minister made Sebi the main regulator of something that cannot even be called “securities” and is usually built on fraud. Incidentally, Mr Chidambaram’s wife has been also investigated in connection with Saradha.

Even then, Sebi has made valiant attempts to “regulate” these schemes, which are often conceived as criminal enterprises from the start. Its actions against high-profile schemes such as Pancard Clubs, MPS Greenery, Rose Valley, Green Touch Projects, Ramel group, and a host of others have also been commendable. Sebi was also the first to stop PACL, or Pearls, from raising money when it had raised Rs 20,000 crore. PACL gamed the legal system and got repeated stay orders until the amount finally ballooned to Rs 49,000 crore plus interest. Sebi has had to face long misuse of legal processes in most other cases too. It is simply revolting that someone in New Delhi has ignored the complexity of the issues involved here and Sebi’s unenviable position regarding CIS, and unleashed CBI on a few hapless employees of the market regulator.

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers