Arun Jaitley bridges regulatory gap to prevent Saradha repeat

The Finance Ministry has decided to bring in stronger regulatory authorities for ‘early detection’ of ponzi schemes.

Written by Madhuparna Das | Kolkata | Updated: July 11, 2014 12:46 pm

After the nation was shook by the multi-crore Saradha and similar chit fund scams, affecting millions of small-time investors in several states like West Bengal, Bihar, Jharkhand, Assam, Orissa and Uttar Pradesh, Union finance minister Arun Jaitley Thursday included new provisions to “bridge the regulatory gap under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978.” The Union finance ministry has decided to bring in stronger regulatory authorities for ‘early detection’ and other deterrents for ponzi schemes, according to the budget proposals.

In the budget speech, Jaitley said, “As part of the legislative initiatives under financial sector reforms, it is proposed to bridge the regulatory gap under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978. This step is expected to facilitate effective regulation of companies and entities which have duped a large number of poor and vulnerable people in this country.”

According to a senior official of the Union finance ministry wing in Kolkata, the government is considering a proposal to form a stronger regulator which will fill the ‘regulatory vacuum’ as witnessed when the Saradha and other chit fund scams unfurled.

The official further explained, “There has to be a common instrument which can crack down ponzi schemes. At present there are distinctions like Collective Investment Scheme (CIS) which is regulated by the SEBI, there are non-banking finance companies, monitored by the RBI and there are certain schemes which are monitored by the ministry of company affairs. Due to these gaps, the “chit fund” companies, otherwise known as “ponzi companies,” designed their products in ways which enabled them to evade existing regulators. The existing regulators claim that under the earlier dispensation, they often got confused in deciding if a particular ponzi scheme came under its jurisdiction. These are the loopholes in the regulatory system which are being taken advantage of by the ponzi companies.”

Anup Sinha, professor of Economics, IIM, Kolkata, agreed that there is ‘need for a common regulator’. “A strong regulation is required. Financial scams like Saradha should not happen again. An instrument is required which can quickly detect ponzi schemes. However, there should also be other regulations which would ensure that companies which are involved in (legitimate) direct selling, not be harassed. These companies too come under CIS,” Sinha said.

After the Saradha scam rocked the state, the Trinamool Congress government had drafted a new bill called — “The West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013” and it was sent to the centre for approval. The bill was sent back to the state with the centre’s suggestions and corrections, which the state incorporated. The centre is now awaiting presidential assent on the bill.

States like Orissa, Bihar, Tamil Nadu, Assam, Maharastra, Andra Pradesh have an operational act called ‘Protection of Depositors in Financial Establishment’ through which several ponzi companies were shut down in those states by the government.

The Saradha scam, now under CBI investigation in West Bengal and other states, is also being probed by other central agencies like the Enforcement Directorate, the SFIO, SEBI. The agencies are also investigating other such companies which mushroomed in the state in the mid-’80s.

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