SEBI, other agencies to join forces against investment frauds

Amid a countrywide proliferation of fraud investment schemes, markets watchdog SEBI is joining forces with other agencies, including RBI, SFIO, Enforcement Directorate and state police departments, to tackle the menace.

New Delhi: Amid a countrywide proliferation of fraud investment schemes, markets watchdog SEBI is joining forces with other agencies, including RBI, SFIO, Enforcement Directorate and state police departments, to tackle the menace.

A large number of fraudulent schemes have come to the fore in recent months, wherein gullible investors are promised huge returns of up to 100 percent in a year or two through 'bizarre and innovative' methods, a senior official said.

The investors being taken for a ride include the poor daily-wage earners trying to save a few hundred rupees a month, the middle-class seeking to invest their hard-earned income for decent returns, as also the rich and sophisticated HNIs looking to grow their wealth by investing in property, artworks and the financial markets.

Investigations of Securities and Exchange Board of India (SEBI) have also found that many of these schemes are being used for the purpose of money laundering and to channelise illicit funds into the financial system, the official said.

Put together, all such schemes are estimated to have raised thousands of crores of rupees from investors across the country.

SEBI on its own lacks full-fledged powers to act against all kinds of 'money-pooling' frauds, although a proposal to strengthen its arsenal is awaiting government's clearance.

In the meantime, the regulator has decided to take a collaborative approach to bring to book perpetrators of these investment frauds, by seeking help from other regulatory and enforcement agencies.

SEBI is roping in other regulators and agencies depending on the needs and nature of the case, the official said, while adding that these entities include banking regulator RBI, Serious Fraud Investigation Office (SFIO), insurance watchdog IRDA, Enforcement Directorate and the Economic Offence Wings and other police departments in various states.

SEBI Chairman U K Sinha had recently said that people are coming up with innovative and bizarre schemes to defraud investors, such as those promising huge returns through investments in goat-rearing and emu bird farming, among others.

Other cases that have come to the notice of the regulator include sale of plots in deserts as agricultural and property development land. It had recently initiated action against a scheme promising huge returns from potato investments.

Many cases have come up in the eastern states of West Bengal and Assam, wherein huge returns are being promised on real estate and hospitality investments. Besides, many such schemes are there in the northern states of Delhi, Rajasthan, Haryana and Himachal Pradesh.

Besides, SEBI last week came down heavily on a leading art fund for running a 'collective investment schemes', including the one wherein it had raised over Rs 100 crore. The fund has been asked to wind up all such schemes and return to investors their money with 10 percent annual return.

A few other art funds are currently being investigated for possible defrauding of investors by violating norms.

While schemes like potato bonds, emu farming and goat rearing are primarily aimed at duping small gullible investors, the sophisticated HNIs are targeted for pooling in money for investments in art works, paintings, antiques, real estate properties and other high-end assets.

In its order against the art fund, SEBI said that its rules do not make make any distinction for different class of investors and "it cannot be anybodies case that law protects only the small investors and affluent investors are left on the peril of unscrupulous business men".

The fund had argued that the sophisticated and high net worth investors had invested in its scheme, wherein the minimum investment size was Rs 10 lakh, and it did not fall under SEBI's jurisdiction.

SEBI at present is also investigating a case wherein an organised syndicate of fraudsters is suspected to have defrauded a large number of people in the name of investments made by their deceased family members.

The syndicate typically calls up the target investors to inform about a mutual fund or insurance product purchased by his or her deceased relatives and promises impressive returns if some fresh investments are made.

In the process, fraudsters earn fat commissions for sale of mutual fund or insurance products.

In a proposal seeking greater powers from the government for handling various investment frauds and misdoings, SEBI has said it has recently faced new challenges in recovery of penalties, regulation of pooling of monies from public by various schemes.
Besides, SEBI has also listed the lack of direct powers for attachment of assets, to conduct search and seizure and to call for information from any person in relation to its inquiry and investigations. As of now, SEBI mostly needs to seek relevant judicial or executive orders on case-to-case basis for such powers.

SEBI said that many entities that predominantly pool investments under investment contracts claim exception from its regulatory regime, pleading their structure and businesses were outside the purview of the markets regulator.

Consequently, SEBI has proposed that any pooling of funds under an 'investment contract' involving a corpus of Rs 100 crore and above should be deemed as Collective Investment Scheme under the SEBI Act.

Besides, it has also sought powers to specify the parameters for determining as to what constitutes pooling of funds from public for the purpose of treating such schemes as Collective Investment Scheme. SEBI has said it is necessary to enhance its powers to make it better equipped to deal with 'innovative' collective schemes that are designed to avoid regulation.