SEBI gets more powers
Added powers for SEBI – most welcome
In independent India, fraudsters and crooks have targeted the stock market with relative ease. Haridas Miundhra, the notorious rags-to-riches businessman had cheated the LIC and countless shareholders. AHe went to jail, sullying the reputation of the then Prime Minister Jawaharlal Nehru and forcing the resignation of T. T. Krishnamachari, the Finance Minister. The amount Mundhra siphoned off from LIC was some one and half crores – peanuts compared to the mega scams of present times.
Since then, the stock exchange has been periodically rocked by scandals of alarming proportions. Harshad Mehta and Ketan Parekh engineered massive scams running into thousands of crores of rupees. The massive losses suffered by banks and the investors created a public uproar to bring in tighter regulatory controls over the stock market operations. As a consequence of this need to ensure transparent functioning of the stock market, the Securities and Exchange Board of India (frequently abbreviated SEBI) was established in the year 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992. SEBI acts as the regulator for the securities market in India.
Despite the prying vigilance by the SEBI, unscrupulous companies, share traders, and individuals continue to discover loopholes in the regulatory framework to engage in unethical practices. Their successes damage the faith of the investing community. Like a cat and mouse chase, the SEBI haunts the predators down and devises means to plug the loopholes by bringing in stricter controls.
The Indian Parliament has passed the Securities Laws (Amendment) Bill to further empower the Securities and Exchange Board of India to deal with predators out to defraud the investors in companies and the stock market.
The purpose of the amendment is to curb the collective investment schemes which give the outward impression of being simple investment schemes. They entice the gullible small investors by offering very attractive returns. Ignorant people, with small investible surpluses, fall for the bait, and hand over their hard-earned savings to these shadowy companies. One recent example is the infamous Saradha group in West Bengal which has sunk taking with it the precious earnings of scores of innocent investors.
These companies operate what is known as the Pongy schemes. This name comes after Charles Ponzi who devised the notorious model in 1920. In this scheme, the company manages to pay the exorbitant interests to its existing clients not by earning the amount through some exceptionally lucrative deployment of funds, but by diverting a part of the fresh receipts from new investors. To camouflage their crooked intentions and their utterly unsustainable business model, they open swanky offices, advertize aggressively and befriend politicians and bureaucrats. The Sahara group went a step further to hoodwink the investors. Its agents fanned out to the remote nook and corner of the country to collect even small amounts from families and businesses from their door steps. The Sahara group collected money from the public through other dubious means such as the optionally convertible debentures. Such method was in total disregard of the laws of the land. Finally, the SEBI caught up with Sahara, and the Supreme Court has been exerting unrelenting pressure on the company by putting its chairman Subroto Ray behind bars. The Apex Court demands the return of the depositors’ money running to thousands of crores of rupees. Sahara group could go this far through its strong political connections. Now, Sahara’s reputation is in tatters and its numerous shareholders have seen the value of their shares nose-diving to near zero level.
There have been many such instances of companies operating for some time and then vanishing overnight leaving the small investors in the lurch.
The new legislation empowers SEBI to deal with these dubious companies with greater power and alacrity. SEBI now gets explicit powers to impound the illegal gains made by the fraudulent entities through their deposit schemes, and by committing capital market offences. The harassed depositors can now claim to be compensated through confiscating and auctioning the assets of the defaulting companies. The money collected through auction and sale of assets will be deposited in SEBI’s Investor Protection and Education Fund. SEBI is now given powers to search and seize the assets with a magistrate’s permission. It can initiate other coercive methods to recover as much money as possible.
The new legislation was long time coming. The UPA government had promulgated an ordinance in July 2013 and then presented a draft bill. It could not be passed due to chaotic functioning of the parliament. The bill lapsed, as a result.
With the passage of the bill, the onus of tracking and bringing these companies to book falls on SEBI. With enhanced powers, SEBI can now act decisively and timely. SEBI’s record in fending off fraudsters from the stock market has been reasonably satisfactory so far. It is hoped that it will discharge this new role of vigilance and prosecution with aplomb.