Weeding Out Ponzi Schemes

Team Money Today        Print Edition: August 2013

In a bid to curb the menace of Ponzi schemes and protect investors, the Securities and Exchange Board of India (Sebi), which regulates the Indian capital market, has been granted more powers.

Sebi can now regulate any collective-investment scheme with a corpus of Rs 100 crore or more, and attach assets of companies in case of non-compliance. The Sebi chairman can also authorise search and seizure operations. The powers were granted by the government through an ordinance.

The finance ministry said innovative methods of raising funds from investors had resulted in regulatory gaps regarding types of instruments and fund-raising.

Though the move is expected to curb irregularities and frauds in the securities market, experts believe it's just a small step towards curbing the practice of illegal collection of money.

"When any financial fraud is committed, it the chit fund industry that gets a bad name. Therefore, any move to curb such fraudulent companies is good," says TS Sivarama Krishnan, general secretary, All India Association of Chit Funds.

Many Ponzi schemes are run like multi-level marketing (MLM) schemes, which sometimes lead to harassment of direct selling companies.

Chhavi Hemant, secretary general of the India Direct Selling Association (IDSA), says that since many financial schemes are run like MLM schemes, any move to curb them would be welcomed. She, however, says since Sebi does not have the powers to look into trade and commerce activities of companies, many fraudulent MLM may still be out of its ambit.

Ajay Shah, professor, National Institute of Public Finance and Policy, however, says there is need for a completely different regulatory approach to weed out Ponzi schemes. "The ordinance does not solve the problem . The bad guys will just modify their business to harness other loopholes in the system," he says.

Shah says the proposed Indian Financial Code (IFC) includes solutions to this problem. The IFC Bill seeks to restructure the financial regulatory framework in the country.

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