Markets regulator Sebi has decided to share with the Ministry of Corporate Affairs the names of over 500 companies that have taken money from investors in violation of its Collective Investment Scheme (CIS) rules.
Sebi will also give the names of the directors of such entities to the MCA, so that action can be taken to prevent these companies and persons from being associated with any new company, a senior official said.
The Collective Investment Schemes, which allow an entity to pool money from investors for certain pre-specified purposes and later distributes the profits, come under the ambit of the Securities and Exchange Board of India (Sebi).
There are estimated to be more than 500 such entities in the country that have undertaken CIS activities without complying with the Sebi regulations, and the regulator has in the past initiated action against many of them.
However, some of these entities and their operators tend to restart similar business under a new name and numerous investors are taken for a ride before they come under the Sebi scanner, the official noted.
Sebi has now decided to request the MCA to circulate the names of defaulter CIS entities and their directors among all the ROCs (Registrars of Companies) in the country to prevent them from being associated with any new company, this official said.
Sebi is also of the view that a complete overhaul of the current CIS regulations was needed, as loopholes in the existing rules allow for gullible investors being taken for a ride, he added.
Ironically, while there are a number of firms engaged in such CIS, only one entity is registered with Sebi to undertake such a business.
The modus operandi of operators of such schemes is the same as a Ponzi scheme: they offer impressive returns in their initial days to lure unsuspecting investors and then suddenly disappear, leaving their investors high and dry.
Some of the most common CISs are related to investments for real estate properties, plantation and agriculture industry, art funds, time-share schemes and multi-level marketing (MLM) schemes, among others.
As per Sebi data, more than one lakh investor complaints are currently pending with it in connection with such schemes, and the matter has been in the courts for a long time in most of these cases.
While Sebi is the regulatory authority for such schemes, a number of other government agencies and departments also govern similar investment products and a lack of clarity in this regard comes in the way of bringing the guilty to book.
Sebi has said that there needs to be one single principal regulator to deal with cases where pooling of money is taking place and investments are made.
The government had first decided to frame CIS regulations and named Sebi as a regulator in 1997, after a number of companies in 1990s started raising money from public through agro and plantation bonds.
Thereafter, it was made mandatory for all such companies to register with Sebi. The existing entities were also required to be registered with Sebi, and those not being able to get a go-ahead were asked to wind up their operations