The passage of the Securities Laws (Amendment) Bill by Parliament is an important step in empowering the Securities and Exchange Board of India to deal with financial shenanigans. The regulatory body had not been fully equipped to deal with ingenious schemes masquerading as collective investment schemes. Many of these promised unrealistically high returns to lure gullible depositors, a notable example being what the Saradha group in West Bengal indulged in. They could sustain their “business model” as long as new depositors, lured by advertisement campaigns boosted by outsized commissions to the sales force and aided by political connections, came trooping in to repay exiting depositors. Others like the Sahara group offered utmost convenience — ostensibly collecting pygmy-size deposits right at investors’ doorsteps even in remote parts of the country. It is a different matter that the Supreme Court suspects the bona fides of Sahara’s huge deposit mobilisation claims and has upheld the SEBI order deeming its latest issue of optionally convertible debentures illegal and ordered the return of the money. Sahara, which has had an earlier run-in with the Reserve Bank, was basically shopping for a benign regulator: the Ministry of Corporate Affairs, it believed, would not look too closely at the bona fides of its investors. For all its faults, Sahara has been claiming that there has not been a single instance of default on its part, but the Saradha group’s investors have suffered enormously as confidence in the group evaporated.
While there have been other similar acts of malfeasance, the important message from the new legislation is that the market regulator can deal proactively with them before they assume menacing proportions. SEBI now gets explicit powers to disgorge illegal gains made through fraudulent deposit schemes and capital market offences. Those who lose money can be recompensed from the sale of recovered assets of a delinquent company. The money collected will be parked in SEBI’s Investor Protection and Education Fund. SEBI can, with a magistrate’s permission, conduct search and seizure operations and initiate recovery proceedings. The new legislation was overdue: the UPA government had promulgated an ordinance in July 2013 and then presented a draft bill, which lapsed. Attention will now be focussed on SEBI, especially on whether it can act decisively against frauds that have thrived amid a regulatory vacuum. In its quarter century of existence, SEBI has had to deal with many sharp practices in the financial system. Its very creation and periodic strengthening have been in response to one crisis or the other. While the new law will deal with extreme cases of malfeasance, SEBI’s overall regulatory framework needs to be strengthened.
