Govt set to crack down on fraudulent firms 

New Delhi : India plans legislation to close a regulatory loophole that has made it possible for fraudsters to dupe millions of savers, as Prime Minister Narendra Modi strives to bring the rural poor into the mainstream banking system. Unscrupulous operators have bilked savers of billions of dollars by running pyramid schemes or promoting questionable investments in everything from tree plantations to farming emus, a flightless bird.

The most notorious has been Sahara, whose founder Subrata Roy was jailed in 2014 after failing to comply with a Supreme Court order to repay money raised under deposit plans later ruled illegal. The court has asked Sahara to return $5.4 billion to investors in those banned plans.

"Our aim is to take steps so that there are no more scams like Sahara in future," said Nishikant Dubey, a member of parliament's standing committee on finance from Modi's ruling Bharatiya Janata Party (BJP). Parliament could consider a bill in July that would replace weak rules that now govern credit cooperatives operating in more than one state. These are now overseen by just 10 staff at the Agriculture Ministry.

The officials lack the resources to monitor such savings groups and, one told Reuters on condition of anonymity, have faced pressure to turn a blind eye from politicians who personally profit from them.

Mind the loophole
India does not have a unified regulatory regime to counter Ponzi, or pyramid, schemes whose operators typically grab new deposits to meet their promise of guaranteed returns to existing savers.

Such schemes can snowball but are doomed to eventual collapse when they run out of new savers. Federal investigators are probing cases in which 60 million savers have lost some $10 billion. The lack of sanctions means that kingpins behind failed deposit schemes are rarely punished. Roy has not been convicted of any crime over his Sahara empire; he was jailed two years ago for contempt by the Supreme Court and recently freed on parole after his mother died.

The Securities and Exchange Board of India (SEBI) does have the power to freeze operations at, and investigate, suspected fraud at collective investment schemes that raise over 1 billion rupees ($15 million) and fall under its purview. But, say lawmakers, stronger sanctions are needed to protect poor people who often save tiny sums for a rainy day. India's 1.3 billion people live on an average income of $3.60 a day in 2011 dollars, the World Bank estimates.

"The looseness in implementation of state acts, including looseness at the SEBI end, has helped fraud operators to loot the people," said Kirit Somaiya, president of the Investors' Grievances Forum and another lawmaker from Modi's ruling party.

Asked to respond, SEBI said in an emailed statement that it had passed interim orders against 273 entities over the past three years, directing them not to collect money or sell property, for a range of violations. It issued final orders against another 144 entities to refund money to investors with the promised returns.

By Manoj Kumar & Mayank Bhardwaj