)
The latest exposure of Saradha Group scam has left various investigating agencies confused over regulating such companies to protect investors. Even as various ministries, government departments and regulators such as Ministry of Corporate Affairs (MCA), Serious Fraud Investigation Office (SFIO) under the ministry, Department of Financial Services (DFS), the Reserve Bank of India and Securities and Exchange Board of India (SEBI) are brainstorming on the issue, officials involved say they are finding it difficult to nail down unauthorized collection of funds by numerous small time and fly-by night operators.
Reason being: most of these organisations operate with unique business models circumventing various norms and regulations under different departments. Officials, investigating the recent Saradha scam, told business standard that such organisations take advantage of overlapping regulatory mechanisms and make use of the exceptions to not get registered under any regulatory agency including RBI or SEBI, which primarily have the mandate to regulate non-banking financial companies (NBFCs), including those taking deposits and those not taking deposits (micro finance institutions), and those engaged in collective investment schemes (CIS). Even some of the money laundering companies exist like this, an official said.
For instance, the alleged perpetrators of the West Bengal chit fund scam Saradha group did not operate as a chit fund. Though the main entity was registered with the Registrar of Companies (RoCs), MCA officials said the information available with the ministry indicates that the company was functioning as an NBFC. However, it was not registered under RBI, the regulator for NBFCs. Apparently, it was also collecting deposits, again monitored by the central bank. Apart from these, the group ran investment schemes and therefore came under the ambit of Sebi as well.
Officials said it is not that there are no rules and laws to monitor such companies but overlapping help such companies to bypass checks and balances and fleece investors. Therefore, the government is now evaluating various models opted by such companies and find ways to tap them under law. The special task force formed under the SFIO as well as the inter-ministerial group under DFS will study various business models and consult all the agencies before arriving at final suggestions which will be submitted to the government.
Various laws in the financial sector governing money laundering, chit funds and other such schemes include the Companies Act, 1956, the Securities and Exchange Board of India Act, 1992, the Prize Chits and Money Circulation (Banning) Act, 1978, the Chit Funds Act, 1982 and the Reserve Bank of India Act, 1934.
Ideally, chit fund companies are also NBFCs. However, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI like chit fund companies come under the Chit Funds Act, 1982, venture capital fund, merchant banking companies, stock broking companies are registered with SEBI, nidhi companies come under the Companies Act, 1956, housing finance Companies are regulated by National Housing Bank.
