Pearls Before Swine SEBIs new powers enable it to wind up unauthorised investment schemes easily. However, ridding the country of Ponzi schemes will take a lot of effort By Dhirendra Kumar | Aug 25, 2014 Is it time for the authorities in Delhis Tihar Jail to start arranging for another conference room? In a case that has all the makings of a Sahara 2.0, SEBI ordered a Punjab-based company named Pearl Agrotech to refund Rs 49,100 crore to investors within three months and then wind up its business. Of course, if Pearls boss Nirmal Singh Bhangoo turns out to be time-waster like the Sahara boss, then it could be many years before things come to that pass. Already, an amazing 16 years have passed since SEBI first asked Pearl to wind up its business. It took a case going all the way to the Supreme Court, as well as a major amendment to the SEBI Act this month that have enabled even this much to happen. What Mr. Bhangoo does now remains to be seen. However, it must be said that Sahara and Pearl are very different kinds of businesses. Sahara is widely understood to be a money-laundering system where politicians and others park their money in the name of millions of fake retail investors. One part of its business did (does?) consist of real investors making real deposits. SEBIs argument in Saharas case has always been that most or even any of the investors did not actually exist. Pearls case is different. Its a classic Ponzi scheme where lakhs of investors clearly exist, and have actually invested a huge amount of money. Pearl stayed away from SEBIs purview by claiming to be a real estate development company. Its pitch was that investors could buy agricultural land by paying a small amount upfront. Some years later they could either take the land or, if they didnt want the land, optionally take a larger amount which would have grown at the rate of 20% or more. Essentially, it was a deposit scheme which, in the classic Ponzi fashion, was paying off old investors from new deposits.. However, it was disguised as a land sale with a bailout option. Unlike smaller outfits--and like Sahara--Pearl has lasted a long time and has acquired enough visibility to become a widely trusted brand in its catchment area. Like Sahara, it has been enthusiastic about sponsoring sports, where its high point was being sponsoring the King XI Punjab team in the IPL. Its not clear what will happen in the Pearl case. I think one can safely rule out that SEBIs demand will be obeyed and Pearl will simply write out cheques worth Rs 49,100 crore so that everyone can live happily ever after. After sixteen years, the legal drama has probably just entered a new stage. This larger issue is that whether this case --and others that SEBI is now tackling with its greater powers--will become a strong enough example that will prevent such schemes from coming up in the future? Obviously, there are two aspects of making this case into an example. One is to prevent other racketeers from starting such scheme. The other is to prevent people from falling for them. Im not sure which is more difficult. Operations like Pearl are a lethal combination of everything that a lot of Indian savers looks for. Real Estate, high returns, talk of a guarantee, ease of operation, minimal paperwork, no questions about the source of the money. What more could anyone ask for? The conventional solution to this is something called financial literacy. However, my sense is that in a country as huge as this, there will always be enough people to fall for schemes like these if they come into existence. Primarily, this is a challenge for SEBI to be able to first wind up those that are already running, and then prevent more from coming up. It wont be easy, and it will help if it succeeds in taking the Pearl case to its logical conclusion quickly, complete with exemplary punishment to its promoters. At this point Im afraid that looks like a big if. from Valueresearchonline with thanks.
Posted on: Wed, 27 Aug 2014 11:30:10 +0000
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