Illegal investment schemes spread as regulators play a waiting game

Local police and state government more effective than central regulators such as RBI, Sebi

Illegal investment schemes may be facing heat in West Bengal, but their omnipresent in India. Recently, in response to an RTI query by a Mumbai-based investor, the Securities and Exchange Board of India (Sebi) said it is probing real estate developer Maitreya Plotters and Structures Pvt Ltd for alleged violations of Sebi (Collective Investment Schemes (CIS) Regulations, 1999. However, the regulator did not share several other details asked by the investor saying “the matter of Maitreya is still under examination and has not yet reached fruition, I find that investigation cannot be treated as completed.”

Even before Sebi investigations began, the company has been under MCA radar. As early as in March, the registrar of companies (ROC) has sent referred the matter to the legal cell of the Ministry of Corporate Affairs for initiating prosecution proceedings against the company for various violations including non-filing of balance sheets and not responding to MCA notices.

 

An email questionnaire sent to Vijaya Tavare, promoter of the group and subsequent reminders did not elicit any response.

According to complaints reviewed by Business Standard, “agents of Maitreya group of companies which pretends to have got ROC permission to sell investment plans, are indulging in deposit mobilisation, guaranteeing  returns of 1.55 times in 4 years, 1.52 times the investment in 5 years, 1.93 times in 6 years from investors under various schemes it has floated.”

Maitreya is only the latest case that has come to light, but it is not alone. Business Standard has in the recent past reported real estate plans, debenture issues and other innovative money raising plans including emu farms that are duping investors in different parts of the country. And, the regulatory action which begins with letter writing and ends with filing court cases does not often make any difference on ground.

Madhya Pradesh High Court order in 2009, which led to raid and closure of numerous such schemes in the state, gives an idea of the modus operandi of such schemes. “Petitioners, who are citizens of Gwalior city, have filed this Public Interest Litigation mentioning the facts that thousands of residents of the district have been fraudulently cheated by various companies and their hard earned money has been misappropriated. The companies have been growing rapidly in the district and they have been receiving deposits from the citizens of the area in the name of various schemes. However, the real purpose of the companies is to receive deposits from the citizens and they promised the persons to give them higher return of interest from 15% to 20%. In order to carry out the afore said activities the companies have adopted various fictitious methods in the name of selling and purchasing of cattle, selling and purchasing of plots and selling and purchasing of other goods.

However, in the books of the companies fictitious entries have been made and in the name of sale and purchase by way of sham transactions and the companies have been receiving deposits from the citizens with a promise to give regular interest or returns on the deposits.”

In doing so, the companies have not taken any permission from the Reserve Bank of India and also no registration is made under the provisions of the Companies Act and the Banking Regulation Act, 1949, the order said.

Thus with absolute lack of know your customer and other prudential norms, there is no control over what kind of money comes into these schemes making them fertile breeding ground for political and unaccounted sums of money.

According to an estimate by Mumbai-based Investors and Consumers Guidance Society, an organisation that works in this area, at least 25 companies have closed down this year and investors have lost several thousand crores of their hard earned money, this year alone. “More than 50% of the investors form the most poorest of poor. All livelihood have been lost and they are reduced to penury. All this when ROC could have taken cognizance of illegal deposit mobilization and could have informed the concerned State officials to take penal action against such companies,” the society said in a recent complaint. 

In addition to these, there are high profile cases such as Sahara India Parivar and Pearls group, where the regulators are engaged in protracted legal battles and the amounts at stake run into several thousand crores.

The proliferation of internet and online payment systems have only complicated the task at hand for the regulators. Even as you read this, several online portals are engaged in enticing investors into some get-rich quick plans. Some of these portals operate out of Singapore and Malaysia. Regulators themselves are not sure about their legal status. Speak Asia has been shut but there are several other schemes, which have floated offering holiday plans, foreign trips, weekly cheque payments etc.

Sebi, under whose jurisdiction most of these schemes eventually fall as the CIS Regulations has the broadest definition that encompasses these schemes, has been asking for more powers to regulate these entities and overhaul of the framework. However, in 2011 Fali S Nariman, leading lawyer and constitutional expert, arguing for Sahara India Parivar companies in Securities Appellate Tribunal said, " Section 11 of the Sebi Act empowers the regulator to even send a man to moon" to protect investor interest, one of the prime duties of the regulator enshrined in its preamble.

Even as Sebi awaits its new powers, local police stations and state governments are often more effective in bringing such illegal schemes to book. Apart from the Gwalior raids of 2011, the Tamil Nadu government has stepped in to bring relief to the investors in investment schemes built around the Australian bird Emu.