Ponzi schemes: Sebi Bill brings clarity, but what about this one gigantic loophole?

The Securities Laws (Amendment) Bill, 2014 (the Bill) introduced in the Lok Sabha on 4 August 2014 brooked no delay. In recent times, innocent people have been mulcted of their money.

Sarada chit funds scam in West Bengal, Amway multi-level marketing scheme etc have been rocking the nation and its echoes reverberated in Parliament too. But the lame duck UPA government could not go beyond issuing ordinance to empower the market regulator Sebi. The Bill would go a long way in addressing many festering problems.

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The Sebi would regulate all schemes with corpus of Rs 100 crore or more-chits, Nidhi or whatever. Hitherto, chit funds, nidhi etc have come within the state government’s remit thanks to exemption given to them when it came to the Sebi’s power. But even after the new law, there could be wiggle room available - do not cross the rubicund, i.e. Rs 100 crore.

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Ponzi schemes hereafter would latch onto this escape route. Splitting of income to pay no tax or lesser tax is common in India. Ponzi schemes can be counted upon to adopt with alacrity many times over this time-tested remedy. Floating multiple firms could be their riposte.

The law should be resilient enough to take on such enterprising crooks - the Rs 100 crore threshold would be ascertained by toting up the corpus of all companies and firms coming under the same management. While this loophole is available for those who are capable of mobilising more than Rs 100 crore, those who do lesser business than Rs 100 core would get away with their shenanigans.

It seems the Rs 100 crore threshold is too high. The touchstone should have been number of members of public enrolled. Sebi’s oversight should kick in wherever more than say 500 persons are enrolled as depositors or members or otherwise in a ponzi scheme.

Sebi’s power to attach properties and pass disgorgement order hasn’t come a day too soon. Crooks in India have so far gotten away with their loot. Disgorgement is the most appropriate punishment because in financial crimes restorative justice alone meets the ends of justice. Enron promoter Kenneth Lay died of a massive heart attack when called upon to disgorge US $ 250 million.

In insider trading matters, the Sebi has been armed with the power to call the records of telecom service providers. Rajat Gupta was nailed by the US public prosecutor in downtown Manhattan by gaining access to the call records of the telecom company. Little did Gupta know that his naivet in whipping out his cell phone soon after emerging out of the Goldman Sachs board meeting and passing on vital information to his comrade in arms Rajaratnam would cost him so dearly - he is now cooling his heels behind the bars in the New York state prison.

The Bill also does well to right the monetary penalty for insider trading. As it is, the punishment is Rs 25 crore or three times the profit made through insider trading whichever is greater. While this sounds frightening and hence deterrent enough, Rs 25 crore could be unconscionable and excessive if the gravity of the crime is lesser.

It is good that hereafter the penalty would be three times the profit made or an amount ranging from Rs 10 lakh to Rs 25 crore, whichever is greater. It is another matter that India does not have anything to boast by way of having nailed an insider. The new fangled power to call for telephone records might well drive insiders to divulge their secrets over a glass of beer.