Ponzi operators to face penalties worth three-times of profits

Operators of illegal money-pooling schemes will soon face penalties of up to three times the profit made by them, as against the current provision of a meagre fine of Rs 1 crore.

The capital markets regulator Sebi (Securities and Exchange Board of India) has decided to increase the monetary penalty for those running unauthorised Collective Investment Schemes (CIS), as the existing mechanism have not proved to be sufficient to deter such illegal mobilisation of money.

A proposal to this effect has been approved by Sebi and the same would be notified soon, a senior official said.

As per a Sebi memorandum in this regard, illegal mobilisation of funds within the existing legal framework falls within a provision wherein a maximum penalty of Rs 1 crore may be imposed.

Sebi is of the view that this penalty "is very meagre compared to the money mobilised by unregistered CIS, especially considering that in certain cases the money mobilised is in multiples of thousand crores.

"Hence, adjudication under the existing mechanism may not be sufficient to deter such illegal mobilisation of money."

Accordingly, Sebi has decided to amend the relevant regulations to provide for "a penalty of Rs 25 crore or three times the amount of profits made, whichever is higher."

To tackle the growing menace of investors being duped of their hard-earned money through various illegal investment pools, many of which are in the nature of 'ponzi' schemes, Sebi has been given the mandate to take action against all such money collection activities involving Rs 100 crore and more.

A typical 'ponzi' scheme involves the operator collecting a large amount of money from investors and paying them returns from their own money or the money collected from subsequent investors, rather than from profit earned by the person or entity operating such a scheme.

Such activities came to be known as 'ponzi' schemes after Charles Ponzi, who became notorious in the US in 1920s for deploying this technique while promising 50 per cent return on investments in 45 days and 100 per cent within 90 days.

A large number of such schemes have come to the fore in India as well, while many

of them have faced regulatory actions by Sebi in recent months.

However, Sebi in most of the cases has only asked the operators of such schemes to refund the money to investors and stop such unauthorised activities.

The schemes that have faced action include those promising huge returns based on investments on potatoes, goat rearing, cattle and butter schemes, emu farming, real estate and holiday memberships.

Tightening the noose on perpetrators of such investment pools, Sebi in its board meeting earlier this month decided that all unathorised CIS activities be declared as 'fraudulent and unfair trade practices' and dealt with accordingly.

With an aim to check proliferation of such schemes, Sebi has now decided to amend its Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations "to provide for imposing deterrent monetary penalties for illegal mobilisation of funds by floating schemes in the nature of unregistered collective investment schemes".

Sebi says it has come across various cases of "huge sums of money being raised by unscrupulous operators from a large number of investors by floating schemes in the nature of unregistered collective investment schemes".

The regulator has been issuing directions against such entities under section 11B of the Sebi Act, but such orders have not proved to be deterrent enough as such schemes have continued to raise huge amounts of money from the public.

Prosecution has also been launched in many cases, but they have also not been very effective due to procedural issues and delays associated with the legal process.

Sebi has, therefore, decided to amend its FUTP Regulations to take enforcement action against unregistered CIS entities by way of adjudication proceedings, which have proved to be more effective and involve larger penalties.

It has been proposed that any illegal mobilisation of funds without obtaining a certificate under the CIS Regulations can be declared as a fraudulent and unfair trade practice under the FUTP Regulations.

The FUTP Regulations are also being amended to declare that dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves mobilisation of money by any person in violation of CIS Regulations and the relevant sections of the Sebi Act.