Measures to Check Cheating of investors by Unscrupulous Companies

K. K. Pant

Deputy Director (Media & Communication), PIB.

Cheating of investors by unscrupulous companies takes many forms, such as: ‘vanishing’ after raising money through public offers; illegal collection of deposits in violation of Section 58A of the Companies Act, 1956; floating sham ‘Collective Investment Schemes (CIS)’ in violation of SEBI Act; collecting money from public by posing as ‘Non-Banking Financial Companies (NBFCs) in violation of RBI Act; and resorting to ‘Ponzy’ or money circulation schemes under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

The Ministry of Corporate Affairs has taken action against ‘vanishing companies’ which have raised funds through initial public offer but thereafter are not traceable. The Ministry has also taken action against certain companies which have failed to repay deposits to public violating Section 58A of the Companies Act, 1956.

Complaints of cheating by companies - which promised high rates of interests to investors, have been received against 87 companies. In these cases Inspection under Section 209A/ Investigation under Section 234 of the Companies Act, 1956 has been ordered. Securities and Exchange Board of India (SEBI) also looked into the affairs of 669 companies whose operations were in violation of SEBI (Collective Investment Schemes) Regulations, 1999. The amount collected by these companies was about Rs 7,435 crore. Out of these companies, 75 have been wound up and the money refunded to the investors. A total of 552 companies were prosecuted; convictions have been secured in 124 cases.

RBI also regulates deposits / investments of the public with Non- banking Finance Companies (NBFC) that are registered with RBI. Complaints received against companies posing as NBFC’s and Unincorporated bodies indulging in cheating / fraud are forwarded by RBI to the Economic Offenses Wing of the State Police for investigation and further action.

There are certain companies which have floated fraudulent investment deposits mobilizing schemes (also called ponzi schemes) under various guises and are liable for action under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. This Act is administered by Ministry of Finance (Department of Financial Services) through the State Governments.

The Ministry of Corporate Affairs has constituted a Steering Committee to develop a “Fraud Prediction Model” aimed at generating alerts for prevention of fraud and malfeasance. It is also proposed to revamp the existing Market Research & Analysis Unit (MRAU) in the Serious Fraud Investigation Office (SFIO) to enable it to function as an intelligence unit. Giving a fillip to the early establishment of a state-of-art Forensic Lab within the premises of SFIO in the national capital; and the development of a Comprehensive Early Warning System (EWS) for detection of corporate fraud and malfeasance at the earliest, three important MoUs have been signed by the Ministry of Corporate Affairs. 

These MoUs are:

Between Director, SFIO ( which functions under the Ministry of Corporate Affairs) and Director, National Institute of Electronics and Information Technology (NIELIT), a scientific organization under the Ministry of Communications and Information Technology;

Between Joint Secretary, Ministry of Corporate Affairs and Director, Financial Intelligence Unit (FIU-IND), an agency under the Ministry of Finance; and

Director, SFIO and Director, FIU-IND. 

As per the Memorandum, NIELIT will set up a state-of-art Forensic Lab within the premises of SFIO - with a total outlay of Rs. 3.80 Crore on a turnkey basis, to be completed in two phases. The MoUs signed with FIU-IND will lead to better and faster exchange of information between the three Government entities. FIU has been playing a pivotal role in the collection and dissemination of information on suspicious banking transactions under the Prevention of Money Laundering Act, 2002. FIU-IND has been helping both the Ministry and SFIO from time to time by supplying information on suspicious banking transactions. Having access to banking information as well as expertise of FIU, the MoU will help SFIO in conducting its investigation in a more effective manner. These initiatives will facilitate development of a comprehensive EWS for detection of fraud and malfeasance at the earliest.

The concerned regulatory agencies of the Central Government have adopted different measures aimed at sensitizing the public of the need to be cautious while making investments into schemes, etc. The Ministry of Corporate Affairs conducts Investor Awareness Programs (IAP’s) for making the public aware of the various instruments of investments available to them. Similarly, RBI issues notice in newspapers regularly to caution the public against the design of entities in collection of deposits illegally. Editors of Newspapers are also sensitized to exercise caution for accepting advertisements pertaining to acceptance of deposits by un-incorporated bodies. Presently, RBI is in the process of undertaking a comprehensive campaign aimed at alerting the public against falling prey to the Ponzy schemes and other monetary mal-practices. SEBI also conducts Investor Awareness Programs in cities / towns across the country and has recently launched publicity campaigns through electronic and print media.