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Can SEBI prevent fraudulent 'chit fund' schemes?
Fri, 10 Apr Pre-Open

'Buyers Beware!' could be the warning that needs to be literally flashed for every investor in Indian markets. Scams in investing are no less than cancer in India. Irrespective of the proceedings, they just keep coming back with double force. The list of errants includes big names like Sahara India, Satyam, NSEL, and then there are countless scams of relatively smaller magnitude that have not yet caught much of regulator's or public attention as yet.

One kind of scam that is perhaps more prevalent than others pertains to illegal and unsupervised investment schemes, also called chit funds or Ponzi schemes that continue to mushroom and dupe naïve investors, especially in the smaller regions, where investors are financially uneducated and have access to limited ways to save or invest money. These firms without any regulatory oversight have raised billions of rupees from public in lieu of promise of strong returns. Forget the returns, these investors end up losing even the initial capital!

However, SEBI, learning from the scams, is now in action mode. As mentioned in an article in Livemint, it has barred 70 firms that raised funds through debentures or collective investment schemes and promised investors to earn returns for them by putting that cash in land, cattle and even holiday homes.

Indian markets are still immature despite their potential to become big. Lack of transparency, regulatory oversight and credibility have been perpetual issues, with regulator often coming into picture post the damage is done. The rot that we are seeing in the markets is the result of decades of apathy towards small investors.

Clearly it will take a long time to clear the mess. In the meantime, laws must be introduced and actions must be taken to widen the purview of regulation and crack down on entities of all sizes that raise money from the public. One of the ways to ensure regulatory compliance could be to monitor the regulator. Actions need to be taken not against such fraudulent schemes, but even the authorities that are supposed to monitor them but fail to do so. In the meantime, investors would do well to increase their awareness and not blindly trust anyone with their hard earned money.

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