SEBI wants principal regulator to monitor investment plans

The collective investment scheme regulations of 1999 are too old to handle the new and innovative schemes that are being introduced. With more scams in this area coming to light SEBI's call for a principal regulator to oversee all collective investment schemes including multi-level marketing schemes has gained strength.

The collective investment scheme regulations of 1999 are too old to handle the new and innovative schemes that are being introduced. With more scams in this area coming to light SEBI's call for a principal regulator to oversee all collective investment schemes including multi-level marketing schemes has gained strength, reports CNBC-TV18's Sajeet Manghat and Ashmit Kumar.

The Speak Asia scam has just started fading from memory and the 'stock guru' scam has emerged to take its place. Experts say both these events are the latest in a long line of instances where regulatory gaps have been exploited through ponzi and multi-level marketing schemes to dupe investors in India. And market regulator SEBI is approaching the FSDC to identify regulatory gaps to ensure a more efficient crackdown.

The last time the government took note of this issue, SEBI put together the SEBI collective investment schemes regulations 1999, to protect investors against agro and plantation schemes. Then in October 2002, to give SEBI sharper teeth, the SEBI act was amended. this amendment made any offence under the SEBI act punishable by up to 10 years imprisonment, and also carried a fine of up to 25 crore rupees. The amendment also stated that cases will be tried at the sessions court, instead of the metropolitan magistrate or judicial magistrate court.

However, with this last clause being challenged at various stages, confusion has reigned and SEBI's problems with regulating such schemes have been mounting.

In January this year, SEBI circulated a status report on collective investment schemes to the SEBI board, and asked for a review of the regulations. It also sought clarity on regulations covering multi-level marketing, art funds and time sharing schemes. The biggest problem is jurisdiction.

Under various acts and ordinances, such schemes can fall under the purview of 4 regulators -- ministry of company affairs, RBI, SEBI and state governments.

The SEBI status report says,"It is clear that certain individuals or companies are able to raise money from gullible individuals by taking advantage of the loopholes in the legal provisions and also taking advantage of lack of clarity about roles of different agencies like MCA, SEBI, RBI, state governments, registered co-operative societies etc."

For instance, SEBI says that in the 14th state level co-ordination committee meeting, it was decided that cases involving multi-level marketing schemes would fall under the prize chits and money circulation schemes (banning) act, 1982 which is an act administered by state governments.

SEBI adds,"There appears to be a need to bring this matter under one principal regulator to deal with all cases where pooling of money is taking place and investments are being made." SEBI also says that the government will also have to prune various exemptions provided for such schemes to ensure investor interest comes first.