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LATEST NEWS UPDATES | Cheat funds, again

Cheat funds, again

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published Published on Apr 26, 2013   modified Modified on Apr 26, 2013
-The Hindu


The spectacular failure of the Saradha Group domiciled in West Bengal but also operating in a few adjoining States reinforces certain important messages from past scams. The first lesson to investors and regulators alike is that it is still possible for unscrupulous promoters to design and operate Ponzi schemes built around promises of extraordinary returns that are clearly unsustainable. Such schemes depend upon a steady stream of fresh deposits - at least - replacing the maturing ones, and when the chain snaps lots of people besides the investors stand to lose. The second message is that the State governments concerned cannot escape responsibility. In this case, the West Bengal government is clearly at fault for failing to take timely action against the high profile, illegal fund collection. The Saradha Group's promoter has now accused a few ruling party politicians of complicity. Though the persons he named have protested their innocence, these allegations need to be carefully probed. However, past experience with other financial frauds suggests that politicians and other influential individuals always manage to keep themselves one step ahead of the investigating agencies.

Unfortunately, therefore, it is ordinary investors who will bear the brunt of the Saradha Group's losses, which are estimated to be above Rs. 30,000 crore. The West Bengal Chief Minister's proposal to set aside Rs. 500 crore to partly compensate investors is not workable as it assumes a fair method for distributing the money to several competing claimants can be worked out. It also runs the risk of moral hazard, of taxpayers' money being used to underwrite scam losses. Regulators like the Reserve Bank of India and the Securities Exchange Board of India have much to answer for. Despite impressive strides in extending regulation to wide swathes of the financial sector, the system has not managed to check the dubious activities of the Saradha Group or for that matter those who have attracted deposits for raising emu birds in Tamil Nadu. Most of these ‘collective investment schemes' operate in a grey zone where the role of specific financial regulators has not been clearly spelt out. It is only recently that SEBI has promised strong action against fraudulent operators. For Saradha's investors, that will be cold comfort really. While greed and gullibility might have induced them to part with their savings, it is also possible that many of them chose risky avenues simply because it is more convenient to invest in them than with say, banks. The mainline financial system too has much to ponder over. When policymakers say they are committed to financial inclusion and financial literacy, scams like these should not happen.


The Hindu, 26 April, 2013, http://www.thehindu.com/todays-paper/tp-opinion/cheat-funds-again/article4655699.ece


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