Probing Saradha

Regulatory confusion about Ponzi schemes must end

The investigation into the collapse last year of the Saradha collective investment scheme, which shook West Bengal, has moved a step forward with the Supreme Court directing that it should be taken over by the Central Bureau of Investigation. The CBI on Monday set up a special investigation team, or SIT, to examine the accusations of wrongdoing, as well as probe regulatory behaviour. The court said the evidence before it indicated that several important individuals wielding considerable influence might be involved, but no progress has been made in unearthing either the money trail or the larger conspiracy at play. That a scam of this magnitude - nearly Rs 10,000 crore was collected from mostly poor people in several states and 2.5 million have so far filed claims - had been going on for years across eastern India, the court feels, suggests deep-rooted apathy, if not criminal neglect, on the part of regulators. These include the Securities and Exchange Board of India (Sebi), the Registrar of Companies and the Reserve Bank of India. Presumably the SIT will now investigate accusations that bribes were paid through middlemen to some functionaries; the sooner this is cleared up, the better it is for faith in India's regulatory structure. The CBI cannot afford to dawdle.

There are two obvious reasons why such Ponzi schemes persist. One is regulatory overlap and confusion. Regulators work in silos, making it possible for fraudsters to come up with ingenious schemes to bypass individual regulators - also called "regulatory shopping". The court notes that while Sebi has claimed that chit funds are not within its jurisdiction, it has also passed two orders directing the winding up of such schemes and refund of deposits. So there is now an urgent need for the highest authorities in the country to put in place a system that quickly spots any scheme seeking to raise money from large numbers of people by promising exceptional returns, and treats it as prima facie suspect and fit for quick investigation and regulatory action.

The other key point, which the court does not mention, is the law's delay. It took the system eight years to come to grips with Peerless and force it to reinvent itself in the mid-1990s. The Sahara saga is now into its fifth year and still running. It is vital to have a fast-track system whereby such activity can be tried and punished promptly. It is also necessary to have an easily accessible safe investment scheme with at least reasonably attractive nominal returns in which ordinary people can put their meagre long-term savings and not fall victim to the exaggerated promises of swindlers. The inflation-indexed bonds, which were floated with this aim in mind, are light years away from becoming popular. There is a need for fresh thinking in order to devise an instrument that ordinary and illiterate or semi-literate people will easily understand and find attractive, and then change the rest of the financial returns landscape so as to achieve consistency. Only then will no Saradha clones exist and flourish.