New Delhi: India plans legislation to close a regulatory loophole that has made it possible for fraudsters to dupe millions of savers, as Prime Minister Narendra Modi strives to bring the rural poor into the mainstream banking system.
Unscrupulous operators have bilked savers of billions of dollars by running pyramid schemes or promoting questionable investments in everything from tree plantations to farming emus, a flightless bird.
The most notorious has been Sahara, whose founder Subrata Roy was jailed in 2014 after failing to comply with a Supreme Court order to repay money raised under deposit plans later ruled illegal. The court has asked Sahara to return $5.4 billion (over Rs. 36,363 crores) to investors in those banned plans.
“Our aim is to take steps so that there are no more scams like Sahara in future,” said Nishikant Dubey, a member of parliament’s standing committee on finance from the ruling BJP.
Parliament could consider a bill in July that would replace weak rules that now govern credit cooperatives operating in more than one state. These are now overseen by just 10 staff at the Agriculture Ministry.
The officials lack the resources to monitor such savings groups and, one told Reuters on condition of anonymity, have faced pressure to turn a blind eye from politicians who personally profit from them.
India does not have a unified regulatory regime to counter Ponzi, or pyramid, schemes whose operators typically grab new deposits to meet their promise of guaranteed returns to existing savers.
Such schemes can snowball but are doomed to eventual collapse when they run out of new savers. Federal investigators are probing cases in which 60 million (6 crore) savers have lost some $10 billion (over Rs. 67,339 crores).
The lack of sanctions means that kingpins behind failed deposit schemes are rarely punished.
Mr Roy has not been convicted of any crime over his Sahara empire; he was jailed two years ago for contempt by the Supreme Court and recently freed on parole after his mother died.
The Securities and Exchange Board of India (SEBI) does have the power to freeze operations at, and investigate, suspected fraud at collective investment schemes that raise over Rs. 100 crore ($15 million) and fall under its purview.
But, say lawmakers, stronger sanctions are needed to protect poor people who often save tiny sums for a rainy day.
“The looseness in implementation of state acts, including looseness at the SEBI end, has helped fraud operators to loot the people,” said Kirit Somaiya, a BJP parliamentarian and President of the Investors’ Grievances Forum.
The Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Bill, based on Britain’s Financial Services Act, would create a committee to decide on whether deposit schemes should be investigated.
This would comprise senior officials from departments such as the home and finance ministries, the Reserve Bank of India, SEBI and the Central Bureau of Investigation, India’s top crime-fighting agency.
It would create special state courts to handle fraud cases, and foresees jail terms of up to five years and stiff fines for duping savers. Repeat offenders would face up to 10 years in jail.
Tougher regulation would back up a drive by PM Modi to ensure that India’s poor have access to regulated banking services. Under the Jan Dhan or People’s Wealth Scheme, 218 million new accounts have been opened.
These are being linked to the national identity card or Aadhar scheme so that account holders can receive welfare benefits directly, to buy cooking gas or for work under a rural jobs scheme, reducing systemic fraud.
© Thomson Reuters 2016