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When it comes to Ponzi schemes, India's regulators have miles to go

November 17, 2015 10:31 IST

It is shocking to know that that most of the non-banking financial companies are very small in size (asset size below Rs 10 crore) and on scrutiny, a majority were found to be not doing any active business.

In presentations to Parliament's standing committee on finance, regulators have given detailed numbers on companies in financial activities and action taken.

Three years ago, the ministry of corporate affairs (MCA) sent a list of 34,754 companies to the Reserve Bank of India (RBI).

It had advised that these might be engaged in non-banking financial activities, without the mandatory registration under the RBI Act. MCA had requested action against such companies.

This was in addition to 145 'chit fund' cases the ministry has assigned to Serious Fraud Investigation Office.

As of June, RBI had distilled the list to 104 companies, which it suspected of holding public deposits. Then, after detailed scrutiny, it concluded none of these 104 were holding deposits.

So, everyone is doing business in line with the rules.

What is all the noise about ponzi schemes, cheated depositors and investors all about?

RBI left out most of the companies from the original list for various technical reasons. For example, it left out 4,253 companies on the list from MCA because their balance sheets were not available on the latter's website.

Thus, if you are taking money from investors illegally but add further violations such as non-submission of the balance sheet, you can escape RBI scrutiny altogether.

A further 16,309 companies did not meet the principal business criteria (PBC) for regulation under the NBFC framework.

Under PBC criteria, a company is treated as an NBFC if its financial assets are more than 50 per cent of its total assets (net of intangible assets) and income from these financial assets is more than 50 per cent of the gross income. Both tests must be satisfied. Therefore, this large group is not fully out of suspicion.

Though perhaps not strictly conforming to PBC criteria, it is possible that some of these are involved in money raising.

Two other categories seem genuine exceptions -- 4,302 companies under liquidation and 4,585 already registered as NBFCs.

With 29,449 companies thus set aside from the original list, RBI had 5,305 companies that met the PBC for NBFCs.

Of this, 297 companies were not found at their registered addresses. This again is a red flag for MCA to pursue.

RBI told the committee it had taken a detailed review of about 2,300 companies and conducted a scrutiny of 1,326. It closed 1,555 cases, saying the entities were registered with some other regulator or did not meet PBC criteria.

RBI said it followed a graded approach for these cases, having regard to the nature of violations.

"It may also be noted that most of the companies (more than 80 per cent) are very small in size (asset size below Rs 10 crore) and on scrutiny, a majority were found to be not doing any active business." The number suggests that while there is a lot of work to be done by MCA, RBI itself has completed scrutiny of only about half the 5,300 companies which meet the PBC.

The Securities and Exchange Board of India has, in the past three years, passed interim orders against 72 entities for activity on Collective Investment Schemes. It has passed 23 final orders. Separately, it passed orders in 152 'deemed public issues', cases similar to the Sahara group entities, which raised money from 49 investors by issuing debentures.

Thus, while the suspected entities are in thousands, the action taken is only in the hundreds. When it comes to ponzis, our regulators have miles to go.

Photograph: PTI

N Sundaresha Subramanian