Regulators should coordinate to end ponzi scheme menace, says RBI

The Reserve Bank of India on Monday stressed the need for more coordination between financial sector regulators to stop the menace of ponzi schemes.

“One important thing we have seen in recent deliberations is that many of these activities are falling under a regulatory vacuum which means in whose turf it falls many times is a grey area and is not very clear,” said S. S. Mundra, Deputy Governor, RBI, while speaking at a workshop on ponzi schemes organised by Multi-Disciplinary School of Economic Intelligence (MDSEI) at the NACEN (National Academy of Customs, Excise and Narcotics) here.

“These schemes usually escape the regulatory radar. One of reason is owing to the time of origination they are typically very localised and at a very small scale,” he added.

Each financial sector regulator operates over a certain jurisdiction in India. “We have an institution-specific regulation rather than the activity-based regulation and this leave the scope of some activities falling on fringe, to be left out of the regulatory radar,” Mr. Mundra added.

Ponzi schemes are fraudulent investment schemes, wherein people are promised high returns without having to assume commensurate level of risks. Mr. Mundra said that regulators are conscious of this aspect and quickly move to bridge any regulatory gap under the inter-regulatory forum such as FSDC and its sub-committee.

He said that unauthorised collection of deposits happen in Tier-II and Tier-III cities where the regulator do not have the presence. Hence they do not come to know of such un authorised collection of deposit unless they start receiving complaints from the investors.

“It is here that the role of state and local administrative machinery assumes significant importance,” said Mr. Mundra, adding, “the unauthorised collection of deposit is any way a state subject and the local police have the power to prosecute the offenders. It is important that the market intelligence gathering is strengthened by the state governments.”

According to him, there is a need to establish an effective two-way communication between the state machinery and the regulators whereby either party should immediately inform the other about any illegal, unauthorised and suspicious financial activities coming to their notice.

Mr. Mundra said that the forum of State Level Co-ordination Committee is a very important forum and there is a need to make it a more active and effective.

The enforcement agencies also do not see the problem until it reaches a much significant proportion and the number of complaints grow.

“Even when these activities come to fore, lack of co-ordinated effort from the investigative agencies and protected legal proceedings fail to create enough deterrence for the fraudster or the potential fraudsters,” said Mr. Mundra , adding, “hence, it is essential that agencies follow a co-ordinated approach to quickly get to the bottom of the problem and bring the culprits to the book and meet out an exemplary punishment.”

Need for an effective two-way communication between the State machinery and

the regulators.