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The department of financial services has proposed amending the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 to make inducement to persons for joining multi-level marketing, pyramid, Ponzi or collective investment schemes an offence to plug loopholes in money churning activities of companies.
The department under the finance ministry has proposed to insert a new section 3A in the Act through an amendment Bill for this purpose, those in know told Business Standard. The development assumes importance as Parliament’s standing committee on finance is also expected to examine the Act.
The existing provisions of the Act ban various fraudulent schemes and any person violating the provision is liable to be prosecuted and punished. However, it is possible that promoters of a fraudulent fund could take up a stand that the scheme is of a business entity and that they are mere employees, who are not responsible for the acts of the entity.
To plug this loophole, the new section will ensure that persons who are promoters in such schemes are individually prosecuted and punished if they fraudulently or dishonestly induce persons to subscribe to or participate in such schemes.
The section will say any person who knowingly or recklessly makes any statement, promise or forecast about return on investment or appreciation in value of property, which is false, deceptive or misleading or by concealment of any material facts, induces another person to join these schemes will be punishable with imprisonment up to 10 years and shall also be liable to fine up to twice the money collected, sources said.
Besides, the department wanted the Serious Fraud Investigation Office (SFIO) be entrusted with the powers of coordination and prosecution in schemes, which operate in many states in coordination with states. SFIO may be entrusted with the powers of collecting information and on fraudulent pyramid companies and issuing caution notices to state police authorities, the department suggested.
The proposals also sought to add a new section in the Act to make it punishable with imprisonment of persons launching a collective investment scheme (CIS) without the approval of the market watchdog, Securities and Exchange Board of India (Sebi).
While section 11AA (2) of the Sebi Act, 1992 allows only a company approved by it to float CIS, the market regulator does not have the administrative wherewithal to detect, investigate and file complaints against persons defrauding the public. As such, fraudulent collections under CIS should be made an offence punishable under general law with powers to the local police authorities to take cognizance of such offences and also to provide stringent punishment for such offences.
Besides Chits Act and Sebi Act, these schemes are currently covered under the RBI Act, 1934, the Companies Act, 1956, and state laws for protection of interest of depositors in the financial establishment.
The Chits Act covers prize chits and money circulation schemes, but there is no specific reference to multi-level marketing schemes for goods and services in the Act.
There are certain business entities, which launch schemes for appointing selling agents for their goods and collect registration fees from them with a further requirement that such agents have to appoint more agents collecting registration fees from them. The remuneration paid to the selling agents consists of a share in the registration fees collected from the new selling agents joining the scheme. Such schemes are known as pyramid, Ponzi or multi-level marketing schemes.
Under these schemes, only selected promoters at the top of the pyramid derive the benefit and when the chain of appointment of selling gents breaks, large numbers of selling agents at the bottom of the pyramid suffer losses and lose their money, officials said.
There is a separate inter-ministerial group, recently set up under the department of financial services, to go into plugging of loopholes that led to busting of the Saradha group which left scores of investors high and dry.
PLUGGING LOOPHOLES
- Finance ministry has proposed to insert a new section 3A in the Act through an amendment Bill to plug loopholes in money churning activities of companies
- Parliament's standing committee on finance is also expected to examine the Act
- The new section will ensure that persons who are promoters in fraudulent schemes are individually prosecuted
