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Ponzi menace needs better surveillance, not new regulator: RBI

Last Updated: Sunday, June 9, 2013 - 14:57

New Delhi: Amid huge amounts of public money being collected via various ponzi schemes, the RBI is of the view that setting up a new regulator might not solve the problem and such illegal activities can only be checked by stronger surveillance and better enforcement of laws.

Also, active involvement of state governments is very important to keep a tab on such activities and take action against the culprits, said Reserve Bank Governor D Subbarao.

While favouring a review of the present legal framework to remove any loopholes, Subbarao said that an amendment of the regulations would not be sufficient to tackle this menace and an effective implementation of laws is more important.

His comments come against the backdrop of numerous cases coming to light about investors being duped of thousands of crores of rupees by ponzi schemes across the country, including in West Bengal, Orissa, Tamil Nadu, Delhi, Bihar, Assam and UP.

Speaking to PTI in an interview on the issue of ponzi schemes and whether there was a need for better regulation, Subbarao said that the problems that have come to the fore are mostly related to illegal and unlawful schemes.

"The problem is not with regulated schemes, the problem is with unlawful schemes, and unlawful schemes are by definition not regulated," he said.

"The ponzi schemes cannot be regulated by anyone because they are illegal and illegal schemes are not regulated," he said, but added that it does not mean that the present legal framework was sufficient.

"I would say, may be, we should look at the laws once again. What I am saying is that it (amendment to laws) is necessary but not sufficient. Sufficiency conditions will be met by more effective surveillance and enforcement of law and catch unlawful schemes."

Ponzi schemes generally involve collections of small amounts of money from individual investors on a periodic basis with a promise of huge returns, which are at times linked to bringing in new investors. However, their operators run away after a huge amount is collected through such public deposits, leaving investors in the lurch.

The issue is currently being debated by a Parliamentary Committee and an inter-ministerial group, among other forums, and the proposals being considered by them include setting up of an independent regulator for all public money collection schemes and stronger powers to the existing regulators.

Such funds are being collected through various routes, including through chit funds that are regulated by state governments, Collective Investment Schemes regulated by SEBI, as also by NBFCs that come under RBI.

However, most of such schemes are generally run by un-regulated entities that do not come under the jurisdiction of any regulator or authority.

Subbarao said that there is lack of clarity on what is a legal deposit and what is illegal, and if these are legal schemes that who is the concerned regulator.

"It is only the legal schemes that can be regulated. So we need to get hold of the unlawful schemes. But, we cannot tackle this without a much more effective surveillance enforcement and that cannot be done without an active involvement of the state governments," he added.

Asked whether a single regulator would help, Subbarao said he was not sure about that.

"I don't know if one regulator will help. Chit funds, for examples, are regulated by the state governments and I think that is correct because chit-funds operate all over the country and I don't think a national level regulator will have the reach and penetration to get there," he said.

On having an independent surveillance agency also, the RBI chief said that the police is everywhere for that job.

He added: "You can't have a surveillance agency just for this (ponzi schemes). That won't work. You have the police enforcement all over the country and they must do it.

"The law needs to be enforced more effectively and should there be a need for amendment, we should do this. It is more about implementation of law.

"It is more effective regulation that is necessary and even more important than that is more effective surveillance and enforcement of existing laws without ruling out the need for amendment of fresh laws as may be necessary."


First Published: Sunday, June 9, 2013 - 14:57
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