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In a yet another attempt to clampdown on collective investment schemes, the Securities and Exchange Board of India (Sebi) has cautioned investors against an instrument called, potato bond, floated by a West Bengal-based company. The product was being widely advertised in local media in West Bengal, particularly in rural areas.
The regulator has asked the company not to not to collect any money from investors or to launch any scheme, not to dispose of any of the properties or alienate the assets of the scheme and not to divert any fund raised from the public at large, whether kept in bank or in the custody of the company. In addition, Sebi had also sought a reply within 15 days.
Sebi, in an order, had said yesterday that it had came cross an advertisement dated September 11, 2012 published in the Bengali newspaper, soliciting funds from the public promising returns of 20-100 per cent under a ‘Flexi Potato Purchase Scheme.
“Securities and Exchange Board of India (hereinafter referred to as "SEBI") came across an advertisement dated September 11, 2012 published in the Bengali newspaper ‘Anandabazar Patrika’ at Kolkata by Sumangal Industries Ltd. (hereinafter referred to as “SIL” or “the company”) soliciting funds from the public promising returns of 20 per cent to 100 per cent under a ‘Flexi Potato Purchase Scheme’(hereinafter referred to as "the Scheme"),” Sebi said in its order.
Funds collected from public are used to buy potatoes from the market on behalf of the investors when the price is low and preserve them in their own cold Storage. The potatoes are sold when the market price rises. It takes 15 months to complete the whole business and return to the investor the sale value of his potatoes. Sebi on October 11, 2012, had advised the company to note that in terms of section 12 (1B) of the Sebi Act, 1992 and the provisions of the SEBI (Collective Investment Schemes) Regulations, 1999, which says that no entity can carry on or sponsor or launch CIS without obtaining a certificate of registration from Sebi.
The regulator had also sought a number of documents from the company.In reply, on October 20, 2012, the company had denied mobilizing funds from public. It also submitted that it is trading in potatoes for which it has a trading licence and it is dealing in agricultural and non-agricultural products both within and outside India. The company also denied that it was running a CIS and submitted that the question of obtaining a certificate of registration from SEBI does not arise. The company did not provide the information and documents sought by Sebi.
“The interest of investors is the first and foremost mandate for SEBI. Under the circumstances, SEBI has to take immediate steps to prevent activities of companies or entities defrauding investors and damaging the orderly development of the securities market. I note that (the company) has to be prevented from carrying on further with its activity related to collective investment scheme without obtaining due registration from SEBI in accordance with law,” Sebi had said.
Earlier, in On December 6th, Sebi published an advertisement in all leading dailies in West Bengal, cautioning investors against the collective investment schemes of a particular company's collective investment scheme. Sebi, directed the company to deposit an amount of Rs 1169 crore as in an eschew account of a public sector bank, as it was operating the scheme without Sebi certificate. The company, however, took Sebi head-on, by publishing another advertisement, claiming that it had valid court orders to raise public deposits. Sebi, in a ten page order against the company, had said, “Such continuous breach by (the company) is nothing but cocking a snook at the Regulator.”
The small investments which have been a big concern for regulators have their roots in multi-level marketing companies. These companies work in the principle of “referral marketing”, where one salesperson is not only compensated for selling a product, but also for roping in other salesperson.
Most multi-level marketing schemes are in the business of agro products and real estate in West Bengal. All these schemes are collectively referred to as CIS, a financial instrument recognized by Sebi since the 1990s.
During the late 1990s when the government noticed that certain entities were operating in the securities markets, who issued instruments against investments such as agro and plantation bonds by offering very high rates of return, the government decided to bring them under the vigil of Sebi under the CIS category. The rule made all CIS operators to get registration certificate from Sebi to float new schemes and operate the existing ones.
