 | « Back to article | Print this article |
The new financial code drafted by the B N Srikrishna Commission proposes to empower the central government to change the meaning of the terms “financial products” and “financial services”. This will help the Centre rein in illegal investment schemes that seek to escape regulation by placing themselves in gaps and loopholes in the legal framework.
Many of these are Ponzi schemes, which work on the principle of paying off old investors from the money brought in by new ones, without any real economic activity. Several such schemes, including those based on plantations, emus and Nidhi companies have imploded in the past, leading to serious losses to investors. A Ponzi typically unravels when the flow of new money is cut off.
The new code proposes to end this menace. Once a product is classified as a “financial product”, the instrument or facility would be required to get registered under the relevant laws and follow the prudential and consumer-protection norms prescribed in the code.
While both terms - ‘financial products’ and ‘financial services’ are defined elaborately under clause 2 of the Indian Financial Code Bill, an additional provision has been made under sub-section 1 of Clause 150, which says: “The central government may prescribe any facility or instrument, in addition to those listed in Section 2(72), to be a financial product….” The clause lays down four broad conditions. If a product under scrutiny satisfies any of those, it can be declared as a financial product.
Under these conditions, the product should allow a person to “(a) make a contribution of money or securities; (b) manage, avoid or limit the financial consequences arising from the happening or not happening of a particular event or fluctuations in receipts or costs, including prices, currency exchange rates and interest rates; (c) make payments, or cause payments to be made, or effect physical delivery of the Indian currency; or (d) borrow money.”
The clause also says the central government may prescribe “any service, other than those listed in Section 2(75), to be a financial service.”
Under the present system, many illegal investment schemes were devised, wherein the end payment was often made in the form of goods such as real estate, retail products or even cattle to conceal the real nature of the scheme and escape regulation and consumer protection obligations.
If the new code came into effect, such schemes could be brought into the regulatory ambit through the provisions of clause 150, said legal experts.
“So many schemes have been floated exploiting these loopholes. This provision would be the government’s way of saying if you are smart, we are smarter. In my opinion, this is a good move and will help consumers,” said Pavan Kumar Vijay, managing director, Corporate Professionals, a Delhi-based advisory firm.
Illegal investment schemes have flourished in the recent past, offering spectacular returns and other inducements. Many of these use the viral effect provided by the internet. Last week, Securities and Exchange Board of India (Sebi) Chairman U K Sinha had estimated the investment grey market to be worth around Rs 10,000 crore (Rs 100 billion). Sinha had said the people investing in such illicit schemes were ordinary workers.
Plugging loopholes
Financial products:
Financial services*
*Code’s definition prescribes a total of 13 services other than residual clause
