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LATEST NEWS UPDATES | A legal blind spot-CRL Narasimhan

A legal blind spot-CRL Narasimhan

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published Published on Apr 28, 2013   modified Modified on Apr 28, 2013
-The Hindu


The Saradha group's spectacular failure has inflicted severe pain not only on its gullible depositors and agents but in a real sense on India's financial regulators and the State government as well. There is a law and order problem in West Bengal. Very soon, public attention will shift to regulation or the lack of it. The crisis, it appears, will not be confined to one state. In the worst case scenario, not only will many other deposit-taking entities be dragged down, but investors might start reposing less faith even in the financial system.

There is a sense of deja vu in all this. Waiting to be resolved from an earlier era are several cases of default by major players who preyed on investors' gullibility and either exploited loopholes or flourished under the benign neglect of regulators.

For governments - at the Centre and in the States - as well as the several regulators of the mainline financial system the ongoing crisis in West Bengal is once again a stark reminder of how little rules and regulations can do to pre-empt fraud. Can regulation, however well thought of, ever be equal to the task of ensuring a ‘safe' financial system?

In no other sphere of the financial sector is the regulatory lacuna so apparent as in the very large category of deposit-taking entities. The group is amorphous and includes the well-regulated banks and NBFCs but also a very large number of entities which are not regulated at all; or are adept at designing schemes that fall between different regulatory jurisdictions.

The scam in West Bengal as well the one in Tamil Nadu involving Emus loosely fit into the description of Collective Investment Schemes (CIS). SEBI has formulated rules for these relatively recently, in October 1999, to cover a number of existing schemes and license new ones. There were bound to be major shortcomings in such an approach. After all even the best-equipped regulator does not have the wherewithal to supervise a teak plantation or an emu bird, leave alone monitor the type of investors who get into such schemes. It is also a question of regulation trying to catch up with existing players. Investors who were taken for a ride are either gullible, or greedy, or both. But that does not absolve the mainline financial system comprising banks, NBFCs and, of course, the regulators of blame.

At a time policymakers are emphasising financial inclusion and literacy, scams like the one involving the Saradha group should not happen so frequently. It is likely that ordinary people find it easier to deal with such entities compared with, say, a bank or regulated NBFCs.

Regulators need to coordinate more closely and gather State-level intelligence reports on large deposit-gathering activities seriously to protect the small depositor.

(narasimhan.crl@ thehindu.co.in)


The Hindu, 28 April, 2013, http://www.thehindu.com/news/national/a-legal-blind-spot/article4661263.ece?homepage=true


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