Yet another CIS scheme is unearthed, by income-tax authorities who intimates the details to SEBI. SEBI investigates and passes an Order asking the Company to repay investors or face prosecution. However, it is almost certain that investors will lose significant part of their monies, considering the huge amounts collected and the low assets the company has. The liabilities in this case are at least Rs. 800 crores, while the stated market price of the assets are barely half of this amount. And this value too would not be wholly realised in case of a distress sale. On other hand, it is not wholly clear whether the amount of liability is all inclusive.
The modus operandi of the company, if one accepts the allegations of SEBI as fully true, is depressingly familiar and just one of the many variants seen in such cases. Highly paid agents are employed. In this case, the commission paid to agents are as high as 30% of the amounts collected in several years. The amounts are collected on the basis of an assured return which, in this case, is12% p.a. However, the company claims that this is really a booking amount for land but has option for refund with assured returns. SEBI rejects this submission as unacceptable considering various factors such as no land deeds being registered, the plot of land not even been identified, the almost nil record of any investor opting to buy land and so on.
Since this Scheme has been operating over several years, the amounts collected accumulate, far exceeding the assets. If the findings of SEBI are correct, then this seems to be yet another Ponzi scheme.
SEBI has ordered the company to refund the amounts raised with promised returns within three months. SEBI has stated that in case of non-compliance, it will initiate prosecution and refer matter to the State as well as Ministry of Corporate Afairs.
It is almost certain that the Company will not be able to make such payments. The book value of the assets, consisting of at least 50% immovable property, is about 50% of its dues. It is not wholly clear whether even such dues include the returns promised and if they do not, the shortfall will be even higher. The shortfall will also almost certainly increase since the land will realize much lesser value on distress sale. Considering the huge cumulative shortfall, it that the investors will lose substantial money and will be a long time before they see any of it.
Another interesting aspect is that the Company seems to have been operating at least from 1999, the year in which SEBI notified the CIS Regulations and continued upto 2009 till the income-tax department informed SEBI of the acts of the Company. Thus, in this case, there was neither prevention nor detection by SEBI. Remedy, as discussed above, also seems to be unlikely. At best, the Company and its Promoters will join the long list of parties against whom SEBI has instituted prosecution.
It is also curious that despite several states, including Maharashtra where this Company is located, have broadly framed and fairly stringent State laws for taking action against persons who raise monies in this manner, such Schemes continue to operate and collect huge amounts of monies. The Supreme Court has recently upheld these Acts reversing certain earlier decisions that had held them to be unconstitutional. SEBI too has stated in its Order that it will refer this matter to the concerned State authorities for taking action. It will have to be seen whether and how action would be taken under such acts will be.
The Mint also reported recently the fact that such schemes are rampant in West Bengal. As per this report, SEBI has asked the finance ministry that the task of overseeing such companies should be to a regulatory watchdog. One wonders how SEBI could say this, considering the provisions relating to CIS under the Act and specific Regulations therefor. Reserve Bank of India too, as per this article, is claiming that the manner in which the monies are raised do not fall under its jurisdiction.
A thorough review of the law and its implementation seems due not to ensure that a duly empowered body in a speedy and effective manner prevents, detects, investigates and remedies such cases and in appropriate cases levies stringent punishment.